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This review is from: The Big Short: Inside the Doomsday Machine (Hardcover)
Based on reading Michael Lewis' Liar's Poker and Moneyball, I wondered whether The Big Short would prove to be entertaining and informative. If you've read some of Lewis' books, you might agree that the "entertaining" part would seem to be a reasonably safe bet. It turns out, it is. The Big Short is fast-paced, straightforward, conversational and salty--very much like his earlier works. Indeed, if you didn't know Michael Lewis had written this book, you could probably guess it. It is easy reading and very hard to put down. In short (no pun), The Big Short doesn't disappoint in being entertaining.
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.
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Showing 1-10 of 33 posts in this discussion
Initial post: Mar 15, 2010 9:42:33 AM PDT
Adam, thank you for your well-considered and thoughtful review. You've convinced me that "The Big Short" is most definitely worthy of my time.
Posted on Mar 15, 2010 10:44:44 AM PDT
G. Powell says:
What is interesting is how long it took Mr. Lewis to come around and write this book. I had read most of this in The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash which was published in 2008. And anyone reading "The market-Ticker.org" by Karl Denninger knows that we are on the edge of the financial cliff because the banks have yet to mark all those non performing loans as bad and write them off. Still Mr. Lewis's view adds yet another dimension to the tale of greed.
Posted on Mar 15, 2010 12:59:26 PM PDT
Seth P. says:
Thank you for a review based on actually reading the book and not based on the fact that there's no kindle edition available. You are my new hero.
In reply to an earlier post on Mar 15, 2010 7:39:39 PM PDT
Last edited by the author on Mar 16, 2010 9:31:52 AM PDT
G. Powell says, "And anyone reading "The market-Ticker.org" by Karl Denninger knows that we are on the edge of the financial cliff because the banks have yet to mark all those non performing loans as bad and write them off."
Really? There is certainly a lot to be concerned about, but being afraid of financial cliffs and all puts you at odds with say Warren Buffett. All of the doom predictors make a very logical-sounding and compelling argument, but I don't see them outperforming Buffett. I don't see Buffett taking any extreme counter measures to protect his vast holdings from the financial armageddon some people are calling for. In fact, his purchase of BNI is basically an all-in bet on a strong American recovery. He did add $10b in debt to the structure, which is at odds since he normally pays all cash, but this is basically a bet for strong future inflation, which is also at odds with the deflationary financial meltdown the doomers are calling for. Like Y2K, this is just another fear game, and people are always so afraid of what they think may happen that they miss the subtleties of the major players, which is why the majority lose money in the market.
While there are arguably unprecedented risks to the global economy, I personally won't take the other side of Buffett's bet. I also won't bet against humanity's talent to adapt and overcome, and nor would I underestimate the incredible technological advances taking place every day right now and their impact in just a few more years. Of course, one can always hedge their position with a few sensible precautions, but all these fear books/websites are certainly not going to help.
Posted on Mar 16, 2010 6:01:19 PM PDT
Ken Tilbe says:
One of the better reviews I have read. Thanks for taking the time to post this. It really more than makes up for all the worthless reviews under the one star rating. You also gotta wonder about the five people who didn't find this review helpful!
Posted on Mar 17, 2010 12:11:58 PM PDT
A. A. Jager says:
What's sad about this whole affair is the thought of how many of the people within the system must've known it was fatally flawed and yet did nothing to stop it because they were making theirs. On the one hand we can't live without incentives, and yet incentives seem to make us turn blind eyes. Who knows what the answer is?
Posted on Mar 19, 2010 12:01:25 PM PDT
Valerie K. Valentine says:
Posted on Mar 20, 2010 4:03:15 PM PDT
Je Maintiendrai says:
This review is comprehensive and valuable (akin to many of your reviews.) I am genuinely appreciative for the clarity of your representation, as well as the detail.
In reply to an earlier post on Mar 22, 2010 1:27:58 PM PDT
[Deleted by the author on Mar 22, 2010 1:28:36 PM PDT]
Posted on Mar 26, 2010 2:09:39 PM PDT
Last edited by the author on May 10, 2010 5:00:34 AM PDT
! Aesop - Sam says:
An informative, helpful, and wonderful review indeed! Thank you for sharing your views.