The Big Short: Inside the Doomsday Machine

The moral of this story is that people will see what they are paid to see and that if they are incentivized not to see the truth, they won't. That was the situation described by Michael Lewis. It was the experts who failed us again. It was one guy with Asperger's Syndrome (which may have given him a huge advantage since the condition does help one to focus intensely) who realized that the banks, in making negatively amortized mortgages, were creating a situation to would inevitably fail. He decided to bet against it, was right, and made billions through the use of the banks own creations: the credit default swap, which is basically an insurance policy that pays off big if a bet goes south.

Goldman Sachs, virtual lone survivor of the show more meltdown thanks to its friends in government, persuaded AIG to insure billions of the subprime mortgages. That was to their downfall. They never did their homework. Nor did the rating agencies. Nor did the regulators.

"People who create disasters make a lot of money cleaning up the disasters because they are the only ones who know about the disasters." The current system is a very elegant form of theft. Basically, Wall Street could care less about investors and is only interested in getting the maximum number of fees. Alan Greenspan is labeled as the worst Fed chair ever, having kept money way too cheap for too long, and ignoring the whole sub-prime mortgage problem thinking, in good libertarian form, that it was none of his business.

The big question is, have what have we learned from this debacle? I suspect nothing. Especially when I hear big wigs predict future financial meltdowns within 5-10 years. Ultimately, Lewis believes that Wall Street has divorced itself from American society and may have done itself in. Soon, as people learn that brokers are encouraging investment in stocks which their own firms might be betting against, customers will learn of the conflict of interest and their world will come tumbling down. It's not a pretty picture. The hatred of Wall Street and its minions is palpable outside NY and Washington. It elected Trump who has learned nothing, instead subscribing to Wall Street's code of doing nothing unless it benefits itself, and falling for its sycophancy. Whether that will ultimately unhinge him remains to be seen. show less

Required reading for anyone who wants a layman's history of the financial meltdown of 2008. Lewis does an admirable job of making sense of the many obscure financial tools that led to the failure of Lehman Brothers and Bear Sterns, as well as the government bailout of AIG. While you might think sifting through the many acronyms (CDS -- credit default swaps, etc.) would be tedious, Lewis uses metaphors to give a relatively clear (as clear as possible, I think) view of the landscape.We discussed this book for the Goodreads, Inc. book club, and we all seemed to agree that there is no good guy in the book. The heroes of the book -- Mike Burry, Steve Eisman, et al -- are merely the smart guys, not the "good" guys. They made money when show more everyone else collapsed. Good for them, I guess. Throughout the book, I felt a kind of righteous anger. In fact, if this book elicited one response from me, it was anger. Anger and disbelief that something like this could happen. But at some point, I just sort of stopped being angry and started laughing at the ridiculousness of it all. Anyway, your level of anger may differ from mine.I'm a raving Michael Lewis fanboy, and this book did nothing to change that. I thought it was a bit better than [b:Liar's Poker: Rising Through the Wreckage on Wall Street|1171|Liar's Poker Rising Through the Wreckage on Wall Street|Michael Lewis|http://photo.goodreads.com/books/1157831864s/1171.jpg|855103] but still nowhere near the genius of [b:Moneyball: The Art of Winning an Unfair Game|1301|Moneyball The Art of Winning an Unfair Game|Michael Lewis|http://photo.goodreads.com/books/1158120691s/1301.jpg|416305]. show less

This is the true story of a handful of investors who bet a relatively small amount of money in the mid-2000s that the housing market would collapse. It took approximately 2 years for their bets to pay off but they made a ton of money. They placed their bets by buying exotic financial instruments (specifically, credit default swaps on collateralized debt obligations, or "CDOs," backed by triple-B or lower-rated tranches of mortgage bonds) that the vast majority of people, including the Wall Street firms that sold them, didn't fully understand.

