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The Big Short: Inside the Doomsday Machine Paperback – February 1, 2011
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The #1 New York Times bestseller: "It is the work of our greatest financial journalist, at the top of his game. And it's essential reading."―Graydon Carter, Vanity Fair
The real story of the crash began in bizarre feeder markets where the sun doesn't shine and the SEC doesn't dare, or bother, to tread: the bond and real estate derivative markets where geeks invent impenetrable securities to profit from the misery of lower- and middle-class Americans who can't pay their debts. The smart people who understood what was or might be happening were paralyzed by hope and fear; in any case, they weren't talking.
Michael Lewis creates a fresh, character-driven narrative brimming with indignation and dark humor, a fitting sequel to his #1 bestseller Liar's Poker. Out of a handful of unlikely-really unlikely-heroes, Lewis fashions a story as compelling and unusual as any of his earlier bestsellers, proving yet again that he is the finest and funniest chronicler of our time.
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― Michiko Kakutani, The New York Times
"Superb: Michael Lewis doing what he does best, illuminating the idiocy, madness and greed of modern finance. . . . Lewis achieves what I previously imagined impossible: He makes subprime sexy all over again."
― Andrew Leonard, Salon.com
"One of the best business books of the past two decades."
― Malcolm Gladwell, New York Times Book Review
"I read Lewis for the same reasons I watch Tiger Woods. I’ll never play like that. But it’s good to be reminded every now and again what genius looks like."
― Malcolm Gladwell, New York Times Book Review
About the Author
- Publisher : W. W. Norton & Company; Reprint edition (February 1, 2011)
- Language : English
- Paperback : 291 pages
- ISBN-10 : 0393338827
- ISBN-13 : 978-0393338829
- Item Weight : 9 ounces
- Dimensions : 5.5 x 0.9 x 8.3 inches
- Best Sellers Rank: #18,633 in Books (See Top 100 in Books)
- Customer Reviews:
About the author
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Top reviews from the United States
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As soon as I finished watching the 2015 movie “The Big Short,” I immediately decided to read Michael Lewis’ book “The Big Short: Inside the Doomsday Machine,” which forms the basis for the film. Lewis, who was himself a Wall Street bond trader in the 1980s and 90s, is the author of several non-fiction books, many of them dealing with the world of finance.
“The Big Short: Inside the Doomsday Machine” isn’t so much “about” the financial crisis as it is about what caused the meltdown in the first place. Lewis tells his story through the actions of four separate investment groups: Scion Capital; managed by Dr. Michael Burry; FrontPoint Partners LLC, led by Steve Eisman; Cornwall Capital, co-managed by James Mai and Charlie Ledley; and Greg Lippmann, a bond trader with Deutsche Bank. These investors, each working independently from each other, correctly foresaw the collapse of the housing markets in the United States in 2007. Nobody else saw it – or wanted to, for that matter.
For years, many of the world’s biggest investment and commercial banks had been investing heavily in high-risk subprime mortgages. This caused housing prices to rise, and a “housing bubble” to form. But soon, variable interest rates on these mortgages would begin to rise sharply, and massive numbers of people with little or no income would begin to default on mortgages they could no longer afford. Our four investors each decided to “sell short” the housing markets by investing in “credit default swaps” – a form of insurance against mortgage defaults. They essentially were betting against the housing markets: when (not if) the housing markets failed, the investors would end up making millions…
“The Big Short” is a very well written book. It’s fast-paced, easy to read, and short (less than 300 pages). Michael Lewis’ story is very much character-driven. His profiles of the main players are surprisingly detailed, brutally honest, and fascinating. Some people who start out looking like villains end up as quite heroic and admirable figures. Others do not fare so well.
One of the things Michael Lewis does best is explain many of the technical aspects of the financial system in a manner that I could easily understand. Although I’m sure “mortgage backed securities,” “credit default swaps,” and “collateral debt obligations” are probably a lot more complicated than even Lewis presents them, I found his explanations simple, straightforward, and very useful. As a result, I gained a better knowledge of the financial crisis.
“The Big Short: Inside the Doomsday Machine” is a very informative and entertaining book. For those looking to understand the basics of the 2008 financial crisis, this is one very good place to start. Highly recommended.
