Book Review - The Big Short: Inside the Doomsday Machine by Michael Lewis
My innocence and belief in the foundations of free-market capitalism has slowly eroded over the last decade, starting with the implosion of Enron (where I worked) to the financial crisis we currently find ourselves in. Michael Lewis's book The Big Short: Inside the Doomsday Machine continues that trend and shaved a few more layers off of my trust of government and corporations, specifically financial institutions. Bottom line... greed is rampant, and there is no accountability left out there.
Lewis chronicles the meltdown of the sub-prime mortgage market, and subsequently the entire global financial system, through the eyes and stories of a small number of individuals who were willing to say the emperor had no clothes. They were convinced that the loan practices of mortgage lenders were seriously flawed, and that the availability of large adjustable mortgages with low teaser rates to people who couldn't afford them would cause high levels of default when the teaser rates expired. Furthermore, these loans were being packaged and sold to others who would assume the risk, so there was no accountability in making sure the loan was sound, as the lender would not be on the hook over the life of the loan. These loan bonds were then repackaged again into other "investment" instruments that were again bought and sold. The complexity and opacity of the packages led the rating agencies to assign high ratings to instruments that were nothing more than junk. You could think of it as a large Ponzi scheme, where everything worked so long as housing prices continued to increase. But when prices went down, everything collapsed in spectacular fashion.
The people that Lewis follows established a way that they could short the mortgage bonds, something that hadn't been possible before. They were lone (and obnoxious) voices in the wilderness, as no one could believe that these few individuals could see something that eluded the view of all the huge financial firms. But when everything collapsed in September of 2008, they made *huge* profits while the multi-billion dollar financial firms lost tens of billions (and some went bankrupt). But even having been proved right, they each suffered their own emotional breakdown and turmoil. The magnitude of the collapse amazed even them, and left them wondering if there was any safe place left for their own money. In their cases, money definitely didn't buy happiness.
The Big Short does a good job of chronicling the greed and ignorance of the finance industry, where profits were everything, and complete understanding of risks was non-existent. I found it amazing that individuals who brought down companies single-handedly (one trader lost 9 *billion* dollars completely on his own) were still able to leave or resign with millions in their pockets. Our government bailed out private firms and shifted their losses to us, the American taxpayer, because these firms had sabotaged the financial stability of the nation through their obsession with profits. And ultimately, no one is really accountable, as those who had to "resign" did so with millions in payouts.
As with all books that look back like this, the knowledge of the outcome allows the story to be told in such a way that the eventual end seems predetermined to happen. At the time, any single decision made along the way could have turned out differently and this specific story would have never been told and experienced. Even so, Lewis weaves a compelling narrative of what *did* happen, and one can't help but be depressed at some level knowing that these lessons will soon be forgotten, new people will come up with new schemes driven by greed, and we'll repeat the cycle once again...
Obtained From: Library