Most people couldn't conceive of housing prices falling everywhere in the country at once and, as a result, Wall Street firms didn't have to do much to convince the rating agencies to give show more triple-A ratings to securities backed primarily by subprime mortgage bonds. Those triple-A ratings then gave everyone else an excuse to ignore the risks they were running. "Wall Street investment banks had somehow conned the rating agencies into blessing piles of crappy loans; . . . the machinery that turned the loans into supposedly riskless securities was so complicated that investors had ceased to evaluate risks." (p 243)

Lewis describes most people on Wall Street as stupid rather than corrupt. "One of the reasons Wall Street had cooked up this new industry called structured finance was that its old-fashioned business was every day less profitable. The profits in stockbroking, along with those in more conventional sorts of bond broking, had been squashed by Internet competition." (p 172) The problem was that Wall Street CEOs didn't really know their balance sheets anymore and therefore did not understand the risks their banks were taking (and the regulators knew even less). As Lewis says, on page 177, "far too many people were taking far too many financial statements on faith." And, "the rating agencies had abandoned their posts . . . they were almost surely rating CDOs without knowing exactly what was inside them."

Lewis thinks Wall Street firms took a wrong turn when they started to go public because that's when "they transferred the ultimate financial risk from themselves to their shareholders. . . . The shareholders who financed the risk taking had no real understanding of what the risk takers were doing. . . . All that was clear was that the profits to be had from smart people making complicated bets overwhelmed anything that could be had from servicing customers, or allocating capital to productive enterprise." (p 258)

He also takes aim at the system of incentives on Wall Street that made even people on the wrong side of the housing market bet rich. "What are the odds that people will make smart decisions about money if they don't need to make smart decisions--if they can get rich making dumb decisions?" (p 257)

And finally he points out that Wall Street firms may have disdained the need for government regulation in good times but insisted on being rescued by the government in bad times or, as he puts it, "success was individual achievement; failure was a social problem." (p 210) At the end, he quotes John Gutfreund, the former head of Salomon Brothers and his former boss, as saying "It's laissez-faire until you get in deep shit." (p 264)

This is a well-written and very entertaining book but also a very disturbing one. The investors Lewis focuses on may have been smart but it's hard to see them as heros. They were able to see reality when most people couldn't or wouldn't and were rewarded by making billions of dollars but they made that money because the housing market collapsed and alot of people suffered.

Wish this book had an index and a glossary and that the descriptions of the exotic financial instruments were a little clearer (but maybe that's impossible). I did really like it and would highly recommend it, but I think it would be easier to understand if you read a book about the big picture first (such as Chasing Goldman Sachs). 4 1/2 starts. show less

I'm actually a little bit angry that this was such a fun read, because I think that the view it presents of the crisis is fundamentally misleading - namely that it treats the financial crisis as a poker game, a bunch of bad beats, rather than what was, which was a series of major crimes that helped plunge the entire world into a catastrophic recession. This book is an account of the subprime mortgage bond meltdown on Wall Street in the years leading up to the latest recession we're still basically treading water in, 2005 to 2008. It centers on a handful of plucky underdog traders whose antisocial, anti consensus, anti-mainstream views helped them see through the miasma of manic speculation around them and eventually reap vast profits show more when everyone slowly realized that the products they had been frantically trading to each other were based on optimistic assumptions that they didn't understand or didn't care about.

It's an excellent tale ably told, with compelling characters, a strong narrative, plenty of clear exposition of notoriously abstruse financial products like credit default swaps and collateralized debt obligations, and even a suspenseful plot arc as the clock on the Doomsday Machine of the subtitle ticks down to zero and people start losing billions of dollars. This would make for an excellent thriller novel, even if only people who actually worked on Wall Street would read it. Unfortunately, this is nonfiction targeted at a general audience, meaning it's supposed to be an accurate account of How Shit Went Down in the days before the financial crisis became everyone's crisis, and it's really lacking when you compare it to other accounts. Lewis' primary mistake is limiting his scope, and although the humanization admittedly improves the read, it completely leaves out the key lesson of the whole thing. He tells the story like it's a bunch of individual oddball traders bucking conventional wisdom through their superior research and what amounts to better math skills (one of the erstwhile heroes has Aspergers, which we're told helps him focus on his work better than the normies) in order to pursue essentially individual grudges in the small world of bond trading. It actually reads oddly like those parts of James Bond novels where he wins big in baccarat because he's a badass.

