The Big Short

This is a book that obviously had to happen. There is no way that Michael Lewis, author of Liar's Poker, not to mention editor of Panic, was not going to write a book about the 2008 financial collapse. Capitalism and the financial system aren't the only things that Lewis writes about, but he's established himself as the author to reach for when you want someone to describe the sheer insanity of Wall Street. Chunks of it had already appeared in Vanity Fair.

By 2011, though, this collapse was an old story. I'd already read or watched innumerable other analyses and discussions, including the excellent All the Devils Are Here by Bethany McLean and Joe Nocera, which traced the origins of the crisis. I'd also read substantial portions of The Big Short when they appeared in magazines. I'd therefore been putting off reading this book; I wasn't sure it would offer anything new, particularly compared to McLean and Nocera's comprehensive treatment.

But Lewis doesn't write quite the same book as everyone else. The Big Short is not really investigative journalism. It is, instead, a sort of fragmentary biography: it's the story of the collapse, yes, but told as the story of several people who saw the collapse coming and had been trying to find ways to be on the right side of the trade. The people in Lewis's book aren't the sort of people who were writing editorials or trying to warn the government. They were the people who found a sure thing to bet against, couldn't believe how much of a sure thing it was, couldn't understand how everyone else was missing it, and were in many cases afraid the trade would disappear before they had a chance to get in on it.

That means you don't get a detailed examination of root causes and history here. I don't think this is the book to read if you want to know what happened. Lewis does explain parts of it, but primarily so that you can understand the emotional narrative, and he doesn't dig deep. What Lewis manages instead, better than any other commentator that I've read, is to capture the sheer incredulity, the existential bafflement, that so many of us have felt reading financial news after all the secrecy started to collapse. Lewis's subjects were just deeper inside, or more willing to dig through reams of convoluted public disclosures, and reached that reaction first.

The strongest moment in this book, and the moment I'll pick to exemplify Lewis's approach, is the point at which the investors he's followed have managed to place their bets against the mortgage market, often feeling lucky to have gotten in before anyone realized what happened, and the house of cards built on mortgage bonds is starting to collapse. Getting there involved sometimes years of persistently insisting that their analysis was right even though the entire rest of the market was going the other direction. They were all, in some sense, playing a game: a game where one pits one's analytical skills and hunches against everyone else. The game has rules, and those rules said they'd won. One can feel the triumph when the underlying numbers start to prove they were right — they were right, and everyone else was wrong.

And then the market doesn't budge. And doesn't budge. And mortgage bonds even become slightly more valuable. And the reader can experience the sense of the bottom falling out of the world: what if the other players just change the rules of the game so that they don't lose? Can they do that? Is there some way in which they can simply refuse to acknowledge reality, to simply bankrupt the people on the short side of the mortgage market before they can collect? Is the corruption that deep?

It's an amazing moment, and a deeply cynical moment, and one that drives home the degree to which the game could simply be rigged. Reality did, in fact, assert itself, the market collapsed, and the short-side bets paid off, although of course the government also stepped in and handed out free money to many of the individuals who had completely failed to analyze the market. But what The Big Short succeeds in showing is that, for a few unbelievable months, there was actually a question of whether that would happen. And, afterwards, there was a sense that the only reason why reality won is that enough of the big players decided to move to the other side of the market. What's the real price of an asset that has no public market? What happens if the counterparty in your agreement simply refuses to acknowledge your existence, when they have more money and more lawyers than you and can prolong the fight beyond the point at which it matters?

I found The Big Short more entertainment and catharsis than factual analysis. It's the book that will make you feel like you're not alone when you look at the structure of the financial markets and ask how that can possibly be sane. It captures the emotional reaction at the sheer audacity of the Wall Street firms that literally could not find enough warm bodies in the United States to give loans to, no matter how lax the standards, and therefore found another solution: sell insurance policies on the mortgages so that each mortgage could be essentially duplicated two, three, five, ten times and used as fodder to make even more equivalent securities. It shows more vividly than I've seen before the degree to which the non-public financial markets are carefully constructed and rigged so that the largest players have control over who can play and when the prices can change. It's the sort of book that makes you wonder if the entire system is corrupt beyond redemption.

As is typical for Lewis, it's also blackly funny and full of characters who Lewis makes memorable. That side of the book is a look at what sort of person can look at the evidence and decide the entire market is wrong, put their money where their belief is, and stay with that position through years of being told by nearly everyone else that they're out of their mind. And Lewis does a good job finding a variety of those people: inherently cautious people with an eye for where the market understates risk, people who are willing to lose themselves in the data and not care what anyone else's opinions are, and crusaders who will bet against the market because they've become convinced it's corrupt from top to bottom. We don't get to see much of the people on the other side — the structure of the book is very much David versus Goliath — but it's a great picture of David.

This is not the book that I would recommend about the financial collapse if you're only going to read one. For that, I'd instead go for something more thorough, analytical, and broad-ranging, like McLean and Nocera. But if reading financial news leaves you incoherent with disbelief, it's probably the most satisfying book you'll find.

Rating: 8 out of 10

Reviewed: 2012-02-07