Many claim to have predicted the financial crisis. With the benefit of hindsight economists, business commentators, academics and investors can all look back and say it was obvious that the crazy lending spree would come crashing down sooner or later.
But in the line-up of professionals who claim to have predicted the crash how many were prepared to put their money where their mouth was? The list shortens.
The Big Short is about those who remain on the list – those who bet against the sub-prime mortgage market when everyone around them thought they were crazy.
Its author Michael Lewis wrote the New York Times bestseller Liar’s Poker, which charted his time as a bond salesman at Salomon Brothers and exposed the crude and aggressive sales culture that epitomised Wall Street in the 1980s.
In The Big Short Lewis returns to his old stamping ground to talk to those who staked vast sums of money on sub-prime’s downfall.
The book features a range of admittedly oddball characters, including references to John Paulson – the man at the centre of, but not incriminated in, the Goldman Sachs fraud case.
Lewis introduces readers to Steve Eisman, who cared little for Wall Street formalities and more about what the big investment firms were trying to hide. This is a man whose straight talking as a junior analyst wound up the big players from the get-go – a man who once told a Japanese chief executive that his financial statements were toilet paper.
Then there’s Michael Burry, a stock market investor with a glass eye who turned to the bond market in 2004 and began ploughing through the 130-page prospectuses that accompanied mortgage bonds in a crusade to short the sub-prime market.
And the focus on characters is what makes The Big Short so good. The story of how risky mortgages were piled into towers of debt, awarded great ratings then sliced up and awarded great ratings all over again is told through these people and those who knew them.
Lewis is brilliant at drilling down into complicated trades without forgetting to tell a good story.
But it’s clear that the investors ridiculed by those in the know at the time are now having the last laugh, thanks to their determination to try and make sense of the incomprehensible. What’s scary is that although these guys might not have known everything there was to know, they found that ratings agencies and chief executives knew even less about the risk firms were holding on their balance sheets.
And readers can sense the exasperation those who saw trouble ahead must have generated back in 2006 when the going was good and their investors were berating them.
In fact, at one point Burry’s investors threatened to sue him and queued up at his door to demand their money back. I bet those investors are kicking themselves now.
All in all, The Big Short is highly recommended. It will appeal to mortgage geeks undoubtedly, but Lewis’ writing skills are so good that it should appeal to those outside the market too. And that’s not bad for a book about sub-prime mortgages.
book review by Natalie holt