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The Big Short: Inside the Doomsday Machine Paperback – February 1, 2011
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“No one writes with more narrative panache about money and finance than Mr. Lewis....[he] does a nimble job of using his subjects’ stories to explicate the greed, idiocies and hypocrisies of a system notably lacking in grown-up supervision....Writing in faintly Tom Wolfe-ian prose, Mr. Lewis does a colorful job of introducing the lay reader to the Darwinian world of the bond market.”
- Michiko Kakutani, The New York Times
“Superb: Michael Lewis doing what he does best, illuminating the idiocy, madness and greed of modern finance. . . . Lewis achieves what I previously imagined impossible: He makes subprime sexy all over again.”
- Andrew Leonard, Salon.com
“One of the best business books of the past two decades.”
- Malcolm Gladwell, New York Times Book Review
“I read Lewis for the same reasons I watch Tiger Woods. I’ll never play like that. But it’s good to be reminded every now and again what genius looks like.”
- Malcolm Gladwell, New York Times Book Review
About the Author
Michael Lewis, is the best-selling author of Liar’s Poker, Moneyball, The Blind Side, and Flash Boys. He lives in Berkeley, California, with his wife and three children.
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So what did I really think of the book? Well, Lewis should be commended for writing a book on the 2008 financial crisis from the most unique perspective thus far. Rather than focus on the major characters that a plethora of other books have focused on (Paulson, Bernanke, Geithner, etc.), Lewis tells his story using some extremely obscure characters as his lead actors: A handful of hedge fund managers who made massive bets against the subprime industry (and by hedge fund managers, I am not referring to high profile, well-known hedgies; I am talking about very, very minor players). Readers will feel connected to the characters when they are done with the book, and a less gifted writer could have never pulled this off. It was a difficult task for Lewis as well, but he skillfully made the points he wanted to make and simultaneously told a story, all through a narrative of four or five unconnected characters of whom the public has never heard.
What are these points Lewis wanted to make? I suppose the major tension of the book is the teeter-tottering between the greed/evil genius of the major Wall Street firms (on one hand), and then the utter stupidity and incompetence of Wall Street (on the other). It is a difficult balance to strike, and one reason it is difficult is because, well, one can not have it both ways. Lewis can not claim, as he astonishingly and explicitly does, that Goldman Sachs made AIG write credit default swaps on the subprime mortgage industry, guaranteeing AIG's demise and Goldman Sachs flourishing, but then on the other hand claim that the firms had no idea what they were doing, and were completely shell-shocked by what happened to their CDO's (the collateralized debt obligation instruments which served as the toxic assets you hear so much about). This inconsistency permeates the book, and tonight on 60 Minutes I heard Lewis repeat what his major thesis is: Wall Street did not know what they were doing. This is the correct thesis. But it is wholly imcompatible with the obscene Goldman Sachs conspiracy movement that has taken over the Oliver Stone mainframe of our society. Even a Michael Lewis fan like myself was taken aback by the audacity of this oft-repeated contradiction.
Perhaps the most disappointing message of the Lewis book is the conclusion he saved for the final chapter - the one I have heard him preaching for some time now on the media circuit. Lewis has been preaching since the days of Liar's Poker that the great sin of Wall Street was when all of the major firms went public (i.e. rather than function as closely-held partnerships, they sold shares to the public in the IPO market and now have no reason to ever check their evil inhibitions at the door). It is a rhetorically effective charge, but one that is not up for the most routine of examinations. The individuals most responsible for the massive money-losing operations of 2005-2007 were the largest shareholders in the firms. Jimmy Cayne of Bear Stearns saw his stock holdings decline from $1 billion of value to $50 million of value, directly under his watch. Richard Fuld was thrown to the lions as Lehman Brothers burned to the ground, but it burned up his $550 million of Lehman stock as well. The gentlemen running these firms were wealthy, and they were driven by a desire to get even wealthier, but it is absurd to postulate that the performance of these companies in the public stock markets were not important to them. It was all that was important to them. Are we really to believe that Wall Street would not have found more creative ways to raise capital in the capital markets if they were partnerships? Whether the firms were partnerships or public corporations, they lived off of balance sheet capital that they mostly raised in the debt markets. It was the bondholders who were on the verge of utter collapse in September of 2008. Why would that be different if they were partnerships? The most obvious refutation of Lewis's thesis is the question many are probably dying to point out to him after reading it: If being a public corporation corrupts the intentions of financial firms, why couldn't the same broad brush be used for all public corporations of all industries? If the removal of the partner capital from the company capital is a self-corrupting event, why should any corporation ever be allowed to go public? What exactly is the difference? Do not huge retail businesses, manufacturing firms, and technology outfits also use shareholder money to grow and operate? Does Lewis really want to advocate the abolition of public equity markets in America? It is absurd to even carry that argument through to its logical conclusion.
