Lewis sees history—or at least, the history of the battle between intuitive and analytic approaches to problem solving that has long informed his writing—to be less the forward march of progress than a circular argument. “I think there’s an eternal dialogue,” he says, “and people overshoot on both sides.” In that sense, The Big Short is the counterpoint to Moneyball. His counterintuitive heroes do, of course, use numbers to see the holes in the risk models and bond ratings systems that aided and abetted the crash, but their suspicions stem from stories, not statistics.
Lewis introduces us to Steve Eisman, one of the earliest analysts of (and proponents for) the subprime housing market, who soured on it after a newspaper story about fraudulent lending practices led him to dig deeper into the sleazy underbelly of the business. There’s Michael Burry, a one-eyed hedge fund manager and former neurologist with Asperger’s Syndrome who followed the subprime money trail like a man possessed, betting against the major players in it, and all but creating the mortgage credit default swap (CDS) in the process, and a pair of semi-amateur investors who were convinced to go all in on shorting the housing market after attending a big conference in Las Vegas. “Usually, when you do a trade, you can find some smart people on the other side of it,” one of them tells Lewis. “In this instance, we couldn’t.”
Along the way, Lewis digs into the nitty-gritties of the mind-numbingly complex array of derivatives, shadow markets, and side bets that laid the financial system low with his customary verbal dexterity and eye for the telling detail. However, it’s his ability to turn dry financial maneuvering into readable, even compelling, passages that truly astounds, usually by finding the illustrative analogy or the story behind the machinations that most reporters miss.
Credit default swaps are transformed from a confusing financial instrument to a fascinating story of a man hell-bent on finding a way to bet against a broken financial system, and investment bank hucksters eager to pass on catastrophic risk to dumb-money clients—as Goldman Sachs did with AIG—and pocket hefty fees in return for their services. The mystery of how poorly rated mortgage bonds could be chopped up, turned into highly rated CDOs (like lead into gold, Lewis writes) and sold off to unsuspecting investors is transformed into a hilarious story of cafeteria politics and pop-psychologizing: Underpaid ratings agency analysts are mostly wannabe bankers, afraid to challenge their betters and hoping to “leave for Wall Street firms so they can help manipulate the companies they used to work for”; supposed CDO experts are, in fact, “two guys and a Bloomberg terminal in New Jersey”; veterans of second-rate business schools and “sleepy” back-office jobs turned “newly, obviously rich,” by big investment banks for pawning off risky investments to the institutional investors they’re supposed to be protecting.
Lewis tends to shy away from direct policy advice on how to avert a similar crash in the future, but he provides something much more important: the most insightful and enjoyable account yet of the financial crisis; a book that concerns itself less with clueless prognosticators and endless streams of Wall Street CEOs and government regulators getting in and out of limos on Park Avenue and Capitol Hill, than with the still largely misunderstood financial instruments and poorly incentivized traders who created the crisis in the first place. With any luck, the politicians haggling over reform, and the future generations of bankers whiling away their time in college and business school will give this book a look.
- Joe Flood