Sunday, April 11, 2010

The Big Short

What is the best way to write an uplifting book about the recent financial crisis? In his new book, The Big Short, Michael Lewis has taken the approach of following the winners, the people who saw that the bubble would burst and made a huge sums of money by betting on it bursting. Along the way we also meet some of the people who took the other side of the bet and lost big. When you compare these two groups, the losers come across as your average every day kind of person while the winners area strange group of outsiders.

The book follows three groups of people. There is the Frontpoint Partners hedge fund led by Steve Eisman, who as a stock analyst had been best known for correctly trashing companies that he followed. Then there is Mike Burry, a one eyed doctor living in San Jose who took up investing because it allowed him to get away from having to interact with other people. Finally there are the guys at the garage band hedge fund who turn $100,000 in to more than $100 million and whose main problem is being taken seriously by the big Wall Street Firms.

Along the way we see scenes of madness from the financial machine that created the bubble. There is the explanation for why a Mexican strawberry picker with no English and an income of $14,000 per year could be loaned every penny he needed to buy a house for $724,000 in Bakersfield California. As it turns out, because he had no debt and no credit history, he has a relatively high credit rating, and that credit rating was needed to balance out the low credit rating of some deadbeat American when their home loans were packaged together with many others into a mortgage bond.

Another scene is the American Securitization Forum, the annual conference of the of the subprime mortgage industry. In early 2007 the conference takes place in the Venetian Hotel in Las Vegas. The Frontpoint Partners and the garage band hedge fund are both there trying to get more information to substantiate their huge bets against the subprime mortgage market. By this time the cracks were beginning to show. For example, the CEO of the Option One mortgage corporation gave a reassuring speech even although Option One was in trouble because they had made loans to people who could not afford to make even the first payment on the loan. When his partner asks "Who takes out a home loan and doesn't make the the first payment?" Steve Eisman responds "Who the #$%^ lends money to people who can't make the first payment?"

Michael Lewis knows what he is talking about in writing about Wall Street because he started his career as a bond salesman for Salomon Brothers as hilariously told in his first book, Liar's Poker. In The Big Short he successfully continues that tradition. The Big Short is full of interesting characters, amusing insights, clear explanations and some genuine tension as towards the end you wonder whether the hero's will get their big payoff or whether Wall Street will totally collapse taking down everybody with them. Like of his other books, The Big Short is highly recommended.

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