Author: Michael Lewis
Published: March 15, 2010
What Is ‘The Big Short’ About?
It’s difficult to talk about this without going into some detail…
‘The Big Short’ is the true story of how a group of Traders & Hedge Fund Managers discovered an epic flaw within the subprime mortgage market.
High risk bonds based on subprime loans (seemingly destined to default) were being re-classified under a new product known as a ‘CDO’ (Collateralised Debt Obligation) and sold on the basis that they were low risk. Subsequently it meant that millions of worthless bonds were being circulated – making a financial crash inevitable.
In response, the Traders bet heavily against the market with ‘Credit Default Swaps’ – an insurance product that would pay out if the debts defaulted.
This book gives you the facts that explain the events leading up to the crash and follows the struggles of the people who knew what was coming versus a system in complete denial.
Why Did I Read ‘The Big Short’?
Like everyone, in 2007 I watched and read the news reports as they came in fascinated by the crisis that was causing the financial markets to collapse. Interviews with traders, politicians and financial experts did their best to explain what was happening, but despite all their efforts I honestly never really grasped an understanding of who, what or why.
What was even more confusing to me was to hear that people were actually benefitting from the crash. Apparently it was possible to make serious money from a global economic downturn?!
This book came with the promise that it would explain not just what happened, but how it happened and how people benefitted from it – so I was keen to read and learn.
What I Liked About ‘The Big Short’
‘The Big Short’ delivers on its promise to make sense of madness. As I had hoped, it focuses on the events leading up to the crash and doesn’t get too bogged down with the aftermath.
I also liked that it wasn’t too preachy or interested in pointing fingers. Blame can be found everywhere in this story, but its divided up into versions of incompetence, misplaced trust and deception.
There are amazing snippets of information in this book, some of which just blew me away – for example:
- There was once a mortgage called ‘the interest-only negative-amortizing adjustable-rate subprime mortgage’ that had a unique quality: It didn’t require any payments.
- Wall street banks can declare forecasted profits as profit in their financial reports.
- Due to the sheer scale of outgoing and incoming trades – it is nearly impossible for an auditor to understand whether an investment bank is actually making money or losing it.
- In 2008, Howie Hubler of Morgan Stanley infamously lost 9 billion dollars in one trade, the largest single loss in history.
- The standard house price to income ratio is 3:1 or 4:1. At the peak of the crisis in Miami it was 8.5:1, in Los Angeles it was 10:1.
- In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 was lent $724,000.
What I Didn’t Like About ‘The Big Short’
Its difficult to find holes in a biography of this nature. After all, it delivers the facts in a concise way so that readers outside of the financial world can understand it.
One thing I would say is that, in the edition I read, it had asterisks in certain parts where the detail was a bit light. I’m assuming they were put in for legal reasons. The extra detail was then in a sectioned off part at the bottom of the page. The problem I found with this was that you had to leave the train of throught for a moment, read the asterisk section and then return to the main thread. This threw me off a couple of times.
Good Or Bad?
Was this book any good? Yes, very good. They’re also making a film called ‘The Big Short’ with Brad Pitt, Christian Bale and Ryan Gosling which I’ll look forward to watching next year: http://www.imdb.com/title/tt1596363/
Would I recommend it? Yes, if you want to understand more about Wall Street’s financial collapse in 2007 this is essential reading.
Would I read it again? Probably, I would say that this book is worth reading a few times over to understand everything it has to say.
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David P. Philip