Book Review: The Big Short

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Lewis, Michael. The big short : inside the doomsday machine. W. W. Norton, 2010.

Master storyteller Malcolm Gladwell calls Michael Lewis the finest storyteller of our generation. Moneyball and Liar’s Poker made him one of the best business journalists today. Among his recent successes is The Blind Side.

The Big Short is called the definitive book on the current recession. Having worked at Saloman Brothers in the 1980s, he provides an insider’s view of a perfect storm brewing. Lewis’ story revolves around several obscure Wall Street players who understood the housing market was built on a house of cards.

Although most people are left with the impact of the recession; Steve Eisman, an analyst at Oppenheimer and Co.; Greg Lippman a bond trader for Deutsche Bank; and Michael Burry, who left Stanford Medical School to manage his own hedge fund, acted upon an opportunity to make tremendous profits.

Analysts noticed that certain states including California, Florida, and Nevada with no-doc and low-doc loans provided by opportunistic brokers were particularly susceptible to failure. These savvy investors made huge bets against the subprime lenders.

The insurers were gambling, and the odds were in their favor. If you pay $200,000 a year to buy a ten-year credit default swap on a $100 million of bonds, the most you can lose is $2 million. The most you could make is $100 million. Selling short or betting on the decline of a financial product is nothing new on Wall Street. J. P. Morgan first used the credit default swap in the mid 1990s to manage credit risks. This theoretically provides insurance against losses. However, many subprime lenders portfolios were heavily invested in toxic assets without loss reserves.

Lewis builds a case that Wall Street banks and specifically Goldman Sachs conspired to inflate the price of the financial derivatives through overrated bonds. To further increase profits, Wall Street banks may have had unethical arrangements with the influential rating agencies including Moody’s, and Standard and Poor’s.

Without government oversight from the SEC, a collapse in 2008 brought the Ponzi scheme spiraling out of control. Rather than being proactive, the government was forced to react.

Lewis’ insightful investigating reporting is a must read, but difficult to categorize, I’m not sure if it would be best described as history, drama, or business. The publicity department at W. W. Norton chooses to call The Big Short a morality play.

Guest reviewer Randall Mayes is a Duke alumnus, author, science writer, and technology policy analyst.

© Reviewer: Randall Mayes & Ford Library – Fuqua School of Business.
All rights reserved.

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2 Responses to “Book Review: The Big Short”

  1. John Says:

    Great read.

  2. Computer Tech Says:

    Michael Lewis is one of my favorite authors. This is a great book, I couldn’t put it down! Two thumbs up from me!

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