I do not want readers to be confused. There are some stellar observations in Lewis's newest book. He gets inside some of the most confused and ridiculous financial transactions ever conducted in the history of civilization, and he does it with the precision of a surgeon. But Lewis does not use his 264-page book to even apply one word - not one single utterance - against the malignant government policies behind much of this malaise. He could easily counter that his book was not meant to be a comprehensive introspection of the financial crisis, and that would be a fair response. But readers hoping for a biog-picture analysis of this crisis will not get it here. They will see the worst of a very small number of Wall Street traders, and they will see a system that was clueless to keep this process from ballooning out of control (his section on the high seven-figure bond traders being regulated by the high five-figure ratings agency analysts is choice). The risk management processes of Wall Street broke down. The hubris of a select number of people grew to a point of perversity. Contrary to Lewis's assertion, the bulk of these CEO's and executives did lose their jobs (Citi, Merrill Lynch, UBS, Lehman Brothers, Bear Stearns, etc.) all fired their Presidents and CEO's as their houses burned to the ground. But overall, the book has a ton of good to say about the crisis. Most notably, he demonstrates how "in an old-fashioned panic, perception creates its own reality" (a concept that I want to explore much further in the future). He summarizes in a single sentence the most important thing that can be said about Lehman Brothers ("the problem wasn't that Lehman had been allowed to fail; the problem was that Lehman had been allowed to succeed").
I am truly glad that I read this book, and I do recommend it. However, as the pivotal work of evaluating the big picture of the crisis continues, the conclusion that Wall Street's transition to a shareholder-owned entity was at the heart of the matter is quite lacking. Unfortunately, both evil and incompetence exist in all kinds of business structures.
In a sense, this book is similar to Moneyball in that Lewis tells his story by following a host of characters that most of us have never heard of--people like Steve Eisman (the closest thing to a main character in the book), Vincent Daniel, Michael Burry, Greg Lippmann, Gene Park, Howie Hubler and others.
How informative is the book? Well, it may seem that Lewis has his work cut out for himself, since the events of the recent financial crisis are already well known. More than that, lots of people have their minds made up concerning who the perps of the last few years are--banks and their aggressive managers, "shadow banks" and their even more aggressive managers, hedge funds, credit default swaps, mortgage brokers, the ratings agencies, Fannie Mae and Freddie Mac, the Fed's monetary policy, various federal regulators, short sellers, politicians who over-pushed home ownership, a sensationalist media, the American public that overextending itself with excessive borrowing (or that lied in order to get home loans), housing speculators, etc. The list goes on--and on. Okay, so you already know this. The defining aspect of this book, however, is that it asks (and answers) "Who knew?" about the impending financial crisis beforehand. Who knew--before the financial crisis cracked open for everyone to see (and, perhaps, to panic) in the fall of 2008--that a silent crash in the bond market and real estate derivatives market was playing out? Indeed, the good majority of this book addresses events that occurred before Lehman's failure in September of 2008. In describing what led up to the darkest days of the crisis, Lewis does a good job helping the reader to see how the great financial storm developed. All in all, this is an informative book.
Interestingly, in the book's prologue, Salomon Brothers alumnus Lewis explains how, after he wrote Liar's Poker over 20 years ago, he figured he had seen the height of financial folly. However, even he was surprised by the much larger losses suffered in the recent crisis compared to the 1980s, which seem almost like child's play now.
For a taste of The Big Short, Steve Eisman was a blunt-spoken "specialty finance" research analyst at Oppenheimer and Co., originally in the 1990s, and he eventually helped train analyst Meredith Whitney, who most people associate with her string of negative reports on the banking industry, primarily from late 2007. Giving a flavor of his style, Eisman claims that one of the best lines he wrote back in the early 1990s was, "The [XYZ] Financial Corporation is a perfectly hedged financial institution--it loses money in every conceivable interest rate environment." His own wife described him as being "not tactically rude--he's sincerely rude." Vinny Daniel worked as a junior accountant in the 1990s (and eventually worked for Eisman), and he found out how complicated (and risky) Wall Street firms were when he tried to audit them. He was one of the early analysts to notice the high default rates on manufactured home loans, which led to Eisman writing a 1997 report critical of subprime originators. Michael Burry (later Dr. Michael Burry) was, among other things, a bond market researcher in 2004 who studied Warren Buffett and Charlie Munger, and who correctly assessed the impact of "teaser rates" and interest rate re-sets on subprime loans. In 2005, Burry wrote to his Scion Capital investors that, "Sometimes markets err big time." How right he would be.
Greg Lippmann was a bond trader for Deutsche Bank, who discussed with Eisman ways to bet against the subprime mortgage market. Before home prices declined, he noted, for example, that people whose homes appreciated 1 - 5% in value were four times more likely to default than those whose homes appreciated over 10%. In other words, home prices didn't need to actually fall for problems to develop. (Of course, home prices fell a lot.) When Lippmann mentioned this to a Deutsche Bank colleague, he was called a Chicken Little. To which, Lippmann retorted, "I'm short your house!" He did this by buying credit default swaps on the BBB-rated tranches (slices) of subprime mortgage bonds. If that's not a mouthful, read further in the book for a description of Goldman Sachs and "synthetic subprime mortgage bond-backed CDOs." Then there's the AIG Financial Products story, told through the story of Gene Park, who worked at AIG, and his volatile boss, Joe Cassano.
Did I say this book is informative? Here's a bit more: Did you know that a pool of mortgages, each with a 615 FICO score, performs very differently (and better) than a pool of mortgages with half of the loans with a 550 FICO score and half with a 680 FICO score (for a 615 average)? If you think about it, the 550/680 pool is apt to perform significantly worse, because more of the 550 FICO score loans develop problems. Think about how that got gamed.
There's more, but hopefully you've gotten the point. This is a very interesting, entertaining and informative book that accomplishes what it sets out to do. Chances are you'll enjoy it.