The Big Short, by Michael Lewis

When the brokers are roaring like beasts on the floor of the Bourse . . . .
–Auden, “In Memory of W. B. Yeats”

This is is not a book to learn the details of credit-default swaps and collateral debt obligations (“CDOs”). There are no tables in the book, and no footnotes. The Lewis style is to tell about financial dealings through the traders involved. The financial products are described in metaphors:

In a mortgage bond, you gathered thousands of loans and, assuming that it was extremely unlikely that they would all go bad together, created a tower of bonds, in which both risk and return diminished as you rose. In a CDO you gathered one hundred different mortgage bonds–usually, the riskiest, lower floors of the original tower–and used them to erect an entirely new tower of bonds. The innocent observer might reasonably ask, What’s the point of using floors from one tower of debt simply to create another tower of debt? The short answer is, They are too near the ground. More prone to flooding–the first to take losses–they bear a lower credit rating: triple-B. Triple-B-rated bonds were harder to sell than the triple-A-rated ones, on the safe, upper floors of the building.

  The long answer was that there were huge sums of money to be made, if you could somehow get them re-rated as triple-A, thereby lowering their perceived risk, however dishonestly and artificially. This is what Goldman Sachs had cleverly done. Their–soon to be everyone’s–nifty solution to the problem of selling the lower floors appears, in retrospect, almost magical. Having gathered 100 ground floors from 100 different subprime mortgage buildings (100 different triple-B-rated bonds), they persuaded the rating agencies that these weren’t, as they might appear, all exactly the same things. They were another diversified portfolio of assets! This was absurd. The 100 buildings occupied the same floodplain; in the event of flood, the ground floors of all of them were equally exposed. But never mind: The rating agencies, who were paid fat fees by Goldman Sachs and other Wall Street firms for each deal they rated, pronounced 80 percent of the new tower of debt triple-A.

  The CDO was, in effect, a credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold.

One of the major characters is Steve Eisman, who bought loads of credit-default swaps on CDOs. Eisman had a nose for hooey; he was the boy willing to say that the Emperor had no clothes. Eventually, as we all know, he made a packet.

One odd item–a quote at the head of one of the final chapters from a Bloomberg News story cites a Milanese professor as saying, “The prediction that an undisciplined economy would collapse by its own rules can be found in an article written by Cardinal Joseph Ratzinger in 1985.” Lewis does not offer an explict comment on this item.

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One Comment on “The Big Short, by Michael Lewis”

  1. Rhoda Potter Says:

    This book has explained something I’ve been puzzled about for a while now. Back in the 90s and early 00s, I’d see late night ads on American t.v. stations from hucksters offering to teach people to make a fortune investing in real estate “with no money down!!” I couldn’t understand how anyone could buy a property with no money, because no Canadian bank – fortunately, as it turned out – would ever lend to someone with no down payment.
    But, of course, these were speculators making use of sub-prime mortgages. They didn’t even need to have jobs, it seems.

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