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Saturday, 10 April 2010

Books - The Big Short - Inside the Doomsday Machine - Michael Lewis

Star rating – 9/10

Now you may not think that a book that tries to disclose what really went on behind the whole subprime mortgage fiasco in the United States, which we now know led to our credit crunch, then to the global recession, is a candidate for a page turner of a book, but I have to tell you that you would be missing out not to read this latest offering from Michael Lewis.

Lewis is famous for writing ‘Liar’s Poker’ in 1989, which exposed the lurid and murky dealings on Wall Street, but which was so good that many seem to have treated it as a bible for how to succeed in the world of finance (not that I have read this book yet - but you can be sure I will be doing so very soon). This latest foray into the world of Wall Street is sensational. It tells the story through the eyes of individuals who found themselves wrapped up in the greatest financial scam that we are likely to see in our lifetimes.

Steve Eisman works on Wall Street, but has been criticising the subprime mortgage industry for some years. The only trouble is he is distinctly lacking in social graces, to put it mildly, and can’t help but offend most people he comes into contact with, so his message is not taken very seriously.

Michael Burry is a doctor who takes a career u-turn to become a player on the stock exchange almost by accident, as he likes nothing more than to sit on a dark room and study the markets. He later learns that the reason for his propensity for numbers, and also for his anti social behaviour, is that he has Asperger’s syndrome. Burry is the first person to buy a credit default swap on a subprime mortgage – in other words , to bet on the subprime mortgage lender defaulting at some stage. And as the banks were lending money to people who had not a hope in hell of ever repaying the mortgage after the first couple of years low ‘teaser rate’, this was one hell of a good bet.

Greg Lippmann, is a typical greedy Wall Street bond salesperson who sees the potential of these bets, or subprime mortgage swaps market, very early on, and so effectively bets on the total collapse of the US housing market.

Charlie Ledley, Jamie Mai and Ben Hockett are three young financial wannabes who set up a hedge fund from a back yard and also realise what the markets are letting themselves in for and so also engage in the business of betting on the subprime mortgage market collapsing. They cannot believe that no one else has spotted what they have spotted.

And one of the most startling things about Michael Lewis’s expose is that it brings home just how little the leaders of the major financial institutions in the US and later around the world, knew or cared about the sort of financial derivatives (or virtual hand grenades) that their companies were dealing with. If the US Government (or in effect the US tax payers) had not bailed them out to the tune of billions of dollars, then the whole global financial system could have gone into meltdown.

Lewis tells this story in such a gripping way that it seems so obvious what was going on, and so incredible that it could have happened. He does come from a particular moral standpoint in the affair, but one that to me seems entirely justified in the circumstances. This is a gripping read, history in the making told in an extremely accessible way – if only someone like Lewis had been around to warn the poor people who were sold a pipe dream of home ownership, only to have to leave their homes abandoned in desperation a couple of years down the line.

1 comment:

  1. Hugely entertaining look at the genesis of our current economic mess. Lewis finds the very few

    investors who predicted and profited from the sub-prime mortgage meltdown and follows their journey

    from initial realization of the impending disaster to eventual payout. Following these eccentric

    characters and their interactions with the big Wall Street investment banks is at turns laugh out loud

    funny and head shaking incredulous. Lewis knows how to turn a phrase and does a good job teasing out

    the dark humor of the situations. He also does a very good job at explaining the essence of very

    complicated financial transactions and gives the reader a good understanding of the whys and hows of

    the financial meltdown. While this book is an important addition to our understanding of what happened,

    it isn't complete as it doesn't spend any time talking about US government policies that contributed to

    the crash (specifically, the special legal status given to the three rating agencies, and Fannie and

    Freddie's role in weakening underwriting standards). Nonetheless, this is still both an important and

    entertaining book. more detail