The Big Short by Michael Lewis

The Big Short is a thrilling story of the origin of the recent credit crunch crises in the United States and of the few people who profited immensely from it. Now I’ve read a couple of very good books about that crises and this book has been the best so far in terms of getting the crasp on what actually happened and why. I remember that when I read Larry MacDonald’s “Colossal Failure of The Common Sense“, also a very interesting book, I had to google some terms to understand what the author meant. Micheal Lewis have made it easier for the reader to understand the concepts. Either that or I have become more knowledgeable.

I think the most valuable lesson to learn from this book is to be rather cynical about the Wall Street and financial world in general. Things that are presented one way are often actually the very opposite. Lewis reveals how investment banks sold securities to their unsuspecting customers and at the same time placed bets that these securities would go bad and lose money to their customer (and win money to the bank). It also reveals a lot about the corruptedness of the credit rating agencies (mainly Moodys, S&P).

The role of credit rating agencies is to be the independent party in the market, evaluating the organisations’ ability to pay back their loans. During the subprime mortgages boom, the credit rating agencies would say on regular basis that the NINJA-s – individuals with no income, no job and no assets – were as likely to pay back their debt (mortgage) as the governments of the US and Germany (ironically, this comparison is not that unimaginable today).

The main reason for those unbelievable ratings was that the agencies were paid by the very same investment banks who sold those securities to their investors. This market was very lucrative for credit rating agencies, at some point it made up most of their revenues. So they provided favorable ratings to please their Wall Street customers.

But the other reason for incredulous ratings was, Michael Lewis states, that the people working in the rating agencies are outright stupid. They do not have a clue. All they have is their rating-model and a PC to calculate that rating. The investment banks knew those models and were able to play them to their advantage.

The stupidity was not only confined to the Moodys and S&P. As it turns out, the very same investment banks who sold the crappy subprime mortgage based securities to the investors (and knew fairly well what kind of junk they were) started actually buying them at some point: if everyone’s buying them, there must be something in them! In a especially spectacular way, Morgan Stanley lost approx. $50 b i l l i o n because although they were betting on the collapse of the subprime-based securites, they bought the same kind of subprime-based securites to finance that bet!

The main idea of the book though is to show three different teams who profited from the collapse of the market. The book shows how they came to the understanding that the whole concept of the subprime mortgage market was faulty and in a lot of ways a fraud. It explains what kind of deals they needed to do to profit from that knowledge and how difficult it was in times to do that.

The book is awesome and if you are interested in finance and economy in general, you should definitely buy this book. If not, then skip; you’d be bored.

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One thought on “The Big Short by Michael Lewis

  1. Good review Lauri – thanks for pointing this book out!

    I wonder thou if this crisis was painful enought lesson for most people. Everybody has the opportunity to buy these books from amazon for under 10 bucks per book and even if it’s been a #1 bestseller in New York Times list I still have a feeling that most of people try to forget about the whole thing quickly and move on:)
    It’s very interesting to study and read about these kind of “interesting human behaviour” in relation to get rich and powerful. Almost as humans are a form of parasites for themselves:)

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