Having loved the film, I decided to buy the book it was based on. The Big Short is an informative and entertaining look at the 2008 financial crisis, primarily from the perspective of those who anticipated the housing market collapse and bet against the market. You will find that many of the scenes from the film were taken directly from the book. With the book you just get more details and a few extra stories and characters. I was particularly keen to learn about the $9 billion trading loss of Howie Hubler at Morgan Stanley. The Benny Kleeger mentioned in the film is really referring to Howie.
on April 22, 2014
Michael Lewis's brilliant book "The Big Short," is billed as a sequel to his earlier biographical effort "Liar's Poker" which covered his 1980s experiences on Wall Street. It's a great example of why Malcolm Gladwell has called Lewis "the finest storyteller of our generation."
Subtitled "Inside the Doomsday Machine," the book chronicles the 2008 market collapse from the perspective of those who saw it coming and bet against the subprime mortgage market at the height of the housing bubble. The protagonists, whose foresight earned them fantastic profits, are a colorful lot, including: Steve Eisman, Danny Moses and Vincent Daniel (of FrontPoint Partners, owned by Morgan Stanley); Michael Burry (of Scion Capital); Charlie Ledley, Ben Hockett and Jamie Mai (of Cornwall Capital); and Greg Lippmann (of Deutsche Bank), and a handful of others.
Amazingly, none of these contrarian investors were experts in the housing market. They saw disaster coming while the "smart money" was betting that house prices would continue to rise and that subprime mortgages would pay off. It took this unlikely group of outsiders to see what was about to happen and undertake "the big short."
So what was the Doomsday Machine and how did it work? As Lewis points out, it was spawned by a toxic mix of the US housing bubble, sub-prime mortgage lending, investor greed, and the insatiable demand for leverage by Wall Street Banks. Aiding and abetting these factors were unwitting credit agencies populated by Wall Street rejects and wannabes.
Investors around the world wanted access to the ever-inflating American mortgage market. This gave lenders ever stronger incentive to push new loans out the door. Interest rates went down and credit standards for borrowers were relaxed again and again with demand filled by writing increasing numbers of sub-prime mortgages. Mortgage-backed security (MBS) sales were driven through the roof.
Many mortgage lenders practiced an "originate and sell" strategy - taking their profits by bundling the loans up as mortgage-backed securities and selling them to third parties, mainly investment banks, (thereby passing along the risk associated with the sub-prime mortgages they were writing). The investment banks then repackaged these mortgages in various ways and sold the mortgage debt of the US household sector to global investors. Among the exotic financial instruments used for this purpose were Collateralized Debt Obligations (CDOs).
CDOs were actually pyramids consisting of tranches representing various levels of risk and related interest payments. The riskiest level ("the mezzanine") got the highest rate of interest, but were the first to be wiped out as defaults rose. The least risky level at the top of the pyramid ("the penthouse") received the lowest rate of interest and were last to fall as defaults rose. Many of these portfolio slices received generous ratings of triple-B and even triple-A from the big rating agencies, creating a false sense of security among potential investors
This process was highly profitable for the financial sector and, as long as home prices were rising and producing good returns for investors. But, when the market turned, things got really ugly. It was a house of cards. Lewis notes that for the whole system to collapse, the housing market didn't need to fail in absolute terms. It didn't even need to fall. It just had to stop growing as fast as it had during the boom years. Of course, as fate would have it, that's precisely what happened.
In the ultimate irony, firms like Goldman, who created and sold CDOs, bet against their own investors by buying Credit Default Swaps (CDSs) which insured the mortgage-backed securities they were selling against default. (For a few cents on the dollar a CDS commits the seller to pay the full value of the contract if a mortgage-backed bond defaults, or becomes worthless.)
What this meant was that, to mitigate its own exposure, Goldman was betting against its own customers. And, by aggressively taking the other side of this risk by selling CDSs for a small return, firms like Morgan Stanley put billions of dollars of their proprietary capital at risk. Not smart!
Just how bad were the mortgages underpinning the subprime mortgage market? Lewis provides an example of "a Mexican strawberry picker in Bakersfield California with an income of $14,000 and no English who was given every penny he needed to buy a house for $724,000." This was cited as an example of the type of "no-doc mortgages"(no evidence of income or employment) that helped fuel the market collapse.
In short, the Doomsday Machine was a massive Ponzi scheme that, save for a massive government bailout, could have collapsed the entire global financial system.