--The executives that control our major banks and corporations are insightful entrepreneurs with unique skills for creating wealth and new businesses
--There is too much government regulation
--Cutting taxes for the wealthy produces more prosperity for all
Remember: the book destroys these myths, not as an ideological diatribe, but from the perspective of brokers and analysts who, themselves, participated in the system but saw the house of cards that their more powerful (and well paid) colleagues were building. Not only saw it, but bet their careers and economic futures that it would ultimately collapse--and they were right. It's this book's stunning, fact-based revelations of the corruption, incompetence, and greed in our corporate executive suites that makes it an instant classic. It indicts a whole generation of America's corporate and financial leaders.
And remember: these same leaders, or their like-minded clones, are still in place, and already trying to turn back the meager reforms put in place to prevent a repeat of their evil. They repeat ad infinitum the shibboleth that government regulation, not corporate malfeasance, is the source of our economic malaise. They further that Big Lie by using their ill-gotten wealth to control the media and to elect their lackeys to office. They have no shame, no sense of decency. Left unchecked, they will destroy America. As they came close to doing in 2008.
Top reviews from other countries
We all know, some years after the event, that a great many people saw the 2007 crash coming. Michael Lewis’s book, however, focuses on the handful of people who really saw it coming and left proof that they’d done so by staking large amounts of money betting that it would.
Take Michael Burry. This is a man we get to know better and better through 'The Big Short', which is appropriate because the events it describes include his own awakening self-awareness (one of the charms of this book). He was perhaps the first to see that the US mortgage industry was lending increasing amounts of money to people who had not the slightest chance of being able to keep up the repayments.
Those mortgages were being sold on to other financial institutions, and then being collected together into bonds which could be sold as packages to yet others. A market quickly developed in those bonds, which developed their own prices quite independent of any value the initial mortgages themselves might have.
In fact, the process went still further, with collateralised debt obligations (CDOs) which contained bits of many bonds and could themselves be sold on.
The explanation I’ve just given is almost certainly inadequate, but I don’t pretend to understand how individual mortgages got packaged into bonds and bonds into CDOs. But that’s the book’s essential point: very few people did understand. These were opaque instruments, not understood by the people who traded in them or by the executives of the Wall Street firms which employed the traders.
They didn’t understand, but they knew that it was in their interest that they keep being created, that their price keep increasing and that the market stay buoyant. So they did all it took to maintain the flow of the instruments – which meant making more and more loans to people less and less able to afford them – and to keep the price high.
In one of his most damning revelations, Lewis explains how Wall Street maintained pressure on the ratings agencies, whose staff were simply not of a calibre to withstand it. So the agencies continued to award to rate these essentially rubbish bonds triple-A. That allowed their prices to be kept floating ever more ludicrously higher.
What the few people like Burry (Steve Eisman, Greg Lippmann and the founders of Cornwall Capital also play major roles in the book) had understood was that this whole structure was ultimately built on lousy loans. It couldn’t be sustained in the long term – the whole tower eventually had to crash. So the trick was to find a way to bet against it. That’s the process known as “selling short.”
Normally, it involves borrowing. You might borrow pounds today to buy dollars, in the belief that the pound will fall, so when you come to buy pounds to pay the loan back, it will take fewer dollars than you’ve realised today; or you might borrow shares to sell today, believing that when you come to buy them again to reimburse the lender, they will cost you less. Large amounts of money can be made that way, but the risk is colossal: if the shares rise instead of falling, or the pound increases in value against the dollar instead of devaluing, your losses can be immense. In fact, they are unlimited.
As it happens there was no mechanism to borrow mortgage-backed bonds in the years leading up to 2007. What there was, however, was a way of insuring against them defaulting. The so-called credit default swap (CDS) meant paying a quarterly premium, against the insurer paying out the full value of any default on the bond – if the bond became worthless, the insurer paid out the face value at which it had been sold.
One can imagine that this was initially a legitimate form of insurance (though it wasn’t regulated as ordinary insurance is). If you’ve lent $100m to someone whose credit you believe is good, you might nonetheless want to take out some insurance against his being unable to pay you back; if someone is prepared to insure the full value for, say, two or three hundred thousand a year then the chances are that you will only be out of pocket by a small percentage of the interest you make on the loan, and usually the insurer will not have to pay out anything (just as in insurance generally: most houses don’t burn down, so the insurers turn the premiums into pure profit). You’ll have made a small reduction in your profit for peace of mind.
Until nearly the end, the Wall Street firms were so convinced of the solidity of the sub-prime mortgage market, that they were more than happy to issue large quantities of CDSs. They were happy to insure the bonds. Interestingly, the men who bet against them didn’t even have to own the bonds they were insuring: they could take out CDSs against the bonds without buying them – in other words, they were making pure bets.
