Lewis’s “Big Short” Long on Entertainment

Michael Lewis, former Salomon Brothers trader and author of The Big Short (W.W. Norton). Image courtesy of Wokay.com.By Ke Ding

Since the fateful and stunning collapse of Bear Stearns in 2008, numerous books have been written on the why, who, and how behind Wall Street’s troubles.  You’ve got, for example, Too Big to Fail by Andrew Ross Sorkin, The House of Cards by William D. Cohan, and most recently, The Big Short by Michael Lewis. 

Lewis was a former bond salesman at Salomon Brothers later made famous by his autobiographical book Liar’s Poker, which chronicled his experiences on Wall Street and the kind of characters that thrived there. As ethnographies go, it was a priceless account of an unspeakably unusual subculture. After the collapse of Stearns, Lewis, who had long since quit finance and was working full time as a writer and journalist, was amongst the many who tried to figure out, well, “What the hell happened?” 

As Lewis describes it, The Big Short is about the build-up of the housing and credit bubble of the 2000s, from the perspective of the people who had bet on its bursting — the people who were right. (Hence the shorting referred to in the title — a way to make money off of a drop in an asset’s price.)  And the number of people who had bet that this would happen was surprisingly small. After an interview with Meredith Whitney, an analyst who first issued a pessimistic report on Citibank in 2007 and had risen in fame as she became one of the first to go bearish on the banks, Lewis wrote that by 2008 “…there was a long and growing list of pundits who claimed they predicted the catastrophe, but a far shorter list of people who actually did. Of those, even fewer had the nerve to bet on their vision…”

The book then goes on to explore in detail the stories of these people who had bet upon the upcoming implosion and why they did so. Lewis weaves a story that manages to talk about some of the fundamental problems behind the financial crisis through the lens of those who are most qualified to tell us what that problem may be: namely, those who were prescient enough to make money betting on it. People such as Steve Eisman, a sometimes callous former corporate lawyer with a populist streak and an almost pathological, sometimes justified, and perhaps even ironic (considering that he works for Morgan Stanley) hatred of Wall Street and oligarchy. Upon listening to the CEO of a savings and loan called Golden West Financial Corporation explain, off the record, free checking as really a tax on poor people (who were more likely to overdraft), Eisman says “That’s when I really decided the system was really, ‘Fuck the poor’.”There’s a few more of these shorters, including a Michael Burry, who Lewis characterizes as a kind of savant, an anti-social former medical student in California who had a talent for sitting in a room for days reading companies’ financial books. 

While taking us through these characters, Lewis also provides a running explanation of the way in which the shorters made their big bet: they invented the credit-default swap, where one party (the people who wanted to short) would pay another (large banks) a certain amount of money up until there were defaults in the mortgage-backed collateral debt obligations (CDOs). At that point, the banks would pay the par value of the bond to the protection buyer (the people who wanted to short).  It was a smart way for people like Michael Burry and Steve Eisman to bet directly against CDOs, and something that in the end, made them a lot of money. 

And after the read, here’s what I would say: The Big Short is very entertaining and does a good job of being as informative as it can be without being too academic, but is ultimately somewhat flawed in its narrative style, and perhaps, in its partisanship as well. Michael Lewis obviously doesn’t like the banks, and this sometimes means that interesting ideas that don’t jive with his philosophy don’t get explored. For example, in the beginning of The Big Short, even Lewis admits that CDOs were initially invented to make the credit markets more efficient: to extend credit to people who otherwise wouldn’t have any and to allow creditors who were willing to bear this kind of risk do so. 

The question then begs to be asked: is there a way to regulate them, to continue to ensure that the credit markets are as efficient as possible through CDOs? But this topic isn’t explored, as throughout the rest of the book, CDOs, and the banks that deal with them, are roundly vilified. In addition, one has to wonder about the central conclusion of the book.It’s certainly no lie to say that Wall Street acted greedily: there was undoubtedly a huge systemic problem there. 

But what about those Americans who were willing to sign mortgages that they had no chance of paying off? Wall Street made it easy for them to do so, true, but are we so infantile a nation that we can’t accept at least partial responsibility for the fact that at the end of the day, it was ordinary Americans who put their signatures upon the dotted line and then weren’t able to pay? 

However, despite all this, to the average reader and to this reviewer, The Big Short was still very informative. The Big Short is, after all is said and done, a good read, and, in a book tackling murky topics like credit-default swaps and collateralized debt obligations, this is clutch.  

Anecdotes that at times were frustrating or seemingly irrelevant — other than, perhaps, to further a political point — were at other times also what made The Big Short read like a story; a flawed and biased story, perhaps, but a fun one nevertheless.