The Big Short's subtitle is "inside the doomsday machine" but it should have been "liars Poker - the consequences" as he explains the massive consequences of Wall Street bond investment banks' utter incompetence. Lewis tells the tale in his usual cinematic, fast-paced way. He masterfully uses the perfect amount of detail to paint the picture is peerless.
Lewis opens his tale with the perfect quote from Tolstoy:
"The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him." Like many situations in Wall Street, the "experts" know so much and are so deeply involved in what they are doing that they cannot see the forest for the trees. During the subprime debacle, it must have been nearly impossible for a bond trader to concede to himself that there was something wrong with giving $750,000 loans to migrant Mexican berry pickers making $15,000 per year. In a culture where most consider the size of their bonus proportional to their own brains, the hubris of these overpaid scoundrels was stratospheric. When the whole thing goes down in flames, Lewis writes "For more than twenty years, the bond market's complexity had helped the Wall Street bond trader to deceive the Wall Street customer. It was now leading the bond trader to deceive himself."
The result is the big investment banks, led by incompetent CEOs, allowed their high and mid-level employees in the bond departments to lose billions of dollars and escape financially unscathed while taxpayers picked up the tab. Low income borrowers were complicit primarily in their lack of sophistication. By getting the criminally incompetent ratings agencies to call all of these poor quality loans AAA, the investment banks created huge bonuses for themselves. When the music stopped playing, every major investment bank had billions of losses because they had started to believe their own bulls---. Meanwhile, the US government assessed the costs to the taxpayers by handing the banks a gift of billions of dollars, without reforming the system in any way.
Michael Lewis' tale centers on a handful of smart investors who saw what was happening and had the foresight to bet against these fools. Even the winners dealt with horrible unintended consequences.
The "heroes" of this story are the brilliant investors, mainly a rag-tag band of Wall Street outsiders, who made common sense statements like "A Home without Equity is Just a rental with debt." They were naturally skeptical in their dealings with Wall Street, asking their salesmen "I appreciate this trade, but I just want to know one thing: How are you going to f--- me?"
These investors knew that investing could not be reduced to a formula. One of them was a one-eyed man with Asperger's, Dr. Michael Burry. He said "the more he studied Buffett, the less he thought Buffett could be copied; indeed, the lesson of Buffett was to succeed in a spectacular fashion you had to be spectacularly unusual. I love this quote from Burry: "If you are going to be a great investor, you have to fit the style to who you are." Investing is something you have to learn how to do on your own, in your own peculiar way.
The irony of his success is that the troubled genius Burry earned his clients a fortune, beating the S&P by a massive margin, for ungrateful clients. Instead, he was hassled because his subprime short took almost 2 years to play out - which was exactly what he said would happen. He was able to beat the market indices by impossibly wide margins, all from a small office in California, far from Wall Street, mainly by reading detailed company filings from a 10-K service that cost only $100 per year. His style wasn't an easy ride, as his typical trade "goes up by ten times but first it goes down by half."
There is much to learn from this remarkable man, including his thought process on communicating his investment ideas. He said: "I hated discussing ideas with investors because I then become a Defender of the Idea, and that influences your thought process." In his first five years running money, the S&P was down 6.84% and in the same period, he was up 242%. He assumed investors trusted him enough to let him invest the way he wanted - but that was wrong.
After the subprime mess did indeed explode, he had more than doubled his clients' money that final year of his fund. At the end of the whole ride, his founding investor Gotham Capital pulled their money out of his fund. He sent them an unsolicited email that said only "you're welcome." By June 30, 2008, any investor who had stuck with Berry from his beginning on Nov 1, 2000, had gained 489% after fees, while the S&P 500 returned only 2% during the same time. In 2007 alone, Burry had made his investors $750 million, yet due to redemptions, he ended up managing only $600 million.
Lewis writes: "What had happened was that he had been right, the world had been wrong, and the world hated him for it."
Michael Lewis accurate descriptions of the sleazy bond salesmen on Wall Street appear to be hyperbole but are instead spot-on. Anyone that has met these creatures will instantly recall real-world examples that look and sound exactly as he describes them.
Lewis writes of the perils for investors of buying this mortgage-backed paper: "An investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit of pythons." "The bond market customer lived in perpetual fear of what he didn't know." (I worked at a hedge fund for a few years that was routinely sodomized by a sleazebag bond salesman. Finally, at one point, I could no longer be in the same room with him when he pitched his ideas to the fund's principals, because I couldn't stand to watch the rape in progress - it was like watching a snuff film).
The physical description of one of the bond traders that copied Burry's idea of shorting this paper was perfect: "He wore his hair slicked back, in the manner of Gordon Gekko, and the sideburns long, in the fashion of an 1820s Romantic composer or a 1970s porn star. He wore loud ties, and said outrageous things without the slightest apparent awareness of how they might sound if repeated unsympathetically. He peppered his conversation with cryptic references to how much money he made..." "He was a walking embodiment of the bond market, which is to say he was put on earth to screw the customer."
