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
