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The Big Short: Inside the Doomsday Machine |  | Author: Michael Lewis
Publisher: W. W. Norton & Company
Category: eBooks
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Rating:  489 reviews
Sales Rank: 57
Format: Kindle Book
Media: Kindle Edition
Pages: 266
Number Of Items: 1
Dewey Decimal Number: 330.973
ASIN: B003LSTK8G
Publication Date: May 12, 2010
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Product Description
Truth really is stranger than fiction. Who better than the author of the signature bestseller Liar-s Poker to explain how the event we were told was impossible-the free fall of the American economy-finally occurred; how the things that we wanted, like ridiculously easy money and greatly expanded home ownership, were vehicles for that crash; and how shareholder demand for profit forced investment executives to eat the forbidden fruit of toxic derivatives.Michael Lewis-s splendid cast of characters includes villains, a few heroes, and a lot of people who look very, very foolish: high government officials, including the watchdogs; heads of major investment banks (some overlap here with previous category); perhaps even the face in your mirror. In this trenchant, raucous, irresistible narrative, Lewis writes of the goats and of the few who saw what the emperor was wearing, and gives them, most memorably, what they deserve. He proves yet again that he is the finest and funniest chronicler of our times.
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Showing reviews 1-5 of 25
 Michael Lewis uses great storytelling skills to unfold an insider's view to the Wall Street side of our recent financial meltdow September 9, 2010
Bryce R. Danley (Fort Worth, Texas)
This book uncovers how a relatively small number of poorly supervised people created the financial crisis of 2008 through a mixture of ignorance, arrogance, inertia, and greed. You do not have to be a financial expert to read and understand this book.
However, a quick warning, the more you understand about the technical side of things, the more you will see the pointlessness of it all and the greater likelihood that you will experience regret that you didn't see it coming yourself. I've often said, "in hindsight we are all idiots" and this certainly applies here.
Key Thoughts:
1. Everyone in the business assumed that "someone else" was reviewing the details of the prospectuses.
2. We should not allow a US chartered bank to issue a "credit default swap" where they take on almost unlimited financial risk in exchange for a relatively small "premium". Even a life insurance policy has a maximum payout! How did the people who created and approved these instruments keep their positions after they virtually destroyed even the incredibly large firms they worked for?
3. Incentives played a huge role as Charlie Munger said- "The Psychology of Human Misjudgement" - "If you wanted to predict how people would behave, you only have to look at their incentives."
The author says that only between 10 and 20 people - made straightforward bet against the subprime mortgage market. The books tells us quite a bit about three of them: Michael Burry, Steve Esinmann, and Greg Lippmann.
Probably the most interesting and unusual character is Mike Burry, who was a former medical doctor/researcher turned trader - not your normal path.
After some time looking for a partner, Goldman Sachs and Deutsche Bank allowed Burry to select any bonds to short he liked - they only looked at the ratings - while he looked at the underlying mortgages - looking for those most likely to default.
For example, one pool consisted ONLY of floating rate negative amortizing mortgages where the borrowers could choose to not even pay the interest and allow their loans to grow even larger as they didn't pay to live in their homes.
It is incredibly interesting to read how, as Burry's negative bets on these wacky mortgages were nearing huge payoffs, his own investors began to criticize him because their returns weren't good as he waited for the house of cards to collapse. He was right and the people who trusted him with some of their money couldn't believe it because they didn't like their short term returns. The criticism eventually turned incredibly ugly, including litigation.
Burry also had to endure/persist through the issuers setting their own prices on the securities he'd purchased - despite bad news for the issuers, they had no incentive to recognize reality and so they didn't - and didn't reflect the winning nature of his bets for over 2 years!
The bond market is much more complex than the stock market because the number of instruments is so much larger and they aren't traded with anything like the regularity of a NYSE stock. Accurate pricing is very difficult to determine.
The MBS market was the ultimate "betting on the come" where even a fall in home prices wasn't necessary to spell doom - all that was required was a slowing in their rate of climb. When the teaser rate period ends, the borrower will need to refinance, and the home needs to have appreciated to cover the new, larger debt - since there are costs and, often, interest to be rolled in. Insanity.