One of my favorite passages in the book is how Lewis describes a meeting in Vegas between the loser/patsy/criminally stupid Wing Chau, who is buying the CDOs (bad loans) in size and Eisman, one of the hedge fund guys who has taken the other side of the bet. The boob Wing Chau earns millions by "managing" CDOs, which is another way of saying buying any and all that Wall Street creates. He says with condescension: "I love guys like you who short my market. Without you, I don't have anything to buy. The more excited that you get that you're right, the more trades you'll do, and the more trades you do, the more product for me." Eisman later grabs the bond salesman that put the meeting together and says, "Whatever that guy is buying, I want to short it." Of course, Wing Chau's is proven to be completely wrong, but like everyone in the right place in this debacle, he emerges unscathed with millions in bonus money.
Some of the most delicious quotes by Lewis in this book have been well reported already, but bear repeating:
On the subject of John Paulson, a hedge fund manager that ended up making billions of dollars shorting the subprime garbage created by Wall Street. A quote by a Goldman Sachs client: "I called Goldman Sachs to ask them about Paulson, they told me he was a third-rate hedge fund guy who didn't know what he was talking about."
One of the hedge fund managers said this to the CEO of Moody's, who claimed his company's ratings were correct: "With all due respect, sir, you're delusional."
After a meeting with Ken Lewis, CEO of Bank of America: "I was sitting there listening to him. I had an epiphany. I said to myself, Oh my God, he's dumb! A light bulb went off. The guy running one of the biggest banks in the world is dumb!"
Then, about Merrill Lynch: "We just shorted Merrill Lynch." "Why?" "We have a simple thesis. There is going to be a calamity, and whenever there is a calamity, Merrill is there." (This turned out to be true, and ironically, Merrill sold themselves to said "dummy" Ken Lewis of Bank of America)
When fighting about values of CDOs broke out and Deustche Bank demanded collateral from another bank: "Dude, f--- your model. I'll make you a market. They are 70 to 77. You have three choices. You can sell them back to me at 70. You can buy some more at 77. Or you can give me my f------ $1.2 billion."
Maybe the best quote of the entire book, is Morgan Stanley CEO John Mack responding to a question on an earnings call. He was asked how just one little desk on the bond floor could have lost $8 billion. He said: "One, this trade was recognized and entered into our accounts. Two, it was entered into our risk management system. It's very simple. When these got, it's simple, it's very painful, so I'm not being glib. When these guys stress loss the scenario on putting on this position, they did not envision... that we could have this degree of default, right. It is fair to say that our risk management division did not stress those losses as well. It's just simple as that. Those are big fat tail risks that caught us hard, right. That's what happened." This type of verbal diarrhea is commonplace on earnings calls.
Michael Lewis writes some statements that I love:
"The Big Wall Street firms, seemingly so shrewd and self-interested, had somehow become the dumb money. The people who ran them did not understand their own business, and their regulators obviously knew even less."
"What are the odds that people will make smart decisions about money if they don't need to make smart decisions - if they can get rich making dumb decisions? The incentives on Wall Street were all wrong: they're still all wrong."
"No investment bank owned by its employees would have leveraged itself 35:1, or bought and held $50 billion in mezzanine CDOs."
"The people in a position to resolve the financial crisis were of course, the very same people who had failed to foresee it: Henry Paulson, Tim Geithner, Ben Bernanke, Lloyd Blankfein, John Mack, and Vikram Pandit...."
"All shared a distinction: they had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger's syndrome."
"The $306 billion (TARP) guarantee, nearly 2% of US GDP - was presented undisguised, as a gift. By early 2009 the risks and losses associated with more than a trillion dollars' worth of bad investments were transferred from big Wall Street firms to the U.S. taxpayer."
"The problem wasn't that Lehman Brothers had been allowed to fail. The problem was that Lehman Brothers had been allowed to succeed (in the first place)"
"This new regime - free money for capitalists, free markets for everyone else - plus the more or less instant rewriting of financial history vexed all sorts of people..."
He ties the whole story up so elegantly, with a quote from Gutfreund, the original bond trader, the first villain of "Liar's Poker" who says:
"It's laissez-faire until you get in deep sh--."
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Love the movie? The book doesn't disappoint
Reviewed in the United States on July 26, 2021
I found myself getting through this one very quickly, something I never thought I’d say about a book mostly dissecting “credit default swaps” and “CDOs, collateralized debt obligations”.Every reader knows where the story is heading, but it’s still a compelling and enjoyable ride to get there.Having watched the movie, I couldn’t help picturing the scenes as they appeared in the book. The book allows you to get inside the heads of the traders better. The paranoia, the obsession to know who they are betting against, the fear that the fool in this trade might be them.As you would expect the book goes into more detail with heavier use of technical terms. As the author points out “Bond market terminology was designed less to convey meaning than to bewilder outsiders.”Easy to understand why so many people are still angry about what happened. This book doesn’t paint a flattering picture of the American investment banking world.
Reviewed in the United States on July 26, 2021
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