The Big Short – Inside the Doomsday Machine, Michael Lewis
During the summer of 2008, rumors were flying about the collapse of major investment houses and companies most thought too big to fail.
While many investors and industry experts waxed philosophically about the inevitability of the great American company to persevere it became more and more obvious that a growing faction on Wall Street knew and were not talking about the reality of the credit and housing markets in the US. By the fall of 2008, confusion reigned with most of the financial world, but not all. A select group of people not only knew what had transpired in the credit markets; they profited greatly from it.
A point of great interest in The Big Short is Lewis’s insight about the large Wall Street firms and what they knew, or more importantly did not, about the mortgages and derivatives they backed and sold as products. One of the main characters featured in the book tries to determine what the employees of the Wall Street firms knew and understood about the products they were creating and backing.
Who was hiding what? “We called it The Great Treasure Hunt,” he [Eisman] said. . . . The more he looked the more sure he became that they didn’t know either. “They didn’t know,” he said. “They didn’t know their own balance sheets.” Once, he got himself invited to a meeting with the CEO of Bank of America, Ken Lewis. “I was sitting there listening to him. I had an epiphany. I said to myself, ‘Oh my God, he’s dumb!’ A lightbulb went off. The guy running one of the biggest banks in the world is dumb!” (p. 174)
Lewis tells the back-story of the credit crisis and the Great Recession in an understandable way, that in and of itself is a reason to read the book. A clear explanation of the birth of collateralized debt obligations and credit default swaps adds to the value, as does the inclusion of several great characters even more interesting as they are real people on the stage of the greatest market crash since the Great Depression.
The book is well written, entertaining and worth the read.