There are pages and pages of backstory on these traders operating in this world where ridiculous deals that no one understands are almost a given, and it's not until the end that you realize that some major questions don't get answered, like: are Our Heroes actually smarter than all these other traders? The book is certainly written that way, and there are several scenes where the opponents are shown to be idiots who don't reads prospectuses or question the flaws in their pricing models or consider what exactly it means to create all these nifty new types of securities. But does that imply that the crisis could have been avoided if everyone had bothered to do their research? I think the answer is clearly no, because multi-trillion dollar assets bubbles don't come about because someone's valuation formula can't handle negative numbers (as Lewis alleges), they come about because everyone is investing in garbage and simply looking for the next sucker, hoping to cash out their bonuses before the music stops. Lewis acts like there are somehow good guys in this story, those canny few who placed the right bets on the right financial products, but they aren't good at all when you look at the story from the outside, because what they're doing is indistinguishable from what Goldman Sachs and Deutsche Bank were doing.

It's easy to lose sight of that fact in the blizzard of financial terminology (which Lewis does a great job of explaining, probably thanks to his background as exactly this kind of trader), but as an ordinary citizen who doesn't think that bond traders do anything especially noble or interesting or beneficial to society, all I see is that a couple of rich people happened to be slightly better than some other rich people at keeping track of which insane bets they were making. The ultimate reason why we had a housing bubble, and why Lewis is writing about these people in the first place, is that traders exactly like the ones we're supposed to be rooting for got greedy when they thought they could make limitless amounts of money from nothing, and eventually they made a few bets too many. The key factor here isn't the stupidity of the traders, though there's certainly plenty of that; it's greed, because a lot of what this boils down to is fraud, plain and simple. That there haven't been more prosecutions speaks to both the timidity of the government and the incomprehension of the public (check out what happens in the trial that Lewis relegates to the last footnote).

I'm positive you could write equally interesting stories about previous crises like the South Sea bubble, tulipomania, the Mississippi Company, the dotcom era, and so forth (Lewis has also written about the S&L crisis, in a previous book I haven't read, and he has a forthcoming book about the fallout from this crisis), because as works like Reinhart & Rogoff's This Time Is Different show, asset bubbles all follow eerily similar scripts. The solution is not to simply make more clever trades and do better math (if someone like Isaac Newton can lose money on a speculative bubble, normal people haven't a prayer), the solution is to think carefully about what this kind of unregulated speculation really means in terms of the human lives out there who are somewhere out there beneath the ethereal whispers of CDSs and CDOs. The kind of gambling that all of these people are doing is corrosive and fundamentally different than what average commodity speculators are doing and should be doing, which is pricing risk and allocating capital.

In the foreword to the book Lewis tries to claim that he's always surprised that people seem to take his financial journalism in the same spirit as all those people who pump their fists to the "greed is good" speech from the movie Wall Street, but he's probably lying: the moral he presents isn't that piling derivatives on top of each other is retarded and bound to blow up in your face to the tune of many millions of dollars, it's that if you're a particular type of prickly savant you can tell rich people to fuck off whenever you feel like it and make zillions thanks to your misunderstood genius. Be a maverick! Fuck the suits! He's unquestionably glorifying the life of a bond trader, and while that's of course his prerogative, he can't claim to be totally unaware of the effect on the reader as he lovingly describes each clever deal and outsized return. The way he tells it, the only crimes committed here all involved not making enough money.

Meanwhile the actual fallout of all of this excitement - i.e. trillions of dollars of real money gone, economies around the world in ruins, widespread riots, and unknown but probably horrible political shifts as society's elites smoothly escape any real consequences for their actions and consolidate their power - gets relegated to the epilogue. This is the anti-Griftopia, a book that takes the insane world of high finance on its own terms almost without reference to the real world. He wants you to root for the main characters, even though they're betting against the housing market! Would you high-five a guy who won $50 betting that his next-door neighbor couldn't pay his mortgage? This was a good read, but a terrible way to understand the financial crisis, and it sucks that people who have never seen Inside Job or read Naked Capitalism will take this to heart without getting into the larger, and more important story beyond these "genius" traders. show less

I am of two minds about this book. Either:

* Everyone in the world should read this book

... or ...

* No one should /ever/ read this book.