Ratings Agencies - staffed primarily by the least talented of the all the Wall Street players - it appears that they didn't have any idea how to rate the risk in MBS. These people were manipulated by the creators of the securities and, financially, these hens are incented to "play nice" with the foxes they are paid to watch. S&P was actually afraid to ask for the internal mortgage data on the securities they were rating - if they pushed too hard, they might go to Moody's instead... Insanity.
The book details how Collateralized Mortgage Obligations (CMOs) were made and then abused. A collection of mortgages (maybe strong ones, maybe weak ones, maybe a mixture) are collected in a pool. The pool is sold, in sections, or tranches, to investors. Some tranches (rated AAA by one or more agency) are structured to be most likely to pay back - they receive the best ratings and lowest interest. Some (rated BBB) are structured to be paid back principal and earnings only if things go well - they are intentionally created to accept the most risk and have the most upside as well. So far, so good - this has been done for years. I remember them from the early 1990s in my bank examining days.
The problem occurred when a bunch of triple B securities were then put into a new pool and restructured again to have "most likely" to pay tranche and then higher risk tranches as well. Here, the risk was much higher because the entire pool was made up from other pools' junk tranches. Somehow, the ratings agencies allowed a large section of this pool to obtain the coveted AAA credit rating. Of course, these AAAs had higher interest for "the same risk". This is always a lie.
Although it seems impossible to believe, the BBBs from these 2nd tier of CMOs were often packaged again and turned into yet another pool of AAA and BBB credits. Here you'd have the worst junk of the worst junk of the worst junk and a large portion of it would still get AAA ratings. Again the interest "paid" would be higher for "the same risk". Again, this is always a lie.
In the end even this activity wasn't enough to satisfy the appetite for the securities. The "synthetic CMO" was created when the firms couldn't find enough mortgages to collect into the initial pools. Insanity.
Although the book doesn't cover the transactions further downstream, I remember hearing that mortgage lenders were earning a $1,000 per loan incentive if the loan was a "subprime" loan - they were actually making more money to issue debt to bad borrowers than to good ones. Insanity. The wayward incentives started at the top and went through every level of the business.
To compound matters an additional level - credit default swaps on the risk of these loans could be bought from AIG who didn't even know what they were insuring. They thought the loan pools were about 10% subprime when they were more like 95%. They thought they that collecting the "insurance" premiums on the swaps was like free money. For less than 2% per year, you could insure (or speculate against) all the risk in a BBB tranche.
At the same time, this was America's problem too - when John Q. Public decided to buy a home that he new in his heart (even if he didn't have the financial expertise to calculate it) that he couldn't afford - he created the problem too.
Our politicians, who also created this problem, through demanding that mortgage lending standards be loosened, and then loosened, then loosened some more - all with the stated purpose of "helping foster the dream of home ownership". These same politicians also repeatedly voting to lower the capital requirements for quasi Government Agencies FNMA and FMLMC. All the while Fanny and Freddie were contributing to these same politician's campaigns. (See [..]) Remember the Munger quote about incentives? These politicians, more than anyone else, have not been held into account for their actions. Many have come out railing against "Wall Street Greed". Insanity.
At this point accountability has been in very short supply. The traders made their money - sure they may have lost their jobs - but one would suspect that their multi-million dollar salaries and bonuses will last them. The Wall Street brokerage and insurance firms and banks like Goldman Sachs and AIG and Citigroup have had their exposure (indeed their very existence) propped up by the US Government. The many of the mortgage borrowers have given their homes to the bank and moved on, or they've "strategically defaulted" to obtain better terms. In the end everyone's happy and no one got hurt and we all learned a lesson. Don't mind the mountain of US Government debt that got accumulated and it's ongoing effect on our economic situation. So who actually has been held accountable? Did our Bailouts really save jobs or did we simply prevent ourselves from learning the lesson? Any idea where the lobbying money from the Bailed out institutions has been heading?
A bit of a warning: The book is also contains wall street/locker room salty language throughout.
Memorable quotes: "I think I've been in the top five percent of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little bit farther." - Charlie Munger
"the wealthiest...have accepted that most managers are average, and the better ones are able to achieve average returns while exhibiting below average volatility." Michael Burry
"could very easily be a 50% drop in residential real estate in the U.S. - Michael Burry May 2003
I'm glad I read this book, it was informative, interesting, explains complicated things very well. Thanks Michael Lewis!
