Book #70: The Big Short

Title: The Big Short
Author: Michael Lewis

If you know Michael Lewis only from the movie based on his book The Blind Side, you may be surprised that he has chosen, in his latest book, to tackle the complicated issue of how Wall Street behaved recklessly in the years leading up to the most recent financial crisis, and how those who bet against the housing market made millions as the country's economic system went into free fall. If you know Michael Lewis from Moneyball or Liar's Poker, you're probably not surprised that he's come back to people who use statistics and educated guesses to their financial benefit.

Two years ago, I never would have considered reading The Big Short, If I had picked it up by accident, all of the talk about CDOs and Credit Default Swaps and FICO scores and tranches would have had me dropping the book like a hot potato. I credit two years of running while listening to the Money Honeys of the Planet Money podcast for giving the book some context. I think that if you're not an active investor or a daily reader of the Wall Street Journal, The Big Short might be a challenging read. Annie asked me what it was about, and it took me an hour to explain it to her, starting with a definition of what a mortgage was, which is just about all I knew when I started listening to Planet Money.

Lewis does a good job explaining all of the technical stuff in The Big Short, but the strength of the book is in the three or four characters he follows, all of whom noticed that as creditors loaned more and more money to less and less suitable borrowers, the likelihood that those borrowers would eventually default on their loans rose, and if housing prices hit a downturn, investors could make lots and lots of money by buying mortgage-backed securities at reduced rates and insurance policies for the full-market value. When borrowers defaulted, these investors would cash in their insurance policies and be rich. Lewis follows a guy with Aspergers who quit his neurology residency to advise people to invest in his hedge fund (and shows them breathing down his neck when they investment didn't pay off as quickly as they'd hoped), a couple of guys working within the Wall Street establishment, and a few guys working out of a garage in Berkeley. Continuing in the vein he started with Liar's Poker, Lewis continues to show that investors on Wall Street are (in general) greedy, stupid, and overconfident, and will almost always choose to make money for their companies instead of their clients (after all, the company pays the big bonus).