The Big Short: Inside the Doomsday Machine

Based on reading Michael Lewis' Liar's Poker and Moneyball, I wondered whether The Big Short would prove to be entertaining and informative. If you've read some of Lewis' books, you might agree that the "entertaining" part would seem to be a reasonably safe bet. It turns out, it is. The Big Short is fast-paced, straightforward, conversational and salty--very much like his earlier works. Indeed, if you didn't know Michael Lewis had written this book, you could probably guess it. It is easy reading and very hard to put down. In short (no pun), The Big Short doesn't disappoint in being entertaining.In a sense, this book is similar to Moneyball in that Lewis tells his story by following a host of characters that most of us have never heard of--people like Steve Eisman (the closest thing to a main character in the book), Vincent Daniel, Michael Burry, Greg Lippmann, Gene Park, Howie Hubler and others.How informative is the book? Well, it may seem that Lewis has his work cut out for himself, since the events of the recent financial crisis are already well known. More than that, lots of people have their minds made up concerning who the perps of the last few years are--banks and their aggressive managers, "shadow banks" and their even more aggressive managers, hedge funds, credit default swaps, mortgage brokers, the ratings agencies, Fannie Mae and Freddie Mac, the Fed's monetary policy, various federal regulators, short sellers, politicians who over-pushed home ownership, a sensationalist media, the American public that overextending itself with excessive borrowing (or that lied in order to get home loans), housing speculators, etc. The list goes on--and on. Okay, so you already know this. The defining aspect of this book, however, is that it asks (and answers) "Who knew?" about the impending financial crisis beforehand. Who knew--before the financial crisis cracked open for everyone to see (and, perhaps, to panic) in the fall of 2008--that a silent crash in the bond market and real estate derivatives market was playing out? Indeed, the good majority of this book addresses events that occurred before Lehman's failure in September of 2008. In describing what led up to the darkest days of the crisis, Lewis does a good job helping the reader to see how the great financial storm developed. All in all, this is an informative book.Interestingly, in the book's prologue, Salomon Brothers alumnus Lewis explains how, after he wrote Liar's Poker over 20 years ago, he figured he had seen the height of financial folly. However, even he was surprised by the much larger losses suffered in the recent crisis compared to the 1980s, which seem almost like child's play now.For a taste of The Big Short, Steve Eisman was a blunt-spoken "specialty finance" research analyst at Oppenheimer and Co., originally in the 1990s, and he eventually helped train analyst Meredith Whitney, who most people associate with her string of negative reports on the banking industry, primarily from late 2007. Giving a flavor of his style, Eisman claims that one of the best lines he wrote back in the early 1990s was, "The [XYZ] Financial Corporation is a perfectly hedged financial institution--it loses money in every conceivable interest rate environment." His own wife described him as being "not tactically rude--he's sincerely rude." Vinny Daniel worked as a junior accountant in the 1990s (and eventually worked for Eisman), and he found out how complicated (and risky) Wall Street firms were when he tried to audit them. He was one of the early analysts to notice the high default rates on manufactured home loans, which led to Eisman writing a 1997 report critical of subprime originators. Michael Burry (later Dr. Michael Burry) was, among other things, a bond market researcher in 2004 who studied Warren Buffett and Charlie Munger, and who correctly assessed the impact of "teaser rates" and interest rate re-sets on subprime loans. In 2005, Burry wrote to his Scion Capital investors that, "Sometimes markets err big time." How right he would be.Greg Lippmann was a bond trader for Deutsche Bank, who discussed with Eisman ways to bet against the subprime mortgage market. Before home prices declined, he noted, for example, that people whose homes appreciated 1 - 5% in value were four times more likely to default than those whose homes appreciated over 10%. In other words, home prices didn't need to actually fall for problems to develop. (Of course, home prices fell a lot.) When Lippmann mentioned this to a Deutsche Bank colleague, he was called a Chicken Little. To which, Lippmann retorted, "I'm short your house!" He did this by buying credit default swaps on the BBB-rated tranches (slices) of subprime mortgage bonds. If that's not a mouthful, read further in the book for a description of Goldman Sachs and "synthetic subprime mortgage bond-backed CDOs." Then there's the AIG Financial Products story, told through the story of Gene Park, who worked at AIG, and his volatile boss, Joe Cassano.Did I say this book is informative? Here's a bit more: Did you know that a pool of mortgages, each with a 615 FICO score, performs very differently (and better) than a pool of mortgages with half of the loans with a 550 FICO score and half with a 680 FICO score (for a 615 average)? If you think about it, the 550/680 pool is apt to perform significantly worse, because more of the 550 FICO score loans develop problems. Think about how that got gamed.There's more, but hopefully you've gotten the point. This is a very interesting, entertaining and informative book that accomplishes what it sets out to do. Chances are you'll enjoy it.

