In the run-up to the housing collapse of 2007–2008, houses weren't merely expensive, they were insanely expensive. Yet just when it seemed that prices couldn't go higher, some fool would come along and pay an enormous sum for a glorified hovel. You didn't have to be a genius to realize that American real estate was overvalued. It did, however, take something special to figure out how to make money off the madness. A group of between ten and twenty people did just that, making the bet of a lifetime that author Michael Lewis calls "The Big Short."
The cast of characters in Lewis's highly readable chronicle of the collapse (and what led to it) includes a misanthropic former medical resident, a money manager who saw himself as Spider-Man, and a pair of men in their thirties who started with $110,00 in a Schwab account they managed from a backyard shed in Berkeley, California. "Each filled a hole," Lewis writes. "Each supplied a missing insight, an attitude to risk which, if more prevalent, might have prevented the catastrophe."
Ever since he left Salomon Brothers to write Liar's Poker, the classic 1989 account of his years as a bond salesman, Lewis has been waiting for a day of reckoning. Little did he realize that the Wall Street he once knew now seems quaint. By 2007, it had morphed into a financial Frankenstein, a "black box" filled with hidden risks on complicated bets that could destroy its creators, but only if the government allowed it to do so.
The first to figure out how to use the system against itself was a man named Michael Burry, who once described himself in an online personal ad as "a medical student with only one eye, an awkward social manner, and $145,000 in student loans." Burry possesses an intellect so unusual that Lewis turns his journey of self-discovery into a fascinating subplot. While working the grueling schedule of a medical resident, Burry started writing about stocks in an online forum. (He also took apart his personal computer and put it back together between 16-hour shifts at Stanford Hospital, prompting his superiors to send him to see a shrink.) When he quit medicine to start the hedge fund Scion Capital, admiring investors tracked him down and gave him money.
When Burry started buying insurance in 2005 on nearly two billion dollars' worth of bonds backed by lousy mortgages, his investors thought he had gone nuts and nearly mutinied. But in 2007, when the housing market began to crumble and Burry's bet paid off, everyone realized that his predictions weren't crazy so much as a sane interpretation of a market gone mad.
Burry might have set the trade in motion, but he was no salesman. The one who took his idea and ran with it, the "Patient Zero" of this tale, was a bond salesman at Deutsche Bank named Greg Lippmann, who went around telling everyone he could that the end was near. Only a few took his advice, but most who did became extremely rich. (John Paulson, who made an astounding personal profit of four billion dollars, is the subject of another recent book on the same theme, Gregory Zuckerman's The Greatest Trade Ever.)
The reader can't help but root for this gang of financial renegades as they take on a corrupt and rotten system. Still, The Big Short lacks the pure narrative drive of Lewis' best-selling sports books, Moneyball and The Blind Side. The new work draws its energy from a different source, a palpable undercurrent of anger at the excesses of Wall Street the author shares with his subjects. Lewis is justifiably outraged at the behavior of Wall Street and what its trillion-dollar subprime-mortgage business truly represented: a means of extracting money from the bottom of America's social pyramid and moving it to the top. The problem isn't that Lehman Brothers failed, he shrewdly observes, but that it was allowed to succeed in the first place.
Lewis reserves special scorn for the biggest banks. Goldman Sachs was selling large volumes of bonds backed by subprime mortgages and, at the same time, betting against the junk it was peddling. The Big Short also tells the little-known tale of how Morgan Stanley allowed a single trader to lose more than $9 billion.
It's appalling, but not much has changed. Most Wall Street CEOs who set a course for the iceberg remain in power today. The blind are still leading the blind. At any rate, as Lewis observes, they still can't see things any better than a one-eyed former medical resident.
Seth Hettena is a freelance writer in San Diego and the author of Feasting on the Spoils: The Life and Times of Randy "Duke" Cunningham, History's Most Corrupt Congressman.