Although there are many books on the subject of what happened in 2008, which we keep referring to as financial meltdown, panic etc. This book is an excellent read for those who do not know anything but would like to know about it without bothering much of complicated explanation.
Before dissecting the book, a few words about the author just to lay the foundation of why he was able to write this book the way he did it.
Who is this guy, ‘Michael Lewis’?
Michael Lewis did his BA in history from Princeton and then pursued MA in Economics from LSE (London School of Economics). He then got a job with Saloman Brothers and worked at its bond desk. He left the company and wrote his first book Liar’s Poker, describing his experience at Saloman Brothers.
In both the books – Liar’s poker and The Big Short – he has mentioned many times how amusing the financial landscape is. Read the following first sentence of the The Big Short “The willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grown-ups remains a mystery to me to this day.”
Ah! So this guy actually understands finance. But most importantly he is not blinded by money and so he managed to walk away from it.
The Big Short – A True Story
In this book, leaving out the nitty-gritty of the financial crisis, the author -- Michael Lewis -- has focused on two things. The book’s idea was to find out the people who first identified the problem in the financial world. And in the process of introducing these people, and their thought on investments; along with that he has also explained the problem of the financial world.
It is common that once an event passes away or has occurred there are many experts or pundits who claim to have predicted it. But how seriously should these people be taken? This is the tough part to answer.
Had someone put in their hard earned income and reputation behind their rationale, well such person should be taken very seriously. Because they will lose out on everything, economic and social, if their rationale doesn't come out properly in real life.
The entire book is about the people who understood the fallacy of profit that the market had built and exploited betting against it. Lewis also meets these people to find out how they came to understand that the castle of modern finance had its foundation in air, and it will fall the moment people wake up from their slumber.
Reading through his search leads to the conclusion that there were four main people who understood and placed their money where there mouth was. These set of people shorted the sub-prime market even when the world discouraged them and against all odds at the end they made truckloads of money.
The first guy mentioned in the book is Steven Eisman, a cynical money manager who does not hesitate to speak his mind and be honest. One of hedge fund manager who described Eisman to Lewis said, “He’s sort of prick in a way, but he’s smart and honest and fearless.” He understood what was happening way back in 2002 although he was shown how to short the sub-prime market only in 2006.
Then the second character is introduced, Dr Mike Burry, who perhaps created the very instrument a carried out the first trade where he shorted the sub-prime market in 2005. In fact, it was his insistence that made all the banks creates the financial product called CDS (corporate default swap). And he was a neurosurgeon by education who also understood equity investment. He started a blog where he would discuss his thoughts on specific equity trade, which eventually many people started following and they were actually making money. How refined he was with investment ideas on his blog can be gauged from the statement made by money manager at a big Philadelphia value fund: “He is doing value investing – in the middle of the dot-com bubble. He’s buying value stocks, which is what we are doing. But we are losing money. We are losing clients. All of a sudden he goes on this tear. He’s up fifty percent. It’s uncanny. He’s uncanny. And we are not the only ones watching him.”
So once Dr Burry realises his potential, he opens a hedge fund called Scion Capital. The moment he made this announcement on his blog, investors piled up. And hence the doctor began his new career as a hedge fund manager. Somewhere in the middle, it is revealed ‘why the doctor is such a genius,’ but at that point the book feels like a personal tragedy where the protagonist discovers that he is not special as he thought he was. (I will not reveal any further about this person. Read it to find out.)
After this the readers will be introduced to Greg Lippmann, a Deutsche Bank trader. “The least controversial thing to be said about Lippmann was that he was controversial. He wasn’t just a good bond trader, he was a great bond trader. He wasn’t cruel. He wasn’t even rude, at least not intentionally. He simply evoked extreme feeling.”
This description should say it all. He is one of the people who dealt with Dr Burry while providing him with the CDS. And once he understood what Burry was doing and that bonds containing home mortgage loans are crap. Lippmann was the guy who went around approaching selling the idea of CDS. He is also the person who showed Eisman on how to short the entire sub-prime market.
Then, the readers will be introduced to two more guys, Jamie Mai and Charlie Ledley who would form the company called Cornwall Capital. These two along with one more person, Ben Hockett, short the sub-prime market. What made these people unique was that the two partners of Cornwall Capital had opened their account for investing with $110,000. They had managed to convert this in to $12 million in a span of two years! There was nothing brilliant or genius about their methodology, it was pure common-sense.
It’s a great book. One should read it just so that they understand that most part of finance is not complicated, it is simple. The book tries to explain an important event. It is unsettling to know that so many smart people had actually no clue about that they were trying to build profit from thin air and in ways that belies the common sense!
Despite making money, Eisman explains how it feels to be on the other side: “In 2008 it was the entire system that was at risk. We were still short. But you don’t want to the system to crash. It’s sort of like the flood’s about to happen and you are Noah. You’re on the ark. Yeah, you’re okay. But you are not happy looking out at the flood. That’s not a happy moment for Noah.”
