The Big Short – Michael Lewis – 2010 (new afterword 2011)

• Michael Lewis: Investment banker turned best-selling writer.
• Reviewers say: “If you read only one book about the causes of the recent financial crisis, let it be this” (Washington Post)
• “Terrific …… brilliant, as always” (Observer)
• “Magnificent …. A perfect storm of brilliant writer meeting big subject” (Guardian)

This book comes at the debacle very much from the point-of-view of a few, named, individuals, and as such is very personality-driven. The cover summarises: “From the jungles of the trading floor to the casinos of Las Vegas, The Big Short tells the outrageous story of the misfits, renegades and visionaries who saw that the biggest credit bubble of all time was about to burst, bet against the banking system – and made a killing.”

The Big Short also goes back to the early 1990s, when it introduced the key players from whose perspectives the story is told, including Steve Eisman, Vincent Daniel, Michael Burry, Charlie Ledley, Jamie Mai & Greg Lippman. This is very much in contrast with Gillian Tett’s book, where the banks and their personnel are the focus …… only Greg Lippman (a Deutsche Bank trader) rates a – passing - mention in her book.

In The Big Short, you really feel you’ve got to know the personalities, so it’s a more ‘human’ book. Although it does describe how JP Morgan invented the derivatives, I did find it useful to have had the fuller explanation given in Fools Gold. If you think it’s complicated – that’s because it is.

This book gives some important added insights.:

• It explains that AIG took a very real risk, at too low a price, but wasn’t regulated because it wasn’t a bank.

• The insurance banks believed they’d bought from AIG, to render their products ‘risk-free’, was a mirage – if AIG went bust, the insurance was worthless.

• It tells how banks pulled the wool over the eyes of the ratings agencies, and got their toxic products rated as if they were safe – enabling them to sell them to unwitting purchasers, and making a nice profit along the way.

• And how good, in general, banks were at hiding things – even from shareholders

Highlights:

1. p.96 – “The subprime market tapped a segment of the American public that did not typically have anything to do with Wall Street …… lenders were making loans to people who were less credit-worthy than 71% of the population. “ Our protagonists asked lots of very relevant questions …. “In short, they performed the sort of nitty-gritty credit analysis on the mortgage loans that should have been done before the loans were made in the first place.”
2. p.143 – The ‘big dirty secret’ of Fools Gold is repeated here, in more robust language: “There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product.” So they synthesised more of them. “That’s why the losses in the financial system are so much greater than just the subprime loans.” As Eismann said, when he finally realised what was going on: “This is allowed?”
3. p.155/8 (2007) – Everyone believed in the ratings, so they didn’t have to think about it. But the ratings agencies were staffed by poorly-paid people, the smartest of whom left for Wall Street firms so they could help manipulate the companies they used to work for. ….. The realisation dawned: “This is a fictitious Ponzi scheme. …. Do these (bond market people) deserve merely to be fired, or should they be put in jail?
4. p.199 & 221 – our protagonists cash in
5. p.243 – “ ….. how Wall Street investment banks somehow had conned the ratings agencies into blessing piles of crappy loans; how this had enabled the lending of trillions of dollars to ordinary Americans; how the ordinary Americans had happily complied and told the lies they needed to tell in order to obtain the loans; how the machinery that turned the loans into supposedly risk-less securities was so complicated that investors had ceased to evaluate risks; how the problem had grown so big that the end was bound to be cataclysmic and have big social and political consequences.”
6. p.244 – Sept. 2008 – Banks own up to the massive losses. “The big Wall Street firms, seemingly so shrewd and self-interested, had somehow become the dumb money.”
7. p.256 – Lewis concludes that, what went wrong was … simple. Given that ‘investment’ and ‘gambling’ have a lot in common, the people on the ‘short’ side of the subprime market had gambled with the odds in their favour. The people on the other side (the entire financial system) had gambled with the odds against them. What’s strange and complicated, however, is that pretty much all the important people on both sides of the gamble left the table rich. …… The CEOs of every major Wall Street firm …. without exception, either ran their corporations into bankruptcy, or were saved by the gov’t. They all got rich. The incentives on Wall Street were all wrong; they’re still all wrong.
8. p.260 – The people in a position to resolve the financial crisis were the same people who had failed to see it: Treasury Secretaries present & future, Fed Chairman Ben Bernanke, all the bank CEOs. And the government officials who should have known a lot more about what Wall Street firms were doing. All shared a distinction: They had proven far less capable of grasping basic truths in the heart of the US financial system than a one-eyed money manager with Asperger’s syndrome.

I like this book because it was easier to read, in an accessible racy style and brought the catastrophe to life through personalities. Paradoxically, I disliked it for the same reason, for lack of any references, and that it was USA-focussed.