Last week I had to spend some few days at the hospital. I had to go through an operation for my “not-so-well functioning” kidneys. But all that time spent in the hospital gave me the chance to read an excellent book: The Big Short by Michael Lewis. Michael Lewis is the famous author of Liar’s Poker. The Big Short was mentioned in the media as one the great books that came out covering the financial crisis of 2008. At first, I wasn’t really excited on the reading book. I first saw a video of the 60-minutes TV show covering what the book “The Big Short” is all about. This is a story about the ones who first saw the crisis on mortgages before it struck in 2008 and who actually bet short on mortgage products (e.g. buying Credit-Default Swaps) and made tons of money. I was expecting the book to be just a regular story of “big-shot” people who made money. However, I completely forgotten how Michael Lewis was and is such a great storyteller. I mean, I did read Liar’s Poker a while ago and I enjoyed it a lot but for some reason I wasn’t hype for his latest book. I bought the book before I got admitted to the hospital and read it fast because it was really, but really good. In “The Big Short”, Michael Lewis simply draws you into the famous “short” characters and you develop a bond with these protagonists. But what I liked the most about the book is this: if you are like me who studied all about those complex mortgage products and other asset-backed mortgage securities (e.g. CDOs, ABMs, CDOsquare, CDS, etc) but always felt a little confuse on the incentives and the minds behind the creation of those products, “The Big Short” is the perfect book to this missing link. The book will make it clear in your head why these products were created, what were the incentives to their creation (beyond money), who were dumb-dumb traders believing in credit ratings, what did really Goldman Sachs do, why were banks holding on subprime-mortgages, who were the party involved in CDS transactions, and how liquidity was injected in these products (say thank you the ones who bought CDS!). The protagonists, the ones who shorted mortgages products, have all different and weird but so intriguing background. Learning how they studied the subprime-market and its problems is fascinating and you really wonder how in the hell did policy-makers and bankers ignored early distress signals. The author does a good job at pointing to several issues that led to the “blindness” of individuals to the subprime-market (mostly a question of incentives).
Liar’s Poker was an excellent book of the “saving-and-loans” crisis and the first creation of mortgage-backed bonds of the 1980s but for someone like me who did not live the 80s crisis (I was way too young), “The Big Short” is like the “Liar’s Poker” for those who lived and studied the current crisis.
At last, Michael Lewis is a great author and storyteller. You know someone is a good storyteller when you think you are reading a fiction book but it is actually non-fiction.
Watch a great interview with Michael Lewis on “The Big Short” UC Berkeley.