If you're keeping score, Lewis points out that Morgan Stanley's $9 billion trading loss was "the single biggest trading loss in the history of Wall Street." But this pales to insignificance when you consider that the losses include five million jobs in the United States alone and some 40 percent of the world's wealth. In addition to the billions in taxpayer and investor losses, the human tragedy toll included evaporated pensions, ruined careers and, in many cases, lost homes.
In retrospect, the questions posed by this book are: "Has anything really changed on Wall Street?"; "Has financial regulation improved?"; and, most importantly, "Could something like this happen again?"
on July 19, 2016
Read the book. The movie is just drivel catering to the feeble of mind. The book on the other hand is an adventure story of a few clear minded individuals as they figure out what is happening in the market then capitalize on it. The story is gripping and you are willing on the protagonists to succeed.
on May 18, 2016
Its a book. A good one. It has many pages and smells of rich mohagany.
I didn't read it, was a gift for a family member.
Also, It's Uncanny that it has the same name as my... Nevermind.
The Big Short is the best kind of investment book: it's entertaining, with larger than life characters in unimaginable situations; it's edifying (you won't even realize you're being schooled until after the fact); and it's a story no-one else has told ("The Greatest Trade Ever" comes closest). Readers can get structured narratives about the recent crisis through excellent tomes like Sorkin's "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis -- And Themselves", or economist's critiques in books such as Stiglitz's "Freefall: America, Free Markets, and the Sinking of the World Economy", but you'll likely not find another book like this one; a stunning and jaw-dropping account by one of the best authors in the business.
Lewis is the same author who burst on to the scene with his first book, the instant classic "Liar's Poker", and who followed up with a string of excellent books, including "Moneyball" and "The Blind Side". "The Big Short" is Lewis at his best.
Lewis understands the investment business like the insider he was, but this book is very much from the perspective of a critic. It is much more direct in its criticism of the financial industry than was Liar's Poker. In that book he similarly crafted a terrific story, but with a bemused "can you believe we did that" tone. In this book, Lewis taps mainstreet's anger, and to great effect (sample quote, "... he was the walking embodiment of the bond market, which is to say he was put on earth to screw the customer"). It's hard for folks on mainstreet to know exactly who to blame, and exactly what Wall Street did to cause such a mess, and Lewis lays out in clear and entertaining detail who did what.
Who comes off looking badly? Wall Wtreet firms, rating agencies (Moody's, S&P, Fitch), the fixed income market, the SEC, Ken Lewis (no relation) of Bank of America, and the financial system in general.
Who are the characters? Steve Eisman, Dr. Mike Burry, and Greg Lippmann, none household names, but all memorable characters who become important cogs in the collapsing Wall Street machine. John Paulson (who, as referenced above, made the greatest trade ever) is featured in a small way, and is perhaps the only protagonist with any celebrity.
Eisman's story is centred on his bets against Collateralized Debt Obligations, or CDOs, an esoteric type of bond backed by assets such as sub-prime mortgagees. The second narrative thread follows Burry and the evolution of his fund in its bets against the housing bubble, and the impatience of his investors as the subprime defaults were slow to materialize. Lippman's story is even more unusual; an insider, the head subprime mortgage trader at Deutsche Bank, and one of the earliest to figure out the likely end to the subprime story. Lippman is willing to tell his story to anyone who would listen; unfortunately, that wasn't his employer.
As in Liar's poker, Lewis weaves his remarkable story around memorable characters, and through the telling of his story, he imparts an incredible amount of industry detail and insight into a very readable text. For example, in a few pages Lewis conveys the essence of options' mispricing, something it takes Nassim Taleb a book to do. The story contains both detail and context; individual transactions and broad commentary on the financial system, and neither individuals nor the system come off looking good.
For those looking for Wall Street conspiracy theories, Lewis provides a different angle than "Too Big To Fail". Goldman Sachs' sale to Burry of credit default swaps (CDS) on subprime mortgage bonds earned them a juicy sales commission, but it was an instrument they didn't back directly ('triple A' rated AIG backstopped most). Burry knew this, but was focussed on profiting from the obvious (to him) subprime credit bubble. When the credit bubble started becoming clearer to the investment banks, they too looked to load up on CDSs, with Goldman becoming one of the larger purchasers. It didn't occur to Goldman that the CDS securities might themselves be a bubble, and that the primary issuer of them (AIG) might itself face bankruptcy. Only the US government's bailout of AIG prevented Goldman and others from being caught in a classic squeeze: paying out on defaults and facing a bankrupt insurer on the other end. Goldman was lucky.
