Margot's Reviews > The Big Short: Inside the Doomsday Machine

The Big Short by Michael Lewis
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's review
Jan 09, 12

bookshelves: non-fiction
Read in January, 2012

After reading this I actually understand the basic concepts behind credit default swaps, asset-backed securities and collateralized debt obligations! Back when all the financial and economic shit hit the fan, I wouldn't have predicted that I could have comprehended the underlying investment instruments that sent the economy to hell--I just chalked it all up to greed. But now I actually have a grasp on the way that greed went so far out of proportion to reason and sense, and I'm even more angry than before. Michael Lewis has a knack for narrative nonfiction that breaks down financial scenarios for the average reader, drawing us in with simple metaphors that he hits us over the head with repeatedly throughout his books. He is somehow able to make sympathetic characters out of those few people who were able to see the logical outcome of financial structures based on subprime mortgages, and basically made giant bets against the economy. If I were more savvy to finance and economics principles, I would most likely tire very quickly of Lewis' narrative technique, but in this case I didn't mind too much being treated like an uneducated child.

Here are a few snippets:

"He wanted to know, especially, how subprime mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody's and S&P and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody's and S&P. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn't thinking about buying subprime mortgage bonds. He was wondering how he might short subprime mortgage bonds." (27)

"In a financial system that was rapidly generating complicated risks, AIG FP became a huge swallower of those risks. In the early days it must have seemed as if it was being paid to insure events extremely unlikely to occur, as it was...All of these places were central to what happened in the last two decades; without them, the new risks being created would have had no place to hide and would have remained in full view of bank regulators. All of these places, when the crisis came, would be washed away by the general nausea felt in the presence of complicated financial risks, but there was a moment when their existence seemed cartographically necessary to the financial world. AIG FP was the model for them all." (70)

"Goldman Sachs was in the position of selling bonds to its customers created by its own traders, so they might bet against them." (77)

"'We just shorted Merrill Lynch...We have a simple thesis,' said Eisman. 'There is going to be a calamity, and whenever there is a calamity, Merrill is there.' When it came time to bankrupt Orange County with bad advice, Merrill was there. When the Internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman's logic: the logic of Wall Street's pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be part of things. The game, as Eisman saw it, was crack the whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain." (175)

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