By now the business media has reported, picked apart and analyzed almost everything about the great financial crisis of 2008.
In many ways we should thank Michael Lewis for this, whose newest book, The Big Short, initially helped guide the public understanding of a crisis brought on by shady deals on Wall Street and flawed ideas.
The Big Short reads a lot like a sequel to Liar’s Poker, Lewis’ last major book about the same topic: shady Wall Street deals, flawed ideas, and the crisis that resulted in the late eighties.
But The Big Short is unique because rather than taking us inside the heads of the crooked Wall Street bankers as Liar’s Poker did, it illuminates the recent crisis through the minds of a very small minority of traders and investors who were on the other side – those who realized something was seriously wrong with the financial system before anyone else did.
One of the book’s main characters, Steve Eisman, finally comes to the realization long before 2008 that the entire industry of consumer finance, “basically existed to rip people off.”
As for the title, The Big Short doesn’t focus on any one big trade as much as it does on many trades that these investors made against the sub-prime mortgage market, using the now-infamous credit default swaps.
Eisman, a bombastic trader on Wall Street, didn’t know anything about Michael Burry, a highly introverted cardiologist with a glass eye who also expertly picked stocks on the side for a wealthy group of investors. Nor did either man know about the three young investors who started a hedge fund out of their home in Berkeley, Calif., called Cornwall Capital Management, with only $110,000.
They all began looking into the fine print on sub-prime mortgage bonds around 2004 and 2005 and came to the same independent conclusion: the bonds, despite their Triple-A or Triple-B ratings from Moody’s Investors Service, were absolute junk. To their surprise, however, a growing chunk of the financial system was built on these “crappy” bonds, meaning that both the housing boom and the system built around it was becoming a gigantic house of cards.
So they did what anyone else in their position would have done: bet against it all.
“Opportunities are rare,” Burry wrote in a letter to his investors before placing one of his huge bets against the sub-prime market. “And large opportunities on which one can put nearly unlimited capital to work on tremendous potential returns are even more rare.”
The discovery would prove to make these men and their investors millions of dollars ten times over when crisis struck. Lewis is aware of the ethical gray area, and toes the line between glorifying those who profited from global financial catastrophe and analyzing how backward our markets actually were.
He provides great perspective, noting that almost all Wall Street traders and bankers involved in the mismanagement of the sub-prime mortgage market parachuted with huge bonuses regardless of the outcome. So we shouldn’t place all the blame on those who bet against an irrational market. In the end, the only real loser was Main Street.
Lewis concludes the problems that caused the crisis were largely symptoms of the problems he wrote about in Liar’s Poker — when big trading firms like Salomon Brothers became public corporations in hoc to shareholders. Delivering short-term profits to expansion-minded shareholders meant traders had to continuously make riskier bets until the long-term health of the financial system was at serious risk.
Lewis gains his expertise on the subject from his experience as a former trader at Salomon Brothers before he became a financial journalist and bestselling author. The Big Short dives like nothing else — save maybe Andrew Ross Sorkin’s Too Big to Fail – into the details and the personalities behind the crisis, bringing excitement and even suspense and to a very familiar tragedy.
But he also brings humor to the seemingly unethical world of Wall Street, reassuring us that one should always be skeptical when making a deal in that small slice of the earth. Danny Moses, Eisman’s second-in-command, embodies this idea while working out the details of a separate trade with another Wall Street firm. “I appreciate this,” he says. “But I just want to know one thing: How are you going to F*** me?”
Overall, the main characters’ psychologies were not left unscathed. Amid the chaos of companies folding and honest Americans losing their 401ks, Lewis writes about the complicated feelings of success, modesty, and even guilt that Eisman and Burry had to live with. His book is a great piece of reporting that reminds us that no action, especially in the far-away and strange land of Wall Street, is without its consequence.