Book Review: The Big Short
By Larry Swedroe | Oct 26, 2010 | 5 Comments
Michael Lewis is one of my favorite authors, whether he is writing about football (The Blind Side), baseball (Moneyball) or business (Liar’s Poker). As good as I thought his other books were, he has outdone himself with The Big Short.
Lewis has done an incredible job researching the origins of the financial crisis. He then provides a great service by making a very complex subject easily understood. He turned what could have been a dry text on the crisis into a character-driven story that reads like a great novel. In addition, he shows clearly how the interests of much of Wall Street are not aligned with those of even their clients, let alone those of investors in general. Lewis demonstrates this by filling the book with tales no Hollywood writer could even dream up. The following, just one of many, demonstrates this point and shows why Wall Street must be required to provide a fiduciary standard of care.
Danny Moses was a hedge fund trader who related the following tale. “When a Wall Street firm helped him into a trade that seemed perfect in every way, he asked the salesman, ‘I appreciate this, but I just want to know one thing: How are you going to f**k me?’ The trader hemmed and hawed but Moses persisted. ‘We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it [the trade], but only after you explain to me how you are going to f**k me. And the salesman explained how he was going to f**k him. And Danny did the trade.”
Lewis also exposes both the conflict of interests between the rating agencies and Wall Street and the mismatch in skill sets that allows Wall Street to exploit this conflict — any rating agency employee with any real talent leaves to a much higher paying job on the Street. He also shows how using a very short sample of data allowed the agencies and Wall Street to delude themselves into believing they were doing the right thing. “The entire food chain of intermediaries in the subprime mortgage market was duping itself with the same trick, using the foreshortened, statistically meaningless past to predict the future.”
Lewis relates tales that show how these conflicts lead Wall Street firms to make the same mistakes over and over, demonstrating that the cultures must change or they will be doomed to repeat the same mistakes. One hedge fund manager related the thesis behind the strategy of shorting not only the bonds sold by Merrill Lynch, but also Merrill Lynch itself. “There is going to be a calamity, and whenever there is a calamity, Merrill is there. When it came to bankrupt Orange County with bad advice, Merrill was there. When the Internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit.”
He concludes by showing how Henry Paulson, Timothy Geithner and Ben Bernanke bailed out the very players who created the crisis — saving their companies, their jobs and their fortunes. And the taxpayer was left paying the bill.
Lewis has written not only a great business book, but a great social commentary as well.