Driving home from work the other day, I sat in traffic while 300 of my fellow Boisians paraded through downtown on their way to the steps of the Idaho Statehouse. The 300 were part of the Occupy Wall Street protest (in Idaho!). Having just finished Michael Lewis’ The Big Short: Inside the Doomsday Machine (W.W. Norton, 2010). I was tempted to abandon my vehicle and join them. OK, not really. It was raining and I wanted to stop at the gym and then the liquor store and still get home in time for dinner. And parking downtown is a bitch. But the thought really did cross my mind, thanks to Michael Lewis.
A while back I reviewed Too Big Too Fail (“TBTF”), Andrew Ross Sorkin’s revealing behind-the-scenes look at the scrambling in Washington and Wall Street to prevent financial collapse of Wall Street financial institutions in the wake of the October 2008 economic meltdown. I confessed to picking up Sorkin’s book at an airport bookstore mostly because it was already in paperback and thus cheaper than the book I really wanted, The Big Short. I enjoyed TBTF. It chronicles the immediate aftermath of the financial collapse and the stakes of bailing out some of Wall Street’s biggest players, who had arrogantly, recklessly over-leveraged themselves on subprime mortgage derivatives. But TBTF was more about the drama and less about the details of what precipitated the crash. And Sorkin failed to challenge his premise, that Wall Street was in fact too big to fail. Still, an informative read from an insider.
The Big Short takes a step back and tells the story of the financial collapse from the perspective of a handful of outcasts who bet against (“shorted”) the subprime mortgage-backed bonds that were the root of the October 2008 financial collapse. On one level, this book serves as a Subprime Mortgage Disaster for Dummies: it explains in digestible fashion how we all helped create a housing boom through our collective exuberance even though any objective analysis should have revealed that it could not possibly last. Everyone accepted the fiction that the housing market would continue its phenomenal growth rate through infinity: the immigrant strawberry picker who took out the $750,000 mortgage for a California McMansion, the local broker who sold him the mortgage, the regional bank that approved it, the Wall Street investment bank that bought the mortgage and diced it up and dumped it into a bond with thousands of other high-risk subprime mortgages, the bond rating agencies that negligently underrated the risk of the subprime loan-backed bonds, the Wall Street traders who sold the bonds, and finally, the investors who bought these bonds. Everyone bought into the fable.
Everyone, that is, except a few outliers who realized that the subprime mortgage bonds would hold their value only if home values continued to increase at the crazy pace of the mid-2000s. And since that had never happened in the history of forever, they overcame their internal fears that they were crazy for bucking conventional wisdom and bet against the trend. They hit the jackpot when the housing boom went bust. This is the core story of Lewis’ book and the core of what has become Lewis’ trademark in stories like Moneyball and The Blind Side. He has a gift for explaining broad concepts through real life example. The Big Short tells the story of a few individuals naive enough, or smart enough, and oblivious enough, or a combination of all of the above, who bucked conventional wisdom and risked betting against the trend. The risk was that if they failed, they would be the (poorer) chumps. Lewis' book provides insight into those who were not afraid to fail while also providing insight into how the masses convinced themselves to defy reason.
A while back I reviewed Too Big Too Fail (“TBTF”), Andrew Ross Sorkin’s revealing behind-the-scenes look at the scrambling in Washington and Wall Street to prevent financial collapse of Wall Street financial institutions in the wake of the October 2008 economic meltdown. I confessed to picking up Sorkin’s book at an airport bookstore mostly because it was already in paperback and thus cheaper than the book I really wanted, The Big Short. I enjoyed TBTF. It chronicles the immediate aftermath of the financial collapse and the stakes of bailing out some of Wall Street’s biggest players, who had arrogantly, recklessly over-leveraged themselves on subprime mortgage derivatives. But TBTF was more about the drama and less about the details of what precipitated the crash. And Sorkin failed to challenge his premise, that Wall Street was in fact too big to fail. Still, an informative read from an insider.
The Big Short takes a step back and tells the story of the financial collapse from the perspective of a handful of outcasts who bet against (“shorted”) the subprime mortgage-backed bonds that were the root of the October 2008 financial collapse. On one level, this book serves as a Subprime Mortgage Disaster for Dummies: it explains in digestible fashion how we all helped create a housing boom through our collective exuberance even though any objective analysis should have revealed that it could not possibly last. Everyone accepted the fiction that the housing market would continue its phenomenal growth rate through infinity: the immigrant strawberry picker who took out the $750,000 mortgage for a California McMansion, the local broker who sold him the mortgage, the regional bank that approved it, the Wall Street investment bank that bought the mortgage and diced it up and dumped it into a bond with thousands of other high-risk subprime mortgages, the bond rating agencies that negligently underrated the risk of the subprime loan-backed bonds, the Wall Street traders who sold the bonds, and finally, the investors who bought these bonds. Everyone bought into the fable.
Everyone, that is, except a few outliers who realized that the subprime mortgage bonds would hold their value only if home values continued to increase at the crazy pace of the mid-2000s. And since that had never happened in the history of forever, they overcame their internal fears that they were crazy for bucking conventional wisdom and bet against the trend. They hit the jackpot when the housing boom went bust. This is the core story of Lewis’ book and the core of what has become Lewis’ trademark in stories like Moneyball and The Blind Side. He has a gift for explaining broad concepts through real life example. The Big Short tells the story of a few individuals naive enough, or smart enough, and oblivious enough, or a combination of all of the above, who bucked conventional wisdom and risked betting against the trend. The risk was that if they failed, they would be the (poorer) chumps. Lewis' book provides insight into those who were not afraid to fail while also providing insight into how the masses convinced themselves to defy reason.
Bottom line: if you are interested in making sense of how we found ourselves in the situation we are in today, The Big Short is a good place to start.
RCM
Thanks for the great review - I put this on hold at the library. As a bankruptcy attorney, I have focused only on two aspects of this debacle - banks lending way too much money to borrowers, and the borrowers willing to sell their first born in order to live in a house that is under water, and feeling ok with it. I wonder if it is an American phenomenon to so desperately want to "own" a house, even when you can't afford it.
ReplyDeleteTell me what you think about the book. He spends most of the book detailing what happened at the Wall Street end, but you do get a chance to see how it all fit together.
ReplyDelete