The Big Short(cut) ... September 7, 2010
James A. Hatherley (Boston, MA)
I have read and reviewed a number of Michael Lewis' books, "Moneyball" being the best to date in my view. While this may not be not be his best book, I cannot imagine that many investigative authors can approach Lewis' tenacity and attention to detail (only Dan Brown comes to mind), and the author's skills are in keen display in "The Big Short".
Perhaps it is because the subject matter was so complicated, but I had difficulty following all the confusing page-after-page details. However, the big picture seemed clear - Wall Street managers devised a scheme to essentially sell billions of dollars of bundled mortgage bond products that consisted of a house of financially hopeless cards yet presented as triple A, no-risk investments. Investors, even presumably sophisticated investors, did not sufficiently understand the nature of the contents of these bond portfolios, nor apparently had the intellectual curiosity to find out. Instead the process and problem continued, and festered below the radar screen due to the greed and associated bonus payouts to the Wall Street smart guys.
Ultimately it was left to a small group of unaligned individuals who inherently understood that what Goldman Sachs et als were selling was not worth buying. (NB, in this instance, there is a distinct and indirect connection to Malcolm Gladwell's "Blink", particularly his chapter on "the adaptive unconscious"). The stories of these contrarians is what "The Big Short" is mainly about - how they came to the conclusion that greed and debt were destroying the Nation's financial system, then began the process of selling short the bogus bundled bonds etc. And, their analysis proved to be correct - unqualified homeowners began defaulting on their loans, corrupting the bonds and causing the entire financial system to collapse. The stories of these few geniuses, and their not so glorious aftermaths, are brilliantly delivered by the author.
However, not so brilliantly developed, in fact, not delivered at all, was the cause and effect of the political manoeverings behind the Government's affirmative action practice of ensuring that loans be made to people obviously unable to repay them - backed by Fannie Mae and Freddie Mac (e.g., the taxpayers). There is no political finger pointing here, which is a clear disappointment, and major flaw to "The Big Short." It's lack of explanation weakens the overall story. For instance, how long did it take for this government mortgage-for-all bullying process to unwind? What were the roles of Clinton, Bush, Frank and Dodd, or others? Did they actively conspire with the Wall Street Executives to create this foreseeable nightmare. And, what about Greenspan and the Fed, how did they contribute to, or even cause, the financial failure? And, what about the SEC or other regulators? Why were a few smart people able to see the impending doom while they turned their heads?
As I noted, this book has so many details that it is difficult to understand at the detail level. However, the big picture is pretty clear. This is a highly recommended book with the exception noted.
GREAT BOOK September 5, 2010
LYDIA
This book gives great insight into the financial meltdown told through the experience of a few people who saw it coming. Lets you know that greed and ignorance is alive and well in the financial market place.
Great book September 5, 2010
M. Hyman (Seattle, WA USA)
The Big Short is a fascinating look into the financial meltdown that caused the collapse of the world economy. It explains in a very understandable way what tanked the economy, as well as looking in depth at the people that caused it, their motivations, the crazy and corrupt system that made it possible, and a variety of individuals who were smart enough (or lucky enough) to predict the meltdown and made fortunes from it.
The book is fast paced and easy to read. It will in part make you want to get in on the action, make you disgusted at the greed and idiocy that lead to the market collapse, and wonder if the market will ever recover. And it will make you even madder about the executives of the large financial companies who make millions and millions in bonuses for essentially stealing the futures away from most people.
A great read. It is one of those current economic event books you will not be able to put down.
A Safe Bet September 5, 2010
Ted Bender (Florida)
The Big Short: Inside the Doomsday Machine
Michael Lewis's Liar's Poker provides an interesting and believable explanation for the Recession of 2009. Taking the perspective of a number of smaller hedge fund managers who saw through the smoke and mirrors of the mortgage crisis, Lewis explains in understandable language how we got into this mess. Readers will see how the actions of mortgage originators, banks, rating agencies and Wall Street all contributed to the debacle. Well worth the read.
Showing reviews 1-5 of 25
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