Lewis again on the dealers' modus operandi, "When you talk to the dealers, you are getting the view from their book. Whatever they've got on their book will be their view." "All that mattered was what Goldman Sachs and Morgan Stanley decided should matter." Whether it was true or not. When all the Wall Street firms were riddled with subprime exposure, they all had to say they were fine, there was no exposure. It wasn't fine, and it took time and effort for the shorts to prove them wrong.
A remarkable story of outsiders tilting at Wall Street when they had limited knowledge, access, and a system working against their interests. Turns out Wall Street was wrong.
on December 19, 2012
Reviewed by Mitchell Rhodes
The Big Short takes the reader on a fantastic ride inside the most recent, and many would say ongoing, financial crisis. Lewis introduces us to people who bet against the subprime mortgage market, in all its variations, and in doing so became unimaginably wealthy. They are presented as a few select heroes pitted against the corrupt and often stupid villains of Wall Street insiders and their legion of minions. Has anything really changed since then?
If Dr. Evil ever resurfaces in another installment of Austin Powers, puts his little finger to his mouth and makes a ransom demand for anything less than, “one gazillion dollars,” it will seem preposterous and, once again, a cue for all to laugh.
The shock and awe of billions or even trillions of dollars are past us. They are now just strings of meaningless zeros heading off into the vastness of infinity. Take for example the capitalized notional value of derivatives—pegged at 1.2 quadrillion dollars (December 2012). Really?
That’s the equivalent of 20 years worth of economic activity for the entire planet. And derivatives are only one asset class expecting a return on investment (ROI). When others classes, such as stocks, (traditional) bonds, money market instruments, real estate holdings, etcetera, are added to the mix, financial expectations, going forward, become even more unrealistic and ridiculous.
Due to a system of circular collateralization, debt, money and other financial assets essentially get boiled down to the same thing—mental constructs of value. The assigned values are now stratospheric. At best, they are delusional, dishonest and corrupt, and at worst, dangerously catastrophic.
It’s not the values in and of themselves that represent a threat; it’s the global financial system—and everyone in it expecting some sort of benefit, return or payback. Interest on global debt (estimated at $100 trillion), along with the expected ROI on other assets, requires continuous growth and a level of physical activity that’s beyond the productive capacity of a finite planet to produce it.
The level of physical activity being undertaken to meet the demands of the global financial system is literally killing off the natural capital that’s required to sustain human life. The ongoing financial crisis is not about strengthening banking regulations, reeling in reckless spending, evoking austerity measures or even curtailing greed, it’s how to deal with the consequences of a global capitalistic system that will ultimately fail. And along with that managing the psychotic state of human collective consciousness arising out of our committed efforts to try and save a doomed system.
For now, it seems, nearly everyone continues to be bullish on capitalism. Those with a desire to become gazillionaires are shorting natural capital markets and are betting that an ecological and social collapse can be avoided. Inherently, and by extension, they have deliberately and without shame or guilt shorted the rest of us too.
And yet, who’s effing who here? Each time we climb into the hamster wheel and begin to run, aren’t we also willingly putting everything at risk?
Most of what you've just read doesn't show up directly in The Big Short—rather it's been inspired by it. The story does tell of a select few who saw things differently and had the courage to act. I’ve taken a short position on capitalism. Crazy! Read The Big Short: Inside the Doomsday Machine and then judge.
Lewis spins out another great Wall Street story. This time it is all about a small group of unknown investors. These investors investigate; mortgage backed securities, the sub prime housing market, Wall Street investment banks, the ratings agencies, and even the SEC. They soon realize the entire housing market is a house of cards, that is just waiting to collapse. Then they position themselves, to profit from a fall in the housing market.
Some of the details Lewis uncovers, are rather shocking. S&P and Moody`s are basically a bunch lackeys, to the big investment banks. The Sec did nothing to monitor the quality of the Wall Street mortgage securities. The banking industry issued so-called liar loans to many home buyers. These people should have never been allowed, to take out a mortgage. And of course, the big investment banks knowingly issued all sorts of risky mortgage backed securities, that were rated as investment grade.
