The Big Short (2010) by Michael Lewis is another great book by Lewis and is a fascinating account of sub-prime mortgage crisis by a very able writer who has a real understanding of financial markets. Lewis wrote the excellent Liar’s Poker about the bond trade in the 1980s. Lewis was a bond trader in the 1980s and so has a real feel for the way financial firms operate.
In The Big Short Lewis looks at various people who saw the problems with the sub-prime market and the creation and sale of Collateralized Debt Obligations (CDOs), Adjustable Rate Mortgages (ARMs) with teaser rates and Credit Default Swaps (CDSs) that were used to rapidly increase the amount of home lending in the US in the 2000s. The people who are looked at Michael Burry, a neurology resident with Asperger syndrome who dropped out a Neurology Residency to become a trader and Steve Eisman, an analyst with Oppenheimer Securities.
The book looks at the way that these people independently figured out that the volume of sub-prime loans was too great and that method of laundering the credit risk of CDOs was suspect. They both figured out that the CDSs that covered the CDOs which had been trading for a very low price were likely to become very valuable when people began to default on their mortgages which would happen when the teaser rates on the ARMs stopped and when the housing market stopped rising.
The book exposes the fact that Wall Street, as well as being dishonest toward their customers was also stupid and did not properly account for risk. Toward the end of the book it is pointed out that one of the reasons for this was the change of the big Wall St banks from partnerships where risk was on the partners to shareholder companies.
The book is fascinating and is brilliantly written. It’s another really top notch book from Michael Lewis.