Economics is a social science. It is predicated on an understanding of human behavior, among other things. It's also recognition that what we think we know may be incorrect. In their recent book, From Poverty To Prosperity - Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity, Nick Schulz and Arnold Kling posed the following question to Douglass North, Nobel Laureate in Economics (1993). North is the Spencer T. Olin Professor in Arts and Science at Washington University in St. Louis:Here's the question from Schulz and King: "What other obstacles prevent economists and policymakers from seeing what really matters?"North's response: "Until they understand that our understanding of the world is very fragmentary, is not complete, is - I believe - partially incorrect, no matter how intelligent we are, we're not going to make sense of the world." p. 151.We live in a world where we must listen for the voices of dissent - the contrarians. When Michael Lewis' The Big Short was delivered, I thought I might pick it up and read a few pages. Warning: This magnificent work is crafted in such a way that sampling the first few pages will transform your day (as it did mine) into devouring this masterpiece cover-to-cover. It is a book about the dissenters, the contrarians, "the few who truly knew" - who developed and exercised the foresight to comprehend the emerging financial crisis in the U.S. (and around the globe). It is a story from the perspective of a very few who recognized that "a great nation lost its financial mind." P. xivAs Lewis writes:"A smaller number of people - more than ten, fewer than twenty, made a straightforward bet against the entire multi-trillion-dollar, sub-prime mortgage market and, by extension, the global financial system. In and of itself it was a remarkable fact: The catastrophe was foreseeable, yet only a handful noticed." P. 105"Even as late as the summer of 2006, as home prices began to fall, it took a certain kind of person to see the ugly facts and react to them - to discern, in the profile of the beautiful young lady, the face of an old witch. Each of these people told you something about the state of the financial system, in the same way that people who survive a plane crash told you something about the accident, and also about the nature of people who survive accidents - all of them were, almost by definition, odd. But they were not all odd in the same way." P. 107This book is incredibly insightful regarding the motivation of homo sapiens in a capitalist society, how we think, what we overlook, and the necessity to learn to question the world around us. Consider the following excerpts from this book:"All shared a distinction: They had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger's syndrome." Lewis' commentary on the failure of foresight by Paulson, Geithner, Bernanke, Blankfein (Goldman Sachs), Mack (Morgan Stanley), and Pandit (Citigroup) vs. hedgefund manager Michael Burry of Cupertino, CA P. 260."I hated discussing ideas with investors," he said, "because I then become a Defender of the Idea, and that influences your thought process." Once you became an idea's defender you had a harder time changing your mind about it. P. 56 - quote from Michael Burry."In retrospect, their ignorance seems incredible - but, then, an entire financial system was premised on their not knowing, and paying them for this talent." --- Lewis' characterization on what percentage of credit default swaps were sub-prime. P.88"Lippmann soon found that the people he most expected to see the ugly truth of the subprime mortgage market-the people who ran funds that specialized in mortgage bond trading-were the ones least likely to see anything but what they had been seeing for years. Here was a strange but true fact: The closer you were to the market, the harder it was to perceive its folly." P. 91"The markets were predisposed to underestimating the likelihood of dramatic change." P.108"Just throw your model in the garbage can. The models are all backward-looking - the models don't have any idea of what this world has become." P. 176 - quote from Steve Eisman.Lewis has an uncanny ability to use interviews and the sheer creative power of his mastery of language to explain terribly complicated concepts in a way the layperson can comprehend. Regarding the design of Morgan Stanley's Credit Default Swap (CDS), Lewis uses the following phrase to characterize this instrument - "what amounted to home insurance on a house designated for demolition." (P. 202). In terms of the CDO market, Lewis says: "Their trade now seemed to them ridiculously obvious - it was as if they had bought cheap fire insurance on a house engulfed in flames." P. 164 --- ...you get the point.If you think that Lewis' "The Big Short - Inside The Doomsday Machine" is "just another book" about a vanilla investigative perspective regarding the U.S. and global financial crisis - YOU'RE WRONG. Don't succumb to this deception! This book is truly unique and will/must be enjoyed by a very broad audience.This work is a truly masterpiece. If you're interested in human behavior, cognitive economics or yearning for a "can't put it down" or how "a great nation lost its financial mind," --- this particular work stands out from all the rest of the pack. Buy it. Devour it. Think about it. Act upon it. Buy three for your colleagues and friends.If you're a U.S. citizen, it's your patriotic duty to read this book. If you are employed in the financial services sector of the global economy, this is required reading.My most heartfelt gratitude to Michael Lewis for sharing the stories of the few who truly knew: Those who "had the nerve to bet on their vision. It's not easy to stand apart from mass hysteria -to believe that most of what's in the financial news is wrong, to believe that the most important financial people are either lying or deluded - without being insane." P.xviiiTo Michael Burry, Steve Eisman, Vincent Daniel, Danny Moses, Jamie Mai, Charlie Ledley, Ben Hockett, and your families; here's something from my family to you and yours:You're "not nuts." You're the folks who provide me with the essential courage to inquire, think, ponder and wonder about the prospects for a better future in this world. You exemplify the few who have lived their lives, embraced incomprehensible pain and sacrifice, and paid an unimaginable personal price --- in pursuit of exposing systemic deception and, begin to restore my faith in the inherent value in the necessity for the contrarian among us. It's people like you who give me hope as my family, my community, our country, and our world continue to struggle as "collateral damage" in the ongoing, ever-unfolding, yet-to-be-experienced, dimensions of the aftermath of this fiasco.I needed to believe in "heroes" again. Thank you for being "something" in the midst of nothing. It's your character, tenacity, insight, intelligence and unwavering commitment to a pursuit of the truth amidst a sea of deception, which will endure with me. True stories of human heroism will never lose their charm. Thank you for living these truths for us.