When The Big Short first came out, I heard about it on NPR, listened to a review on Planet Money, listened to an interview with Michael Lewis on Planet Money, heard several more people talk about this book, and then decided not to read it for 'rage management' reasons. Planet Money recently released their recommended books about the crash and the economy and, this time around, I felt enough time passed between the crash and now that the rage would be a lesser rage, that I would not throw my Kindle into the wall, and the teeth grinding would be lessened.

The Big Short is a concise history of Wall Street show more from 2003-2008. By following the lives, and trades, of several sets of investors who saw the crash coming from miles away, the book delves deeply into the world of mortgage backed securities. As well as anyone can, it explains bond trading, tranches, credit default swaps (CDS), collatoralized debt obligations (CDOs), and synthesized CDOs which are CDOs made, bewilderingly, of other CDOs. Then the book goes on to talk about the crazy trader at Deutsche Bank who ran around selling CDSes on everything, the bond trader group -- who used to be equity traders -- who went short on everything they could find, the doctor come hedge fund manager who fought endlessly to tell his investors that these no-doc, negative amortizing adjustable rate mortgages with 2 year teaser rates were going to blow up and they did not listen, the kids from Berkeley who tried to make a killing and the people who actually went long on these things.

The pinnacle of the book is the "Wing Chau" scene, where the equity trader met someone on the other side of his trades who, in 2006, when bonds were already going bad, was convinced of the status quo forever and ever. Then the equity trader went home going "oh my god..."

The game was rigged. In theory Americans would refinance every two years from one terrible mortgage to the next to generate endless fees to dump into endless bonds that pretended to be "riskless." In the end, the mortgage deals blew up and the huge bundles of bonds were not riskless. Housing did not increase in value forever.

And yes, the few people who saw it coming made hundreds of millions off the crash, but at what cost to society as a whole? Most of them left, never to return to the game. They made their money but the cost to themselves was so high it wasn't worth it anymore.

It's a story of massive collective delusion, of outright greed, of fraud, of lies, of gamed rating agencies, of banks shifting massive untold risk on to their shareholders, of normal banking becoming too 'boring', of an industry who sucked up trillions of dollars and produced nothing, and of people who were playing with things they had no hope of understanding. A story of a giant game played with people's homes and people's ignorance on a mass scale and turning the American homeowner into just one dot in a giant Ponzi Scheme that was bailed out, no questions asked, by the US Government with even more of the American homeowner's money.

The book has an incredibly hooky style. It's clear. It's concise. It's sarcastic. It's entertaining. It's compulsive. It reads quickly. It's also a drive by on a twenty car accident on a freeway. I want desperately to recommend it but I feel everyone who reads this book will promptly sell their house, pull their money out of the banks, and go live on a compound somewhere in Western Michigan.

Seriously two thumbs up but now, when I read the economics blogs -- all which recommend the Big Short -- I am always going to think about one bond trader screaming at another one: "I'M SHORTING YOUR HOUSE!" show less

An absolutely riveting "financial thriller" that describes how three groups of investors, working independently, managed to win big betting against an overinflated housing market. Lewis, who's intimately familiar with the subject of monetary misadventure, uses these intertwined narratives as a tool to make an extremely complex subject accessible to the lay reader. "The Big Short" is, among other things, the clearest explanation of the Crash of '08 that I've read to date. CDOs, mortgage bonds, floating ARM loans: they're all explained here in gruesome detail. The book also provides fascinating portraits of its oddball investor heroes. It seems that making money off real estate derivatives was such an intoxicating experience for Wall show more Street that it took a slightly cracked outsider to see how doomed the market really was. In more personal terms, it's gratifying to see these talented eccentrics – most of them late bloomers without any formal training in finance – beat the Wall Street pros and make a bundle doing it. Lastly, "The Big Short" is a stunning indictment of Wall Street fecklessness and irresponsibility. Say what you will about those Occupy Wall Street folks beating on drums in downtown Manhattan: "The Big Short" will make you want to heave a brick through the window of an investment bank and hide your own money in a mattress. After finishing Lewis's book, you'll never look at modern capitalism the same way again. show less

A frightening book. Pissed me off all the way through. A lot of people should have gone to jail over the sub prime lending fiasco.

I read this trying to get a better grasp of what happened to our economy. I am not a big finance guy and hoped it would be written in a way I could understand. It was great.

People saw the collapse coming but were ignored in favor of greed. A must read.