The Big Short

Michael Lewis ("Liar's Poker" author) makes a brisk, illuminating story out of the run up to the 2008 financial collapse.

By

  • close
    The Big Short:
    Inside the Doomsday Machine
    By Michael Lewis
    W.W. Norton
    288 pp., $27.95
    View Caption

This spring the US Congress will finally vote on legislation to address the weaknesses in the financial system that enabled the 2008 collapse. In that light, it is hard to imagine a stronger case for reform than the one implied by the brisk, illuminating story Michael Lewis (author of “Liar’s Poker”) tells in The Big Short, his chronicle of the three years leading up to the bursting of the subprime bubble.

Lewis’s account revolves around two men – Steve Eisman and Michael Burry – who as early as 2005 saw what few others on or off Wall Street did: that the entire subprime apparatus, from the million-dollar mortgages extended to minimum-wage workers, to the bonds manufactured from those mortgages, was a house of cards. It was each man’s eccentric personality, says Lewis, that led him to this contrarian insight. Eisman is described as a profanity-spewing fund manager whose hypersensitivity to the venality of others caused him to view his trades as a crusade on behalf of Americans suckered by the subprime hucksters. Burry, by contrast, is a recluse with Asperger’s syndrome and a glass eye, whose life circumstances had conditioned him to look at the world differently from everyone else.

In early 2005 Burry saw that what appeared to him to be very risky securities were being priced extraordinarily cheaply, as though they carried almost no risk at all. He went looking for a way to bet against subprime mortgage bonds, but quickly discovered that the nascent market had no mechanism by which to do so. Undeterred, he convinced Deutsche Bank and Goldman Sachs to create and sell him a type of insurance policy – the infamous credit default swap – that paid out if the subprime bonds went bad.

Recommended: Five ways big banks' Libor scandal affects you

In addition to its improbably low cost, the most peculiar quality of this type of insurance was that Burry did not have to buy the underlying bonds in order to purchase the policy. It was roughly equivalent to owning fire insurance on your neighbor’s home. He cherry-picked the worst of the worst bonds (the ones comprising home loans most likely to be defaulted on) and to his surprise found that Wall Street was almost blithely eager to insure them. (Later, Burry discovered that Goldman and Deutsche Bank were only acting as intermediaries, taking a cut off the top and then passing the insurance through to the witless and now notorious financial products group at American International Group.)

A first bona fide of “The Big Short” is the lucidity with which Lewis explains credit default swaps and the other complex financial instruments behind the crash. He describes how Wall Street, when it ran out of subprime mortgage bonds to insure, invented a new way for speculators to gamble on the market called a collateralized debt obligation (or CDO). CDOs took the worst pieces of each subprime bond and recombined them into a new product that was meant to appear less risky than the sum of its parts. The gambit was like a meatpacker grinding together bits of bone and gristle and calling it top sirloin, and it worked because Moody’s and Standard and Poor’s – the meat inspectors of the financial world – were either asleep at the wheel or on the take, depending on your level of cynicism. Regardless, CDOs opened the possibility of an infinite regress of wagers – a bet on a bet on a bet – and enabled speculation in subprime mortgage bonds to reach the economy-destroying heights that it did.

As the book progresses, the bubble inflates and the trades get more complex, and it becomes evident that most of the traders and executives Burry and Eisman are dealing with either can’t understand what’s going on or – because of compensation incentives that encourage willful ignorance – don’t want to. “The Big Short” subtly but unambiguously upends the view – propagated with particular vehemence by deregulationists – that Wall Street is a place populated by grown-ups who understand their business better than the government ever could.

In one particularly telling moment, Eisman has dinner with a cheery, hopelessly unsophisticated fund manager named Wing Chau, after which Eisman tells an associate, “Whatever this guy [Chau] is buying, I want to short it.” Such was the small world of subprime finance where the limited number of players involved, combined with the opacity of the securities, created a market ripe for manipulation and exploitation. As Lewis puts it, “The world’s biggest capital market wasn’t a market.” At any given time it was nearly impossible to determine the exact value of subprime mortgage bonds – until, that is, it became clear that they were worth nothing at all.

The Americans who bought the homes that provided the foundation for this Wall Street speculation spree remain largely offstage throughout “The Big Short.” But their presence is felt. One of the first hints that Eisman had that the subprime market was askew came when the Jamaican woman who formerly looked after his kids told him that she was now a real estate mogul in Queens and the owner of six townhouses. Lewis also notes the representative case of a Mexican strawberry picker earning $14,000 a year who was loaned $724,000 to buy a home, no money down and few questions asked, at the height of subprime mania.

In Lewis’s estimation it is part of human nature to overreach – we shouldn’t expect people to turn down cheap money. Restraint, in his view, if there were to have been any at all, needed to come from the lenders and the underwriters who should have had a clearer picture of the risks involved. But such were the conditions in the middle of this past decade that even if the Jamaican real estate mogul from Queens defaulted on her loans – as she very likely would – everyone, from the bank issuing the loan to the Wall Street traders who speculated on it, stood to pick off some money before the body hit the floor. It was a clever game and it made a lot of undeserving people rich, that is, of course, until Wall Street realized that it was in free fall, too.

