The Big Short
Inside the Doomsday Machine
By: Michael Lewis
Published: March 16, 2010
Format: Hardcover, 320 pages
ISBN 9780393072235
Publisher: W.W. Norton & Company
"It was then late 2008. By then there was a long and growing list of people who claimed they predicted the catastrophe, but a far shorter list who actually did. Of those, even fewer had the nerve to bet on their vision", writes best selling author Michael Lewis, in his brilliant and incisive book The Big Short: Inside the Doomsday Machine. The author describes a few of the people who did foresee the disaster, involving credit default swaps (CDS), collateralised debt obligations (CDO), and residential mortgage backed securities (RMBS), and had the courage to invest their money in the collapse of these derivative markets.
Michael Lewis, as a former Wall Street insider, understands the world of structured finance, that includes an alphabet soup of exotic financial instruments. Through his knowledge of the arcane details of the derivative market, and the investment houses who created them, the author provides the reader with a crash course in Wall Street finance. At the same time, Michael Lewis introduces the reader to some colorful characters, who saw the world of structured finance as a house of cards, about to collapse at any moment. While many bloggers and even Wall Street insiders, recognized the unsustainable housing bubble, and the derivative market it fueled, Michael Lewis introduces some of the people who had the courage to bet against conventional wisdom. This small number of investors made a fortune shorting the market, while other investors lost vast amounts of money on the wrong side of the trade.
Michael Lewis (photo left) isn't afraid to name people who supported and enabled the bubble in structured financial instruments. He describes how the bond rating agencies as being unable to fully comprehend the nature of the bonds they were asked to assign a risk level. Provided with minimal information on the bonds and securities by the Wall Street investment houses, the bond rating agencies, including Standard and Poor's, Moody's, and Fitch, gave the majority of the bonds a AAA rating. Through restructuring the remaining bonds, they too were assigned a AAA value. Contrarians described in the book, including Steve Eisman, Michael Burry, Charley Ledley, Jamie Mai, and Greg Lippmann, saw the writing on the wall for these supposedly investment grade securities, and forecast their implosion.
For me, the power of the book is how Michael Lewis combines his knowledge of Wall Street investment vehicles with a gift for compelling storytelling. The author breaks down even the most arcane derivatives, and their complex composition, into easy to understand language. Through his descriptions, the reader can get a feel for the underlying weakness and flawed design of the structured finance instruments. On the human side, Michael Lewis creates a page turning narrative of the investors who dared to short Wall Street, and the resistance met by their ideas and analysis. While the book doesn't include every investor who may have shorted the housing bubble, or even those who predicted its demise well in advance as well, Michael Lewis provides a representative sample of the type of individual who dared to move in opposition to the herd mentality.
I highly recommend the landmark and must read book The Big Short: Inside the Doomsday Machine by Michael Lewis, to anyone seeking s deeper understanding of the mindset that surrounded the real estate bubble, based on housing prices that were believed to rise forever, and the doubtful and arcane securities it spawned as a result. The book also contains funny and insightful descriptions of the individuals who saw through the smoke screen, and recognized a bubble about to implode on itself.
Read the seminal book The Big Short: Inside the Doomsday Machine by Michael Lewis, and discover the obscure and often deliberately opaque world of Wall Street derivatives. You will never look at a market prospectus or listen to investment advisers in the same way again.
