on 21 April 2010
The book's salient points appear on the bottom half of p.243 "...how Wall Street investment banks somehow conned the rating agencies into blessing piles of crappy loans;how this had enabled the lending of trillions of dollars to ordinary Americans;how ordinary Americans had happily complied and told the lies they needed to tell to obtain the loans;how the machinery that turned the loans into supposedly riskless securities was so complicated that investors had ceased to evaluate the risks;how the problem had grown so big that the end was bound to be cataclysmic and have big social and political consequences..."
The elements that comprise the book excellence are:the first class intellect of the author matching the quality of the Institutions he was educated namely Princeton University and the London School of Economics;his charisma in writing concisely, lucidly and impressively wittily, and the fact that he is imbued with morality;the story is not presented in the abstract but through brilliant albeit eccentric protagonists - all betting and winning against the market - such as Steve Eisman graduating from the University of Pennsylvania magna cum laude,and then with honours from Harvard Law School and Dr Michael Burry who abandoned neurology studies at Stanford to immerse himself in the world of finance. Burry's transition was apparently due to his unknowingly been afflicted with Asperger's disease which made him focus with immense intensity with whatever his interests might be, he might well be collecting stamps;the clarity and wit of the author's explanations of relevant financial instruments such as subprime mortgage bonds, credit default swaps and CDOs;the elucidation of the alchemy of transforming bundles of triple-B-rated subprime mortgage bonds into CDOs,eighty percent of them miraculously tranformed into double or triple rated-As. The facility of securing loans for houses is illustrated through a strawberry picker owning a $750,000 house and a Las Vegas stripteaser owning five.
The book concludes with a bitter taste in that there is no catharsis because instead of redemption the corrupt financial institutions are rescued by the State and thus ultimately the innocent ordinary American pays through taxes for their sins.
The book is not simply recommended reading, it is required reading.
A well written, thoroughly researched insight into the relatively small band of individuals that predicted that the house mortgage market would implode. To these investors and speculators who chose to take, not much more than a cursory glance at the underlying assets of the glut of 'mortgage bonds' marketed by Wall Street institutions, it was blindingly obvious that many contained extremely high levels of 'guaranteed to default' sub-prime borrowers. They were further amazed when they were offered by Blue Chip universally known companies who in many cases had put the bonds together and sold them to their clients, insurance cover at very low cost, to pay out vast sums of money as and when the bonds failed. And guess what?........you didn't even have to own one of these toxic pieces of financial crud....just pay the premium and pick-up the loot! These policies known as Credit Default Swaps (CDS) are what the author refers to as 'The Big Short'.
Many of the beneficiaries were constrained in making even more money by restricting the CDS's they bought because of the fear that making a killing cannot be this easy and 'we must have missed something'. They hadn't, it was a fast route to vast riches.
Those who put together these Mortgage Bonds and those who traded in them, blindly ignoring the irresponsible dishing out of mortgages to all and sundry and the collapse in the value of properties were either blinded with greed or certifiably stupid.
A really good book, interesting, informative but at the same time quite shocking.
on 12 May 2010
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.
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.
on 28 March 2010
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.
on 14 December 2010
I bought this book because I enjoyed Lewis' first book Liars Poker. I was somewhat disappointed in this, his latest book.
The Big Short told me little that I, an unsophisticated market follower, did not already know about the latest market crash/scandal/disaster. The story line was kind of weak and the character development somewhat disjointed: kind of like he tried to make up something to make a technical presentation interesting to the laymen.
What I did get out of it was an understanding/appreciation of the financial instruments and thinking behind their creation, that underlined the latest market problem. That alone, for me, made the book worth reading.
on 24 March 2010
Michael Lewis definitely has an ability to tell a story in an engaging fashion. "Liar's Poker" was great, and this is no different. He takes the reader through the past few years of calamity, tracks the origins, and identifies the main weaknesses of the system.
Predictably, he comes to the conclusion - like so many others have - that the ratings agencies and credit default swaps had significant roles in the development of the financial crisis.
And that is really the main problem with this book. Although, it is an engaging read, it doesn't really add anything new to the picture, and as such, it feels as if it's at least a year late to the party.
on 24 January 2015
Fab. Insightful. Very readable. Exposes the venality of the market and those who ran it (whilst accepting that we don't get to hear their response to Lewis's views and accusations), and the way the establishment clubbed together, as it always does, to protect itself. Many should have gone to jail, but instead it was the 'innocents' who lost money - share holders and investors, whilst those who perpetrated trillions of dollars of losses were effectively rewarded, most kept their jobs, and also the $millions they were handed in salaries and bonuses awarded for their fraudulent deals, scams and trickery. Not too different to the UK, where the establishment has protected leaders of big banks who caused mayhem and personal angst and strife for many - careers ripped up and destroyed, and the various personal fall outs, but they were allowed to get away with it, a slap on the wrist, an apology maybe, and were allowed to keep enormous pensions.
Two criticisms of the book, although it's explained it's sometimes hard going to understand some of the detail (the gist is always clear), and it is sometimes repetitive. Still a five starer though, for the effort of producing something so revealing, and which clearly stung a few people, people who were incredibly fortunate to have only been stung rather than buried.
