My Rating – 4.25/5
The Big Short describes the unravelling of the great credit bubble burst from the perspective of 3 investment groups, which bet explicitly in favour of the Armageddon (i.e. against the entire matket), though each was a rank outsider from the gigantic fixed income market factory that churned out the trillion dollar mortgage bonds.
I read The Big Short in November 2010. By that time the carnage was already over and the stock market was once again on the ascent. I was quite aware about most of the major events during the crisis and yet the book kept me on tenterhooks. Reading it was like reading a financial thriller. Lewis deftly tells the story of 3 set of investors – Steve Eisman and his colleagues at FrontPoint, Dr. Mike Burry, the one eyed hedge fund manager of Scion Capital with Asperger’s Syndrome and the team at Cornwall Capital – Charlie Ledley, Jaime Mai and Ben Hockett.
Each one of them was unique. Mike Burry was a loner interested only in hard facts sitting in his office for days on end with blinds drawn, immersed in numbers. Eisman was a former equity analyst turned hedge fund manager – specialist in subprime lenders. The team at Cornwall Capital were in the habit of making money by betting on the “Black Swans” that Wall Street least believed would occur. By 2005 each of them came to the same conclusion that the subprime mortgage machine was doomed and the smart guys on the Wall Street had no real idea about it. Each bet explicitly against the market using the credit default swaps – insurance contracts that let you mitigate your risk.
Lewis narrates the lives of these people during the period that led to the boom and the subsequent doom. It’s interesting to read how all of them came to the same conclusion through their own and unique thinking process, how their personalities and psychology played the part in shaping their lives and their investment philosophies. While doing so Lewis also explains how the once revered “financial engineering” of CDO (Collateralized Debt Obligation) and CDS (Credit Default Swap), instruments that were meant to help the bankers to distribute the capital efficiently in a free market became the tools of greed that subsequently led to the catastrophe. He also asks some uncomfortable questions as to the incentives for people that made them turn a blind eye towards the obvious, why and how the regulators were caught off guard, why the people who were supposed to foresee the crisis and failed to do so were left in charge of it afterwards and how people on both the side of the trade left the table rich.
The Big Short is a captivating read. Lewis is equally skilful (as previously demonstrated by him in Liar’s Poker) at explaining the complex workings of mortgage bonds, CDOs and CDS in a simple manner so that everyone can grasp the concepts. The book takes the story of Liar’s Poker to its inevitable conclusion.
Thank you for reading. I appreciate your time.
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My other reviews of Michael Lewis’s books –