Kevin Hartnett is a freelance writer in Philadelphia. A selection of his work can be found at kevinhartnett.com.

Join the Monitor's book discussion on Facebook and Twitter.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Let me know about a good book you've read recently, or about the book that's currently on your bedside table. Why did you pick it up? Are you enjoying it?

Loading...

Loading...

Loading...

eZ debug

Clear cache:

Quick settings:

Timing: Jul 09 2014 11:42:43
Script start
Timing: Jul 09 2014 11:42:43
Module start 'content'
Warning: eZDebug::accumulatorStop Jul 09 2014 11:42:43
Accumulator 'Search' does not exist, run eZDebug::accumulatorStart first
Warning: eZDebug::accumulatorStop Jul 09 2014 11:42:43
Accumulator 'Search' does not exist, run eZDebug::accumulatorStart first
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: path in /var/www/www.csmonitor.com/extension/ezwebin/autoloads/ezpagedata.php on line 158
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: path in /var/www/www.csmonitor.com/extension/ezwebin/autoloads/ezpagedata.php on line 175
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: path in /var/www/www.csmonitor.com/extension/ezwebin/autoloads/ezpagedata.php on line 158
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: path in /var/www/www.csmonitor.com/extension/ezwebin/autoloads/ezpagedata.php on line 175
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_remote_id_ms in /var/www/www.csmonitor.com/extension/csm_base/classes/CSMFunctionCollection.php on line 1028
Warning: eZTemplate:def @ extension/csm_base/design/csm_design/templates/content/datatype/view/ezbyline.tpl:10[1] Jul 09 2014 11:42:43
Variable 'story_source' is already defined.
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_remote_id_ms in /var/www/www.csmonitor.com/extension/csm_base/classes/CSMFunctionCollection.php on line 1028
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_remote_id_ms in /var/www/www.csmonitor.com/extension/csm_base/classes/CSMFunctionCollection.php on line 1028
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_class_identifier_ms in /var/www/www.csmonitor.com/extension/ezfind/classes/ezfindresultnode.php on line 111
Notice: PHP: E_NOTICE Jul 09 2014 11:42:43
Undefined index: meta_remote_id_ms in /var/www/www.csmonitor.com/extension/csm_base/classes/CSMFunctionCollection.php on line 1028
Timing: Jul 09 2014 11:42:43
Module end 'content'
Timing: Jul 09 2014 11:42:43
Before parse_includes
Strict: PHP: E_STRICT Jul 09 2014 11:42:43
Non-static method MugoViewExtras::get_view_extras() should not be called statically, assuming $this from incompatible context in /var/www/www.csmonitor.com/extension/mugo_view_extras/autoloads/template_operators.php on line 37
Warning: eZTemplate:def @ extension/csm_base/design/csm_design/override/templates/extra/archive.tpl:21[1] Jul 09 2014 11:42:43
Variable 'view_extra_node' is already defined.
Timing: Jul 09 2014 11:42:43
After parse_includes
Timing: Jul 09 2014 11:42:43
End

Timing points:

CheckpointElapsedRel. ElapsedMemoryRel. Memory
Script start 0.0000 sec0.0196 sec 1,285.6406 KB1,162.1406 KB
Module start 'content' 0.0196 sec0.7540 sec 2,447.7813 KB11,071.4063 KB
Module end 'content' 0.7737 sec0.0146 sec 13,519.1875 KB401.8594 KB
Before parse_includes 0.7882 sec0.0421 sec 13,921.0469 KB285.1406 KB
After parse_includes 0.8304 sec0.0008 sec 14,206.1875 KB-185.9766 KB
End 0.8312 sec  14,020.2109 KB 
Total runtime:0.8367 sec
Peak memory usage:16,427.3047 KB

Time accumulators:

 Accumulator Elapsed Percent Count Average
ini_load
Load cache0.0079 sec0.9369%360.0002 sec
Mysql Total
Mysqli_queries0.0982 sec11.6979%1590.0006 sec
Looping result0.0088 sec1.0500%1520.0001 sec
Template Total0.7770 sec 92.5% 7 0.1110 sec
Template load0.0073 sec0.8655%70.0010 sec
Template processing0.7698 sec91.6651%70.1100 sec
Template load and register function0.0003 sec0.0344%40.0001 sec
states
state_id_array0.0037 sec0.4400%80.0005 sec
state_identifier_array0.0054 sec0.6386%110.0005 sec
override
Cache load0.0071 sec0.8407%730.0001 sec
eZ Find
MoreLikeThis0.0000 sec0.0000%00.0000 sec
Query build0.0057 sec0.6782%10.0057 sec
Engine time0.0169 sec2.0129%10.0169 sec
Search0.2653 sec31.5851%20.1326 sec
Class attribute list0.0755 sec8.9953%10.0755 sec
Sytem overhead
Fetch class attribute can translate value0.0025 sec0.2922%40.0006 sec
Fetch class attribute name0.0002 sec0.0269%90.0000 sec
XML
Image XML parsing0.0049 sec0.5861%40.0012 sec
class_abstraction
Instantiating content class attribute0.0001 sec0.0119%90.0000 sec
General
String conversion0.0000 sec0.0035%30.0000 sec
dbfile0.0015 sec0.1789%420.0000 sec
View Extra building0.0091 sec1.0847%40.0023 sec
Total script time:0.8398 sec

