Review: The Big Short: Inside the Doomsday Machine

The Big Short: Inside the Doomsday MachineThe Big Short: Inside the Doomsday Machine by Michael Lewis
My rating: 5 of 5 stars

I am of two minds about this book. Either:

* Everyone in the world should read this book

… or …

* No one should /ever/ read this book.

When The Big Short first came out, I heard about it on NPR, listened to a review on Planet Money, listened to an interview with Michael Lewis on Planet Money, heard several more people talk about this book, and then decided not to read it for ‘rage management’ reasons. Planet Money recently released their recommended books about the crash and the economy and, this time around, I felt enough time passed between the crash and now that the rage would be a lesser rage, that I would not throw my Kindle into the wall, and the teeth grinding would be lessened.

The Big Short is a concise history of Wall Street from 2003-2008. By following the lives, and trades, of several sets of investors who saw the crash coming from miles away, the book delves deeply into the world of mortgage backed securities. As well as anyone can, it explains bond trading, tranches, credit default swaps (CDS), collatoralized debt obligations (CDOs), and synthesized CDOs which are CDOs made, bewilderingly, of other CDOs. Then the book goes on to talk about the crazy trader at Deutsche Bank who ran around selling CDSes on everything, the bond trader group — who used to be equity traders — who went short on everything they could find, the doctor come hedge fund manager who fought endlessly to tell his investors that these no-doc, negative amortizing adjustable rate mortgages with 2 year teaser rates were going to blow up and they did not listen, the kids from Berkeley who tried to make a killing and the people who actually went long on these things.

The pinnacle of the book is the "Wing Chau" scene, where the equity trader met someone on the other side of his trades who, in 2006, when bonds were already going bad, was convinced of the status quo forever and ever. Then the equity trader went home going "oh my god…"

The game was rigged. In theory Americans would refinance every two years from one terrible mortgage to the next to generate endless fees to dump into endless bonds that pretended to be "riskless." In the end, the mortgage deals blew up and the huge bundles of bonds were not riskless. Housing did not increase in value forever.

And yes, the few people who saw it coming made hundreds of millions off the crash, but at what cost to society as a whole? Most of them left, never to return to the game. They made their money but the cost to themselves was so high it wasn’t worth it anymore.

It’s a story of massive collective delusion, of outright greed, of fraud, of lies, of gamed rating agencies, of banks shifting massive untold risk on to their shareholders, of normal banking becoming too ‘boring’, of an industry who sucked up trillions of dollars and produced nothing, and of people who were playing with things they had no hope of understanding. A story of a giant game played with people’s homes and people’s ignorance on a mass scale and turning the American homeowner into just one dot in a giant Ponzi Scheme that was bailed out, no questions asked, by the US Government with even more of the American homeowner’s money.

The book has an incredibly hooky style. It’s clear. It’s concise. It’s sarcastic. It’s entertaining. It’s compulsive. It reads quickly. It’s also a drive by on a twenty car accident on a freeway. I want desperately to recommend it but I feel everyone who reads this book will promptly sell their house, pull their money out of the banks, and go live on a compound somewhere in Western Michigan.

Seriously two thumbs up but now, when I read the economics blogs — all which recommend the Big Short — I am always going to think about one bond trader screaming at another one: "I’M SHORTING YOUR HOUSE!"

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