The Big Short - Michael Lewis - Book Review

Hi Guys,

‘The most difficult subjects can be explained to the most slow- witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.’

-Leo Tolstoy

Michael Lewis starts the book ‘The Big Short’ with the above quotes. The author traces a few people who had good knowledge on the Financial sector of USA and predicted the collapse of US Financial sector. The book is more of a compilation of different stories over the time frame of 2005-2008. The author conveys the story of how these people understood that the financial sector is too unstable and they can make big money out of it.

The book starts with the quote to depict the fact that many big players and intelligent investors failed to realize the risk of collapse. They were too happy with the money they were making and thought the business could sustain.

Across the book, you come to know how the whole fiasco was created with the help of detailed explanations. Banks lent their money to people who were insecure. The 2001 crisis led to lower interest rates and this made interests low. The investors were looking for better returns. The subprime mortgages were converted into Credit Debt Obligations (CDOs) and they were rated. These CDOs were bought by investors and the risk was passed on. The final risk was bore by either the investment banks or insurers. The hosuing rates increased and hence banks started chasing people to buy more houses. In 2006-2007, when the interest rates were increased the people who got loans started to default. Slowly, the crisis started.

The book traces the stories of some traders or hedge fund managers like Steve Eisman, Greg Lippmann, Michael Burry and others who predicted the collapse around 2005 and gathered funds to invest against the CDOs (or short the CDOs). The book goes on to say how these people were being treated when nothing happened as the investors were angry. After the crisis happened and the people got the money, no one cared to thank them. They were forgotten.  No one recognized them.

One of the most captivating pieces of the book is the role of Rating Agencies in the crisis. The Rating Agencies worked along with the banks to make the CDOs that were not even worth BBB ratings as AAA ratings. The author says how the whole rating system is flawed and how it helped these people making money. For instance if a person with low income applied and he hadn’t taken a loan before he was given a higher rating despite the fact that there is no clear picture.

He also identifies a flaw in the whole system. The whole investment banking industry works on the Rating provided. So, the rating agencies must be the one with higher status. But, in reality people prefer to work for investment banks. Investment bankers get more packages and the rating of the bonds is considered as a boring job. The author says it must be the other way round.

In the end, the author says how the big names escaped with Government funding and how none of them got affected. The common man was affected, but who cared.

Though I knew the basics of the crisis, this book was a big revelation to me. All the big names that were behind the scenes escaped without action. Even today these firms are rated very highly and are chased after by MBAs.

Most importantly, if someone comes and say you complex terms in Economics and say this is the reason for what is happening, don’t believe blindly. Mostly, it can be explained in plain English terms.

This is must read book If you are interested in Finance or Economics.

Happy Reading!!!