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