This was the Big Short. They were taking out fire insurance on houses belonging to other people, which they were convinced were already burning. And they made a packet.
The main lesson for us? They did it because they were alone in understanding what the people paid huge salaries to manage the industry failed to grasp.
And the saddest lesson? No lessons have been learned. The finance sector was bailed out by the taxpayer. It goes on paying its senior players wildly excessive salaries. And it continues to pursue huge profits from financial instruments they don’t understand.
P.S. The film (same title) is not at all bad, either.
But it didn’t end there. Those that failed to get the desired rating were simply repackaged, so that all these dubious products were eventually classed as ‘risk free’. This was the second part of the conspiracy and a huge failure by the rating agencies (who were paid by the banks). They failed to examine in detail the structure of a given CDO, but simply accepted the bank’s assessment. The situation rapidly spiraled out of control. A CDO-A might contain some of the mortgages in CDO-B that in turn might contain some of the mortgages in CDO-C, and the latter might even contain some mortgages that were in CDO-A. This was an Alice in Wonderland world where it was impossible to give a true value of any CDO, and its worth was what the bank said it was worth. Even the senior staff at the banks that were selling the CDOs didn’t have a full understanding of what was happening.
This is where the outsiders entered. First they realized that the original loans were often being made to people without asking for proof of income (‘liars’ loans’) and that the home owner was offered a low interest rate (the ‘teaser’ rate) initially, typically for the first two or three years. They argued that after this period expired there would be a high probability that the owner would default and, crucially, that this would happen to the vast majority of loans within any given CDO, because they would all be unable to pay for the same social reasons. The banks, however, had risk models that only considered a worse case scenario of just a few percent failures. If they could take out insurance, via what were called ‘credit default swaps’ (CDSs), against a failure of a CDO, they argued that they would only have to wait a couple of years or so before the low-rate period expired and the insurance would have to pay out. Throughout they remained worried that they had missed something, because the logic seemed so obvious, they couldn’t understand why the banks themselves had not seen it. Eventually they did of course, and much later started to cynically (even corruptly?) bet that the very bonds that they had issued would fail.
Initially, the outsiders had hurdles to overcome. They had difficulty finding any bank that would sell CDSs to them because they were mere minnows with only small funds. However, these hurdles were overcome and to some amusement of the banks they started to accumulate substantial positions in ‘bets’ that the CDOs would fail, and at only a small cost in premiums. It was a nail-biting time because the price of CDOs continued to be stable, even sometimes rise, despite the increasing rate of defaults on the underlying loans. But the end, when it came, was very rapid, just as the outsiders had predicted. Indeed the losses were so great that they feared the big banks would themselves fail and so be unable to pay out on the CDSs. In great haste in the last stages of the collapse they scrambled to offload them and managed to get out before the final collapse.
The rest is history: several major bank collapsed; hundreds of billions of dollars were pumped into the system to keep others afloat; Congress stepped in and bought subprime mortgage assets for up to 2% of the US GDP; and senior bankers who had lost billions in the debacle were allowed to walk away with ‘bonuses’ of tens of millions of dollars. But the householders who had defaulted on their loans received nothing and were dispossessed.
What this sad story revealed was widespread cynicism in the financial industry, banks, rating agencies and regulatory bodies, bordering on corruption, and a remarkable lack of understanding of the fundamentals at the highest level in the banks. There have been many books about the causes of the financial crash of 2008, but few can match this one in the detailed knowledge of its author and the clarity of his presentation. There is some repetition in explaining technicalities, but this is acceptable. If the reader understands it first time these can easily be skipped over without loss of continuity. Overall it is an excellent book.
Two criticisms of the book, although it's explained it's sometimes hard going to understand some of the detail (the gist is always clear), and it is sometimes repetitive. Still a five starer though, for the effort of producing something so revealing, and which clearly stung a few people, people who were incredibly fortunate to have only been stung rather than buried.
I had previously seen the film, however the book really captures incredibly well the hubris and madness of Wall Street. I have found this book very hard to put down. I’ve also had to stop swearing out loud in shock at some of the passages as Lewis exposes some of the utter stupidity and dishonesty of some of the key players in an act of collective madness and greed.
Strongly recommended to students of recent financial history.
You really have to wonder why lots of people didn't go to jail after you've read it...