The Big Short: Inside the Doomsday Machine Is Another Michael Lewis Must Read

As a senior citizen who watched helplessly as her 401K tanked down to an 001K, I read whatever could help me make heads and tails of the great 2008 economic tsunami.  In his new book, The Big Short: Inside the Doomsday Machine, published March 15, 2010, Michael Lewis helps ordinary people understand some of the elements of the perfect storm that brought on the problem.


The Big Short is fast paced and entertaining as the great economic fall is told in the narratives of a group of not very well known hedge fund managers who knew about the disastrous economic practices of big mortgage lenders, banks, and Wall Street firms and warned others of the impending doom.  Having been ignored, they bet against the tide and earned big money for themselves and their clients in the process. Thus, they profited from shorting the market, betting on its fall as they predicted.  Key to the storm is the greed and seduction of money of Wall Street firms matched by the seeming incompetence and denial of Wall Street to manage the snowballing tide of subprime mortgage.  Wall Street's failed risk management is discussed by the different hedge fund managers in the book.

Steve Eisman, one of the protagonists tried to describe the scenario," How do you explain to an innocent citizen of the free world the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation?" How, indeed, would you explain that to this innocent citizen of the free world?

We, of course know it now.  We know that mortgage lenders and big brokerage houses found a way of packaging real estate units which were sold on Wall Street.  As these got gobbled up, brokers beat the bushes to find more home buyers by lowering lending standards, offering mortgage to unqualified borrowers so they could buy price-inflated homes.  When this was not enough, brokerage houses sliced and diced these mortgage packages and took out insurance in case the market went sour.  Motivated by greed and seduced by the ease with which money came, Wall Street firms operated in disregard of sound financial practice and failed to police their own.  And so on and so on. 

Michael Lewis blew into the writing world in his debut book, The Liar's Poker an entertaining and humorous account of his life as a finance analyst trainee at Salomon Brothers during the financial folly of the 1980's.  His subsequent book, The Money Ball: The Art of Winning an Unfair Game, about the effect of statistical analysis on baseball was a best seller. His other best seller,The Blind Side,( about football player, Michael Oher who was rescued from poverty by foster mother Leigh Anne Touhy and prodded into football stardom) was adapted into the big screen, became a blockbuster movie and earned Sandra Bullock an Oscar.  Lewis is an engaging story teller  whether he writes about himself, a inspiring biography or, in this case, an economic disaster.  He lures the reader within the first few pages to read on and soon the reader is hooked. He writes with dark humor and sarcasm helping to make the terrible outcome more palatable.

Lewis revisits his cautionary tale in the Liar's Poker in the foreword to The The Big Short as he writes of his hopes that the finance industry would have learned from the 1980's " when a great nation lost its financial mind." Alas, it did not find its mind and the American economy tumbled into a recession taking the rest of the world with it.  Sadder still, harbingers of doom appear as we continue to get into debt like borrowers of the last decade and print money like the toxic mortgage units and credit default insurance of the 2008 fiasco, the government and the finance industry seemingly impotent to stem the tide or oblivious of the need to manage the risk. As the book characters caution, there may not be an adult in charge. Meanwhile already devastated innocent citizens of the world look on helplessly.

For other scholarly information, I suggest "The Greatest Trade Ever: The Behind the Scenes Story of How John Paulsen Defied Wall Street and Made Financial History." by Gregory Zuckerman, November 2009