The Big Short by Michael Lewis

The Big Short by Michael Lewis, author of Liar’s Poker, is a well researched, although obviously biased, look at sub-prime debt crisis and the factors that led up to it.  The book has been on several best sellers lists and for good reason – it is the best book that I have read on the topic and is interesting even if you do not know anything about CDO’s, subprime debt, the US housing market and all the other factors that led to the crisis.

Although the book primarily focuses on the hedge funds (including a fund that was seeded by Joel Greenblatt, author of You Can Be a Stock Market Genius which was been previously reviewed on this site) that saw the crisis coming and made significant money out of it, Lewis also looks at the other players in the market including the buyers of the mortgage backed securities, the buyers of the credit default instruments, the investment banks that were pedalling the goods to everyone and the ratings agencies who were probably the reason that the whole thing came undone.

The strength in The Big Short is on Lewis’ ability to distil quite complex products and topics down to rather simple explanations of how they work and the relative pros and cons of either side of holding the product.  Also I liked how Lewis broadly arranged his books into time periods and then looked at that particular time period from every angle (i.e. pre-crisis when no one realised there was a problem, when people started to realise the issues, when the crisis became public knowledge etc)

As a last point of note, when I read this book I read it from the perspective of an investor (as that is what I do for a living).  However I was chatting about it to investment bankers who really focussed on the failings of their business model and incentives.  Again when chatting about it to those who have nothing to do with the financial industry the focus was on how the system failed.  There are so many different ways to interpret the lessons from this book and it all depends on the perspective you are reading it from.

Pros

·         As mentioned above the biggest strength of this book is in Lewis’ ability to write a book about complex financial products that anyone can read

·         Probably the book with the most wide variety of inside knowledge of what was going on through the crisis

·         I have rarely read a nonfiction finance book where I have become attached to the characters in the book, however such is the skill of Lewis’ writing that I found myself rooting for certain people in his books

Cons

·         The only reason this book did not get 5 stars from me is that although it only portrays the investment banks and investors in CDO’s and insurance contracts (e.g. AIG) as greedy and dumb it doesn’t really explore what they were thinking at the time, who made the decisions, why they were made etc.  I would have liked the book to be much more balanced

Overall

·         Overall I immensely enjoyed this book.  It provided an insight into the subprime crisis at a much deeper level than the usual hysterical anti-capitalist rants that are mostly around in newspaper and journal articles.  The access Lewis had to the hedge funds was particularly enviable and interesting.

This book isn’t overly complex and can be read by anyone, from low financial intelligence to those who deal with the markets every day in their careers.