CSS/JS files loaded with "ezjscPacker" during request:

CacheTypePacklevelSourceFiles
01a980f93dc967c6e39d52a11ae2108b_1404899611_all.cssCSS3extension/csm_base/design/csm_design/stylesheets/normalize.css
extension/csm_base/design/csm_design/stylesheets/html5b.css
design/standard/stylesheets/debug.css
extension/ezwt/design/standard/stylesheets/websitetoolbar.css
extension/csm_base/design/csm_design/stylesheets/jquery-ui-1.10.3.custom.min.css
extension/csm_base/design/csm_design/stylesheets/desktop.css
ede0a88fd146f1a095d27fb22227d0e5_1398846822.jsJS2extension/csm_base/design/csm_design/javascript/modernizr.js
extension/csm_base/design/standard/javascript/jquery-1.10.2.min.js
1650da1ba852ac5f9af81af07e8fa105_1404899611.jsJS2extension/csm_base/design/csm_design/javascript/jquery-ui-1.10.4.min.js
extension/csm_base/design/csm_design/javascript/json2.js
extension/csm_base/design/standard/javascript/jquery.cookie.min.js
extension/csm_base/design/csm_design/javascript/jquery.mobile.custom.min.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.arthole.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.sticky.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.csmstory.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.right_column.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.csmstory_editorspickdialog.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.sailthru_signup.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.jcarousel.min.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.history.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.mainNav.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.gallery.js
extension/csm_base/design/csm_design/javascript/plugins/jquery.staffdialog.js
extension/csm_base/design/csm_design/javascript/jQuery.rollChildren.js
extension/csm_base/design/csm_design/javascript/pubService_extended.js
extension/csm_base/design/standard/javascript/csm/csmNew.js
extension/csm_base/design/csm_design/javascript/jquery.quiz.js
extension/csm_base/design/csm_design/javascript/jquery.spectrumQuiz.js
extension/csm_base/design/csm_design/javascript/global.js

Templates used to render the page:

UsageRequested templateTemplateTemplate loadedEditOverride
1node/view/full.tplfull/article.tplextension/csm_base/design/csm_design/override/templates/full/article.tplEdit templateOverride template
16content/datatype/view/ezxmltags/paragraph.tpl<No override>extension/ezwebin/design/ezwebin/templates/content/datatype/view/ezxmltags/paragraph.tplEdit templateOverride template
2content/datatype/view/ezimage.tpl<No override>extension/csm_base/design/csm_design/templates/content/datatype/view/ezimage.tplEdit templateOverride template
16content/datatype/view/ezxmltags/link.tpl<No override>extension/csm_base/design/standard/templates/content/datatype/view/ezxmltags/link.tplEdit templateOverride template
2content/datatype/view/ezxmltags/strong.tpl<No override>design/standard/templates/content/datatype/view/ezxmltags/strong.tplEdit templateOverride template
2content/datatype/view/ezxmltags/emphasize.tpl<No override>design/standard/templates/content/datatype/view/ezxmltags/emphasize.tplEdit templateOverride template
1content/datatype/view/ezstring.tpl<No override>design/standard/templates/content/datatype/view/ezstring.tplEdit templateOverride template
1content/datatype/view/ezxmltext.tpl<No override>design/standard/templates/content/datatype/view/ezxmltext.tplEdit templateOverride template
1content/datatype/view/ezbyline.tpl<No override>extension/csm_base/design/csm_design/templates/content/datatype/view/ezbyline.tplEdit templateOverride template
1content/datatype/view/ezobjectrelationlist.tplcontent/datatype/view/story_images.tplextension/csm_base/design/csm_design/override/templates/content/datatype/view/story_images.tplEdit templateOverride template
1content/datatype/view/eztext.tpl<No override>design/standard/templates/content/datatype/view/eztext.tplEdit templateOverride template
1content/datatype/view/ezxmltext.tplcontent/datatype/view/story_info_box.tplextension/csm_base/design/csm_design/override/templates/content/datatype/view/story_info_box.tplEdit templateOverride template
1content/datatype/view/ezmatrix.tplcontent/datatype/view/ezmatrix_article_related_external_links.tplextension/csm_base/design/csm_design/override/templates/content/datatype/view/ezmatrix_article_related_external_links.tplEdit templateOverride template
1pagelayout.tpl<No override>extension/csm_base/design/csm_design/templates/pagelayout.tplEdit templateOverride template
1modules/mugo_view_extras/extra_cached.tpl<No override>extension/mugo_view_extras/design/standard/templates/modules/mugo_view_extras/extra_cached.tplEdit templateOverride template
1setup/debug_toolbar.tpl<No override>design/standard/templates/setup/debug_toolbar.tplEdit templateOverride template
 Number of times templates used: 49
 Number of unique templates used: 16
 Time used to render template usage: 0.0003 secs