This was a very entertaining and informative read. In fact, I think this may have even topped Liar`s Poker.
on January 8, 2012
This is going to be less a 'book review' than a brief commentary.
In providing the former, this: 'The Big Short' is a amicably-written explanation of The Great Financial Meltdown that despite being a gripping tale, is still confounding to both the brain...and the spirit. This is the second book by Mr. Lewis I've read on this theme...the first being 'Boomerang'...and though I believe I understand more of 'what happened' back then, I'm still bewildered, and the questions I have are less about the specifics, or even 'Why was it allowed to happen?' than issues a few steps back from all that. Nevertheless, my gratitude to the author for once more adding some delineation to the subject.
In dealing with the latter...
I'm not going to say much that's new here, but I'll proceed anyway: I believe that one of the greatest bulwarks against 'progress' towards a more humane society in North America is the conflation going on regarding 'capitalism' and 'democracy'.
People see the word 'capitalism' and think 'democracy'.
And in the US especially, you don't mess with anyone's democracy...and therefore, you don't mess with anyone's capitalism. No matter how much each need to be 'messed with'.
Moreover, in America once you wrap an issue in the flag, all discussion effectively ends. So it's very difficult to talk about economics, about 'the travails of the 99%', about political reform, about just about anything having to do with Life Being Lived, without setting off a conflagration. Because, of course, it's all connected to democracy, the imperfect experiment, but the only system that 'In God We Trust' Americans have any faith in. Therefore, nothing really changes.
Add into the mix the utter manipulation of modern media to effect the whims and priorities by Those People From Both Arenas That Dicate The Dance (capitalism and democracy) as well as the pretty-shameful ignorance on the part of the average participant of each about each arena...and you've got the mess we're witnessing today.
People will not fight for something, notion, a cause, that they don't grasp. And in both instances, capitalism and democracy, there's been a pretty much wholesale 'hands-off' attitude about them...resulting in, for example, nothing being done about What Happened On Wall Street: nobody was charged.
What did I most get from 'The Big Short'? The inkling that if what happened had happened in another arena...say, the manufacturing of biological weapons, for instance...and there had been a catastrophe of equal proportions, then all Hell would have broken loose and that previous landscape would never have been the same. People simply would not have tolerated it. But because we're talking 'capitalism', because there's so little comprehension about it, because there's so much resignation and apathy...combined with 'capitalism' being the great dance partner with 'democracy'...nothing was done.
(A film adaptation of Mr. Lewis' book...the third one to be done, after 'Moneyball' and 'The Blind Side'...is schedded for release in 2014.)
Personal rating: 9/10
on March 21, 2011
I picked this up because I was so curious about how we got into such a mess with the economy. As a Canadian with a good job, I am somewhat removed from the crisis personally, but I see it everywhere in some way and didn't quite understand what caused all of that.
I can't say I completely understand everything in this book. Lewis definitely expects that the read has some understanding of stocks and bonds and definitions, but the more complicated things are explain a few times in the book, in a few different ways, using metaphors and illustrative language.
I also like that the various people he talks about become characters as he describes their personality and mannerisms, and provides back stories. Giving the reader characters to interpret and painting them sometimes in an unflattering light, makes for interesting reading between complicated economic analyses.
For anyone who is interested in what happened before the crisis, this is an interesting read.
For more of my thoughts - visit
on October 4, 2010
Michael Lewis's fabulous book, The Big Short: Inside the Doomsday Machine, is not, on the surface, a book about a decision-making, but in many ways, it's entirely about decision-making. According to Lewis, the near-collapse of the financial markets in 2008 was caused by a thousand small decisions: the decision of investment banking firms to go public in the 1980s, the decision to let bond desks run autonomously, the decision of rating agencies to issue ratings on instruments they clearly misunderstood, the the decision to permit investment dealers to enter into leveraged trades, the decision to allow home owners to enter into mortgages they could not afford to service, and the list goes on. But Lewis gets at the real problem: a problem that ' since the government was forced to prop up these institutions deemed too big to fail ' continues to go unaddressed: '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?' All business leaders know that behaviours tend to align themselves with the compensation system and the bailouts ensured that this compensation system remains out of whack. As Lewis wrote, 'That was the problem with money: What people did with it had consequences, but they were so remote from the original action that the mind never connected one with the other.' The book does not leave one with warm and fuzzy feelings but is a fantastic read nonetheless.