The Big Short is fantastic!

April 2, 2010

Michael Lewis’ books have been hit or miss for me. Liar’s Poker provided a great social commentary on the insanity of Wall Street and was a great introduction, in my teens, to the world of high finance. Moneyball’s description of how statistical analysis helped Billy Beane, general manager of the Oakland As, to defy conventional wisdom and win so much with the lowest payroll in Baseball was engrossing! The New New Thing, while attempting to portray the crazy “can do” ethos of Silicon Valley, somehow felt short probably because Michael Lewis chose the wrong role model in Jim Clark and spent too much time describing Clark’s building of his sailboat Hyperion.

The Big Short represents Michael Lewis at his best – it’s a nonfiction book that reads like a thriller! It’s very similar to The Greatest Trade Ever by Gregory Zuckerman, but instead of focusing on John Paulson’s trade, it focuses on the stories of the other crazy cast of characters who saw the crisis coming in subprime mortgages and what they did about it.

The stories of Steve Eisman, Michael Burry, Greg Lippmann and the others are every bit as compelling as the story of John Paulson’s trade. What is even more remarkable is that The Big Short does a better job at explaining what actually happened. You finish the book understanding how AIG, Citigroup and others lost those tens of billions of dollars.

As I sat reading the book, I could not shake the feeling that the story was far from being played out. The global government bailouts of their banks and economies suggest that the financial crisis will be followed by a fiscal crisis. The deleveraging event that was supposed to occur has not occurred: leverage has just been transferred to the government balance sheets and those have since been levered up even more. As more money is leant to governments with unsustainable future spending commitments and non-productive current consumption, one is left to wonder if the entire Ponzi scheme of lending money to subprime borrowers hoping house values would rise and they would be refinanced to repay their debts has not been replaced by a Ponzi scheme of lending to governments hoping they can refinance their debts to repay them. Eventually someone will realize that many governments are not in a position to repay and all hell will break lose. Michael Lewis will have a great sequel to write. Now I just need to find out a way to make the trade that will make me one of the central casts of characters 🙂

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