The Big Short: Inside the Doomsday Machine [Hardcover]

Let me get one thing straight out of the way - this book is unlikely to have the impact of Liar's Poker (Hodder Great Reads) for two reasons. The former was one of the first on the subject and defined 1980s banking to an extent, it got many graduates excited about potentially becoming BSDs themselves. It was in a way the perfect pitch for the industry, working even better as a result of being a critique of the system. The second reason was that while Liar's Poker was timely, this book came out a bit late to the 2008 financial meltdown party. Books like The Black Swan: The Impact of the Highly Improbable or Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets were a lot more timely, and while not everyone will appreciate Taleb's writing style, they were in some ways more general and applicable to broader sets of situations.

Be that as it may, Lewis is still an accomplished writer and knows how to package the book well. Unlike in Liar's Poker, this book is not based on his own personal experiences (he retired from the industry prior to writing Liar's Poker) but follows several of the investors, who saw the unsustainability of the subprime mortgage market and decided to short it ahead of the curve. Through their stories Lewis shows how the market developed, the systemic problems plaguing the sector (a bit like in the second part of Liar's Poker) and how the downfall happened.

He does not go into the bailout to any great extent (only briefly passing over it in the last couple of pages), the sotry is largely over in the last part of 2007, when the book's protagonists have all succeeded beyond expectation in shorting what they (rightly) believed was a market doomed to fail.

The book is not as funny as some of the earlier ones by Lewis but will still produce the odd chuckle and is definitely easy to read. The language is not too complex and even someone not from the industry will be able to follow the logic, the arguments and the descriptions. Like Liar's Poker I foresee a generation of graduates getting excited over the content and the industry, and a generation of current bankers seething at what was written (Lewis does not exactly portray most of them in a gleaming light - although he does acknowledge that it was primarily the systemic failure, rather than individuals, who brought us to this).

Finally there is no solution proposed, only a warning - things changed drastically when the financial institutions playing the game turned from partnerships into publically traded companies and the incentive structures started getting badly misaligned with the long term interests of both the institutions and the stability of the market overall.

Michael Lewis is one of the most gifted and entertaining writers today - anyone who has read his reputation-forming Liar's Poker will know this (if you haven't, and you aspire to a career in finance, you should), but his subsequent offerings, particularly the singularly brilliant Moneyball have also been outstanding. He distinguishes himself from his peers firstly by his thorough insider's understanding of how, when and why finance works (and by extension how, when and why it doesn't) but also a deft turn of phrase and devastating wit. When the subject is the logic-defying but leaden topic of tranched portfolio credit derivative armageddon, both attributes are in good demand. And both, in the shape of Lewis' airy but insightful writing, are in abundant supply.

The rosette for "best book about the financial meltdown" is hotly contested - luminaries such as George Soros, Mohamed El-Erian and Hank Paulson have entered more or less weighty tomes (some excellent, some portentous, some a bit wacky); as have well-respected and deeply learned journalists like the NY Times' Andrew Ross Sorkin and the FT's Gillian Tett.

I thought I had awarded my own best-in-show to Sorkin for his massive and all-encompassing political tome, which manages to encompass the total business perspective across an extraordinarily wide theatre of conflict, somehow holding the whole thing in focus the whole time. A criticism I had seen levelled at that book was that, while it admirably covered the outright red alert state of affairs that prevailed at boardroom level for a couple of years after the credit crunch, it failed - didn't really even try - to explain what, economically, caused all this mess in the first place.

Here, therefore, is the ideal companion volume. Instead of viewing the battle from Operations HQ by reference to the crisis meetings of Wall Street's and Washington's Masters of the Universe (the image that comes to mind is beetroot-faced generals strutting about impotently while the Andrews Sisters push military units around a big map with snooker cues), Lewis takes us right into the heat of the combat, like a journalist embedded with a crack squad of advanced position infantry men as they dodged sniper fire and the general fog of war armed only with a Rusty Humvee and some tarpaulin (think Generation Kill as opposed to Downfall).