In this book, the author focuses on the activities of a small group of people, in many ways eccentric amateurs, and initially totally unknown figures to the ‘big beasts’ in the rarified world of investment banking, who foretold the crash of the US mortgage bond market that was the start of world-wide financial turmoil in 2008, and in so doing profited greatly. By a huge amount of tedious work, reading boring, jargon-heavy literature put out by the banks and other financial institutions, they realized that there was a massive fraud being perpetrated on investors in this bond market, an area that had rapidly come to hugely outstrip the traditional equity market. The first part of the conspiracy was to lend billions of dollars to house buyers who clearly did not have the means to meet the payments in the long term. These were the notorious ‘subprime mortgages’. The banks were then packaging these mortgages into financial instruments called ‘collateral debt obligations’ (CDOs) and persuading the rating agencies to give 80% of them a triple-A rating on the basis that the CDO contained a few low-risk loans. They could then be sold to eager buyers worldwide and earn the bank substantial fees.
But it didn’t end there. Those that failed to get the desired rating were simply repackaged, so that all these dubious products were eventually classed as ‘risk free’. This was the second part of the conspiracy and a huge failure by the rating agencies (who were paid by the banks). They failed to examine in detail the structure of a given CDO, but simply accepted the bank’s assessment. The situation rapidly spiraled out of control. A CDO-A might contain some of the mortgages in CDO-B that in turn might contain some of the mortgages in CDO-C, and the latter might even contain some mortgages that were in CDO-A. This was an Alice in Wonderland world where it was impossible to give a true value of any CDO, and its worth was what the bank said it was worth. Even the senior staff at the banks that were selling the CDOs didn’t have a full understanding of what was happening.
This is where the outsiders entered. First they realized that the original loans were often being made to people without asking for proof of income (‘liars’ loans’) and that the home owner was offered a low interest rate (the ‘teaser’ rate) initially, typically for the first two or three years. They argued that after this period expired there would be a high probability that the owner would default and, crucially, that this would happen to the vast majority of loans within any given CDO, because they would all be unable to pay for the same social reasons. The banks, however, had risk models that only considered a worse case scenario of just a few percent failures. If they could take out insurance, via what were called ‘credit default swaps’ (CDSs), against a failure of a CDO, they argued that they would only have to wait a couple of years or so before the low-rate period expired and the insurance would have to pay out. Throughout they remained worried that they had missed something, because the logic seemed so obvious, they couldn’t understand why the banks themselves had not seen it. Eventually they did of course, and much later started to cynically (even corruptly?) bet that the very bonds that they had issued would fail.
Initially, the outsiders had hurdles to overcome. They had difficulty finding any bank that would sell CDSs to them because they were mere minnows with only small funds. However, these hurdles were overcome and to some amusement of the banks they started to accumulate substantial positions in ‘bets’ that the CDOs would fail, and at only a small cost in premiums. It was a nail-biting time because the price of CDOs continued to be stable, even sometimes rise, despite the increasing rate of defaults on the underlying loans. But the end, when it came, was very rapid, just as the outsiders had predicted. Indeed the losses were so great that they feared the big banks would themselves fail and so be unable to pay out on the CDSs. In great haste in the last stages of the collapse they scrambled to offload them and managed to get out before the final collapse.
The rest is history: several major bank collapsed; hundreds of billions of dollars were pumped into the system to keep others afloat; Congress stepped in and bought subprime mortgage assets for up to 2% of the US GDP; and senior bankers who had lost billions in the debacle were allowed to walk away with ‘bonuses’ of tens of millions of dollars. But the householders who had defaulted on their loans received nothing and were dispossessed.
What this sad story revealed was widespread cynicism in the financial industry, banks, rating agencies and regulatory bodies, bordering on corruption, and a remarkable lack of understanding of the fundamentals at the highest level in the banks. There have been many books about the causes of the financial crash of 2008, but few can match this one in the detailed knowledge of its author and the clarity of his presentation. There is some repetition in explaining technicalities, but this is acceptable. If the reader understands it first time these can easily be skipped over without loss of continuity. Overall it is an excellent book.
on 6 April 2010
What a great book!
How many times have I been asked: 'well, if a trillion dollars was lost in the credit crunch... where did it go?'
Now you can find out by reading this excellent book by Michael Lewis.
Lewis is such a good reporter/writer. He manages to get inside information from obscure sources and turn quants and rogue traders into characters you can get involved with.
I read this book in one day, and it's 264 pages of short-selling, collateral-debt-obligation jargon-infested material, but Lewis manages to make it interesting and readable.
You will discover the one-eyed man with Asperger syndrome with no collateral who gave up being a medical doctor and made a BILLION dollars by shorting (betting against) the subprime market.
And the two geeks at Cornwall Capital who didn't just bet against subprime but against the Wall Street firms who peddled them and made a fortune.
And Eisman, The Iceman, who kept telling the big banks that their CBO books were worth zero, and a $200M stockholder in Bear Stearns that his bank was daffy-ducked minutes before it really was!
Learn how AIG, Merrill's and Lehman's went bust.
Lewis has this wonderful metaphor of the big players all holding the ropes of a giant ever-inflating helium balloon (the subprime racket) trying to stop it escaping. Some let go on time, others are dragged up into the void.
The Big Short is a book that shows an entire system and everyone in it can be totally wrong or totally lying!
It reminds us all to follow our gut instinct: 'if it looks too good to be true... '; and 'what goes spectacularly up for no reason will, inevitably, crash!'
Truly a wonderful insight into the world's biggest racket. A racket that is still in full swing!
Well done Michael Lewis!