Un libro excelente en todos los aspectos, en cuanto a calidad de papel y portada, respecto al contenido había visto la pelicula, pero no me podía quedar sin leer el libro y la verdad lo superrecomiendo

Complex financial instruments, not the most foreboding harbingers of doom but therein lies the trick. They most certainly delivered when it came to wrecking the global economy back in the mid to late noughties at any rate. This book is the real life tale of an opaque and seemingly distant world to most of us, one where a few numbers going the wrong way can have profound and wide-ranging effects on the world beyond. It shines a light on one part of that shadowy world and whilst it is tremendously well-written, I don't know if I like the realisation it bestows upon the reader. Namely that those managing such impactful things don't really understand the things they are managing, but there it is regardless.Excuse the vague layman's terms there, I'm no money man myself but I found it refreshing just how detailed this book was whilst not managing to lose its reader amongst the flurry of financial jargon and murky accounting. It's not a simple account but it doesn't patronize the reader either. Having some knowledge of the impact of the financial crash certainly helps but is not essential, the film is very good too as a broad strokes introduction but there is really no substitute for the wealth of detail and recent history on offer in the book itself.At the heart of it is debt, bad debt that will probably never be repaid, bad debt packaged and made to look like good debt. It's the story of how some people might look at that and see bad things approaching and take steps to insure themselves against it, making a bet with long odds on what seemed like the distant prospect of failure in the US sub-prime mortgage market. Through many twists and turns, it's the story of greed and stupidity in the great financial institutions who bought into the prevailing good times of the day and either couldn't see or wouldn't see the crumbling foundations it was all built on.It's also an intriguing personal story of some unlikely individuals making headway in a system which largely privileges the grand institutions of finance over the smaller players in the field. There are some nicely nuanced accounts of these individuals and how they came to see what by and large others could not. What saw them through this situation was an eye for detail and willingness to actually look closely at the reality beneath the numbers. It's a picture that slowly builds with a growing tension and the book does a great job of making you feel like the fly on the wall at some very pivotal moments in the development of this crisis.That sense of unease is very much the defining trait of this book for me. A slow-burn disaster movie in numbers playing out page by page. It captures a moment in recent history pretty well without reducing some essential complexity. It's mostly a tragedy with hints of absurd comedy strewn throughout. It's a reminder that the devil is in the detail, that numbers matter and that ingenuity can sometimes pair quite nicely with stupidity. It is, in short, a solid recommendation from myself.

Wszystko super, ciekawa książka

One of the best books I have read so far! Gives a good indepth analysis of US subprime crisis of 2007. Although the topic is factual and needs some understanding of stock and bond markets, author has crafted out quite an entertaining narrative! A must read for any finance enthusiast.

Gosto muito do estilo claro e direto de Michael Lewis, do qual já li também "Flash Boys". O filme "The Big Short" (A grande aposta) foi muito bem transposto para o cinema, mas falha em explicar melhor o que são os CDOs, origem da confusão toda. Acredito que Lewis conseguiu explicar bem para um leigo o que é e como surgiram esses títulos e, principalmente, como conseguiram transformar um título composto de dívidas duvidosas em títulos avaliados como AAA pelas agências de créditos. Além disso, o livro desce um pouco mais a fundo na perspectiva daqueles que perceberam com muita antecedência que os títulos estavam destinados ao calote e apostaram contra, além de explicar melhor também como foi feita essa aposta.