This strategy enables Lewis to tell some interesting human stories - the rag-tag collection of fellow travellers he introduces us to are, as befits players in a tragic farce - idiosyncratic outsiders and loners - but through their experiences Lewis offers uncommon colour as to what it is like at ground level engaging with Wall Street.

Along the way you will learn, with great clarity and simplicity of image - exactly what mezzanine mortgages-backed CDOs were, why the went wrong, and how the self-fulfilling cycle of CDO creation ratcheted a well-intentioned risk-spreading device into something which was nothing more, really than a glorified ponzi-scheme. And, unlike Bernie Madoff's scheme, which took some time and expertise (if not much) to reverse engineer and figure out, this one - an order of magnitude larger - went on in full, transparent view of everyone.

That said, I do think Lewis over-simplifies, though not in ways that fatally undermine his case - but in ways that are calculated to make the whole market sound as preposterous as absolutely possible; an exertion which really was not needed. The role of AIG and the Monolines, for example, in converting the "towers of dross" into triple A securities, was under-explained. Lewis characterised the insurers as investors: in a sense they were, but actually they were insurers of the performance of these bonds for other investors - yes; exposed to the risk of their default so investors in that sense, but in return lending their own triple-A credit rating to the senior slices of what Lewis compellingly describes as a cow pat pie.

Lewis is especially, and incompatibly, unkind to some investment bankers in particular (a point well made by David Bahnsen in his excellent Amazon review), and having read this, it comes as no surprise that The Big Short should have fuelled the ire of the Senate financial services committee - whose chairman repeatedly referred to it - in its recent hearing on the Goldman Sachs Abacus situation, Goldman being repeatedly implicated within Lewis' pages.

With that in mind it will be interesting to see how The Big Short fares in this year's Goldman Sachs/Financial Times business book of the year (among the judges: L Blankfein)

But if Goldman is bagged, poor Howie Hubler from Morgan Stanley - who had the prescience to short the mezzanine tranches, but catered for the negative carry of his CDS premia by going long the (equally suspect) triple A tranches (ouch) but in ten times the size (ouch to the power of ten) thus losing nearly ten billion on a single trade is utterly excoriated.

Not poor Howie at all, actually, as he (like all Bank employees) got to keep previous (multi-million dollar) bonuses and was simply deprived of his own "forward carry" - a small and asymmetrical price to pay for putting 15bn of his employer's shareholders' money at risk.

Lewis handles the build-up to the final collapse masterfully - especially the lack of faith shown in his motley band of brothers by their own investors even as CDO indices plummeted yet, by some remarkable anomaly, the mark-to-market valuations of their short positions continued to decline - and the denouement when it finally arrives is as striking as you'd expect (Lewis, with a thriller-writer's flair, pegs it to a (positive) CDO forum being held at Bear Stearns, during which Bear's stock price, hour by hour, tanked.

As the dust clears Lewis returns to Liar's Poker, which he regrets has been read more as a how-to guide rather than the cautionary tale he intended. As an odd coda, in the epilogue, Lewis meets his old boss and nemesis (though from the exchange it transpires to be the other way round!) John Guttfreund. Clearly Guttfreund hasn't got over the damage Lewis did to his reputation (to be fair, Lewis was simply the first among many - and Guttfreund did preside over the most catastrophic hedge fund failure of all time well after Liar's Poker was published, so it's a bit glib of Guttfreund to sheet all his troubles back to Michael Lewis), and even now Lewis has not entirely forgiven the old Titan, for ushering in the era of the publicly owned investment bank, which Lewis contends was the sine qua non which made all of this disaster possible.

An interesting thought, whether that impulse, so many years ago, might have led to all this now.

Olly Buxton

After reading tons of material on financial crisis, I thought that this one will be just another book of financial breakdown. I was completely wrong, and this book has been truly a pleasure to read. In fact it has been the best of the dozens of books published spitting on credit armageddon. The typical Michael lewis style to put a very complex financial structure in simple english embedded in the very enchanting story will definitely leave a reader spellbound. Its worth reading again and again. I will go with 5/5 for this fantastic story of the greatest economic event of our times by the best in the field.