Book Review: The Big Short

Lewis describes the financial industry collapse induced by subprime mortgage bond derivative market from the point of view of a couple of hedge fund managers who shorted them. Not very large hedge funds either. Instead of focusing on well known managers like John Paulson, he focuses on relatively unknown and minor investors, with interesting personalities.

There's Steve Eisman, the most pedigreed of the bunch with actual wall street experience, who's abrasive personality insists on telling the truth even if it rubs everyone the wrong way. Running a fund that was owned by Morgan Stanley, Eisman desperately wanted to short his parent company but was prohibited by his lawyers. At one point in the book his partner asks “Who takes out a home loan and doesn't make the the first payment?” to which Steve Eisman responds “Who the #$%^ lends money to people who can't make the first payment?” But that's what happens when you lend $700,000 to a strawberry picker who makes $14,000 a year.

Dr Mark Burry, a one-eyed doctor with Aspergers syndrome,who quits his medical career to start a hedge fund with his own money and makes nearly $750 million for his investors. And an almost comical garage-band hedge fund called Cornwall Capital that starts out with $110,000 and ends up with a whopping $135 million.

The book explains in great detail exactly how the great investment banks were creating junk bond securities with AAA ratings and selling them to institutional investors. Companies like Bear Stearns, Lehman and Goldman Sachs blatantly lied about the quality of investment-grade bond products they were selling. The ratings agencies weren't competent enough to properly rate these securities and they got hoodwinked like everyone else. In the end, everyone wins (except the US taxpayer) and no one goes to jail!

In all it's a fascinating read on the excesses of wall street, the complexities of the financial derivative markets, and the crooks who run the show.

If you found this post helpful, consider donating to my coffee fund!