Posts Tagged ‘banking’

The Big Short” by Michael Lewis: A short review

Posted 07 Dec 2010 — by Charles Martineau
Category Books, Finance

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.