The Big Short: Inside the Doomsday Machine by Michael Lewis
How a few smart weirdos actually made money in the last five years
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FOR ALL OF ITS ENGAGING STORIES, excellent journalism and unbelievable real life events, the most important section of “The Big Short” comes on page 14, when a financial analyst studying subprime mortgage data before the crash has a revelation about what he is seeing:
“It was as if the ordinary rules of finance had been suspended in response to a social problem. A thought crossed his mind: How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.”
For my money, this is Patient Zero of the financial crisis. To be sure, greed and fraud and poor oversight from both government and financial institutions played a key role. But if you want to talk about how Wall Street managed to establish its dumbass ideas as a pillar of our nation’s economy, find out where it received buy-in from the American people. And not just poor Americans, but everyday American families.
Once upon a time a family could get by on a single income, until, gradually, two incomes became necessary to sustain a middle class existence. By the turn of the 21st century, a lot of two-income families, whose incomes were not rising, needed some way to generate more money to keep up with the costs of paying for health insurance and/or sending the kids to college. Those families could add a third income — which despite its quaint, child labor Industrial Revolution era charm, never really caught on (though there’s still hope!). Or they could take out a loan on the one financial asset whose value had kept up with everything else: their home. Historically low interest rates made it easier to swallow, and we went on thinking all was well, until it wasn’t.
These few lines from page 14 are also important because they are, for the most part, the only glimpse Lewis provides of the saddest stories in all this: the people who were left with nothing but damaged collateral when the market fell out, and to this day have received less relief than is good for them or our country. “The Big Short” is, in fact, the opposite story. Over the course of the book, Lewis follows a handful of eccentrics who managed to make money betting against the system. The approach is risky since, well, just imagine the pitch meeting:
ML: “I’ve got a book about the guys who made out like bandits, pulling in billions when millions of Americans lost everything.”
PUBLISHER: “Great! People are going to save their nickels to read how you hammer these bastards!”
ML: “Well, actually, they’re the good guys.”
ML: “Did you ever read ‘The Blind Side’…”
Despite the hazards, Lewis’ choice of protagonists works in important ways. First, they are all sympathetic characters. They are not greedy and they don’t really celebrate the wealth they gain. Most of them try to alert everyone they can about what is happening, before realizing there’s not much they can do except capitalize on the impending fall. None of them ever rejoices in the failure of the market, or their ability to make money off of it.
Second, they provide the perspectives of the few people odd enough or brilliant enough, or oddly brilliant enough, to be skeptical of so much easy money. If you’ve ever found yourself in a questionable situation, and then been reassured by a drunk fratboy that “dude, it’s going to be fine,” then you have a general feel for what Lewis’ subjects were facing. Their questions are a convenient vehicle for Lewis’ clear explanations of the collateralized debt obligations and financial “innovations” that led to the collapse, which, I have to admit that, still don’t really make sense to me.
Third, Lewis’ subjects set the stage for a relatively straightforward narrative of good guys and bad guys, as well as something of a happy ending that was sorely missing in the actual financial crisis. For instance, the thoroughly satisfying passage below, from one of our subjects:
“I think Alan Greenspan will go down as the worst chairman of the Federal Reserve in history,” he’d say, when given the slightest chance. “That he kept interest rates too low for too long is the least of it. I’m convinced that he knew what was happening in subprime, and he ignored it, because the consumer getting screwed was not his problem. I sort of feel sorry for him because he’s a guy who is really smart who was basically wrong about everything.”
The fact remains that no matter how many Citi Group bonuses go out this year, or how many suckers think “Atlas Shrugged” tells you how to run a society, or how much crybaby whining Rick Santelli does about bailing out low-income home buyers, “The Big Short” is, so far, the best-established history of how the people who thought they knew everything didn’t really know anything. And that is what passes for comforting in this situation.
“The Big Short” is not a story about money or the financial market. It’s a story about human beings and the dangers of combining massive greed with basic competence and extraordinary arrogance. It’s the story of Icarus, only in this case it’s not enough to say that the wax in our wings melted when we flew too close to the sun. It’s more like saying we thought we could fly over the sun by lining our melting wings with dynamite. And when we got too high, well…