There are countless ways to respond to risk, but until the mortgage bonds began to sour in record numbers in 2007, the sheer intoxicating euphoria of profit appeared to mask the tightened sensation in the Wall Street air of the coming storm. The prediction that we were living in a golden age of economic stability – which, obviously, was insulated from the truly intractable avarice within Wall Street – had evanesced, to be displaced by panic and the uneasy sensation that any attempts to assuage the market was based more on faith than any true appraisal of the situation.
Wall Street, rightly or wrongly, has become known as an attitude rather than a place, a euphemism for greed. We want innovation to clarify values and not to denigrate them, yet the sole intention of these sophisticated instruments of doom that seemed to amass complexity out of thin air was to obscure rather than illuminate.
Worst of all, profits were recumbent upon several fatuous assumptions that seem almost arcane and untenable in retrospect: housing prices would always rise, ratings were to be taken at face value, and most importantly, a grownup was in charge of the financial system. The whole foundation of those mortgage backed securities was like a brilliant mathematical construct that rested upon the faulty premise that you add where you are supposed to subtract.
Out of these, the belief that there was a mastermind behind the scenes is the most subversively facile: it is like a tonic for conspiracy theorists, but it was also, inexplicably, a mental cloak under which the banks could pass the intellectual buck. In reality, those in charge were just as culpable in the failure to understand what they were doing. They labored under the misapprehension that they were immune from their very own instruments of financial treachery that they eventually succumbed to.
Nobody seems more perfectly positioned to tell this side of the story of the financial crisis than Michael Lewis, who is a former ’80s Wall Street insider with an author’s gift for storytelling that can hold the reader in sway. Some books may be more comprehensive such as Andrew Ross Sorkin’s Too Big to Fail, which is so big that a single book can start a fire that can be seen from space, but The Big Short: Inside the Doomsday Machine distills the crisis into the essential elements of aberrance and financial malfeasance that nearly drove the economy to the brink of systemic atrophy.
The best attribute of Lewis as a writer is his instinct for captivating characters who embody the message that he is attempting to portray; in this case, the financial prescience to short the market. There is nothing particularly unique about a prophet of doom – anybody can live life in a mental fallout shelter and make riskless prognostications from the fringes – but it’s another thing entirely to bet against the machine and transmute that cynicism to gold. Those who did short the subprime market are still inconspicuous, dismissed at the time and now lost in the clamor of those who claimed to see the crisis coming, but The Big Short tells the interesting tale of those who saw the crisis coming and did something about it.
This cast of characters includes the antisocial Michael Burry, physician turned financial wizard, Greg Lippman, shady, self-proclaimed evangelist of the credit default swap, Steve Eisman, who came to see subprime mortgages from an early age as exploitative and anathema to rational endeavor, and investors at Cornwall Capital, who took advantage of the failure to properly appraise the probability of improbable events.
Each of these personalities act as foils to the vices of the financial institutions that engineered and promoted the most rancorous aspects of the economic freefall. Eisman and Burry might not have understood the full composition of the complex mortgages, but neither did the people who created and peddled them for a living, which is the very aspect that facilitated their cynicism in the institutions that obscured risk for profitability. For Eisman, the short was personal, a shot across the bow of the people and institutions that had literally swapped in sound equanimity for financial vagrancy.
Withering and intransigent, much of the humor in The Big Short derives from the stock villainy of the investors on the other side of the glass wall whose duty it was to fortify against the very crisis they caused. Stupid, greedy, and without conscious are common assessments given by Eisman and others, rightly or wrongly, in response to the derision they faced. There is an element of rage, but it is an intellectual rage born from those who saw that Wall Street had conjured up risk by extending credit to those who wanted to buy into the American Dream – namely, owning a house. It is noted often with humor and incredulity that the entire health of the economy rested upon the ability of the stripper in Las Vegas who had taken out five mortgages to pay.
Lewis himself cannot resist some sarcastic barbs in footnotes. Speaking of Morgan Stanley CEO John Mack, Lewis notes that “so much of their livelihood depends on people believing that what they do cannot be translated into plain English,” which is a scathing indictment about the very existence of these institutions. Elsewhere, Lewis notes that one of the jurors who acquitted bond traders from Bear Stearns for fraudulent behavior would “happily invest money with them.”
Lewis also provides some of the most lucid explanations for these complex financial instruments yet scored to paper: the creation of CDOs from subprime mortgages but also, when the desire for greater profits couldn’t yet be satiated, the ability to use a bet placed against the CDO to create even more synthetic CDOs. The fecklessness of the endeavor on the long end was like playing with alien technology. Very few people, from the traders to the rating agencies, seemed to understand the contents or the toxicity underlying their products. It was a machine in the truest sense of the word: all that was required was to pull a lever or push a button without any awareness of what the action implied in order to send the product along to the next great cog in the process. The business of creating a CDO didn’t actually convey what was inside these instruments.
Michael Lewis has written in past books such as Moneyball about the true value of things, endearing himself to the subject of the financial crisis above and beyond the din of voices who just want to add their opinions to posterity. This is a book that affects you along the spine, and it should be read by anyone who is seriously interested in the beliefs that were at the heart of the financial crisis.