The Big Short – Michael Lewis

6 March 2011
Prologue; Chapters 1-2
It’s good fun. In the Prologue, Lewis lays his credentials on the table: he hasn’t got any, but that didn’t stop him getting a job on Wall Street in the 1980s. He soon saw that the whole thing was built on nothing at all, and that the bubble was bound to burst in the end – so he got out and wrote a book about it, in the late 80s. 20 years later, sums of money that seemed crazy in the 80s seem quaint – his word – and the bubble is unimaginably huge. Ok, got you.

This is a book about individuals, usually mavericks like Lewis himself. Chapter 1 is mainly about Steve Eisman, who arrived in Wall Street in the late 80s. (Lewis takes the trouble to remind us that he was just getting out at that time.) Lawyer, bored with the job, wangles a job with some big company – hang on – Oppenheim – where his parents work, doesn’t like some of the things he sees, starts to kick up a fuss. He isn’t a team player of the kind Wall Street likes – a constant theme in these chapters – and, as he goes more deeply into how money is bought and sold, lets people know how rubbish he thinks it all is. He has to start his own company, finds himself, in Lewis’s words, becoming the first socialist trader on Wall Street.

To get his information, Lewis has done a lot of talking to someone who ended up working for Eisman, Vince Daniel. A novelistic thing happens when Daniel is simply expressing an interest in a job – a lot of novelistic things happen in this book – when Eisman keeps him waiting as he answers a call on his other line. He never gets back, and Daniel only finds out later that the other call was to tell him that his son was dead. Lewis includes the bizarre detail that a night nurse rolled on to the child in bed and suffocated him… and it affects Eisman in ways that are hard to define but, well, you know. Eisman is a good egg – a phrase Lewis quotes – as shown by the way he calls a spade a spade, rubs people up the wrong way, behaves utterly individualistically: he wants his company to be ethical, for God’s sake. But Lewis leaves us with a cliffhanger: Eisman wants to get into the bond market, whatever that is – however much Lewis explains these things, the explanations never stick – but the bond market is ‘about to create an Eisman-shaped hole.’

Eh?

Cue Chapter 2, and another maverick. Michael Burry is an even more Dickensian character than Eisman: made painfully diffident by a glass eye, he ploughs a lone furrow. He is diagnosed, clearly erroneously, as bipolar, but Lewis presents him as some sort of autistic savant. He goes through medical school whilst studying other subjects as well, and by the time he is doing his internship he’s writing a nightly blog about theoretical investments he’s making. He’s like Mark Zuckerberg as played in The Social Network: tireless, socially inept, with the ability to see implications that others don’t. His blog gets a following amongst traders and, because he hates the social aspects of medicine, Burry decides it’s time to get a proper job.

The rest of the chapter is about how he sees a potential money-maker: if he takes out insurance against particular companies specialising in the most unreliable of subprime mortgages – companies he has spent hours, days, months researching by reading prospectuses and reports that everybody else is too busy or blasé to even notice – he will receive big payouts when the defaults begin once the fixed-term interest period is over. Lewis ups the suspense: will Burry be able to make the deals before other people realise what is absolutely bound to happen? We already know the answer, and he’s waiting for the payouts as the chapter ends. But who, he wonders, will actually be paying out? Not the big companies, who have already sold off the bonds because that’s what the game is…

At the end of the chapter the name of a Deutsche Bank employee has been mentioned, one Greg Lippmann. Burry had sold them back a small proportion of his insurance bonds (they aren’t called that), and Lippmann is telling everybody he’s about to make a billion dollars. What is this, a western? We have outlandish figures standing out against the faceless crowd of ordinary joes, slugging it out. What I’m not a bit clear about is where the moral high ground is supposed to be. Where does the money come from?

7 March
Chapter 3
This is where I start to get lost. In a book like this, in which arcane matters are laid before the lay reader, there’s a kind of half-life. Sometimes, when you finish reading, you have the idea that you more or less know what it’s about. Whether you could explain it to someone else is a different matter, but for a brief time you know what Relativity is about, or particle physics. This is how I was with the first chapters of The Big Short… and then I wasn’t. Occasionally Lewis throws us a morsel to reduce his chapter-long simplification to a single sentence. We get it on page 78, when it comes down to why traders didn’t object to this ‘recipe for catastrophe’ – basically, to do with re-labelling triple-B loan risks as triple-A then re-insuring them. The reason: all the traders were wondering, ‘How do I do what Goldman Sachs just did?’ Ah.

This chapter’s Dickensian grotesque is the Greg Lippmann Lewis has already mentioned. What he’s doing is what I’ve just said: developing ways to repackage sure-fire defaulting loans as triple-A, then getting somebody to re-insure. And the somebody – remember how Lewis made us wonder about this in Chapter 2? – is AIG FD. Lippmann has amassed insurance for billions of dollars’ worth of bad debts at a minuscule rate – Lewis has explained, sort of, how he and dealers at Goldman Sachs are good at hiding what is really being insured, but I couldn’t explain it to you now – and he wants the market to collapse. So he’s just been to AIG headquarters in London to tell them what he’s been doing. He wants them to close down the market. It’s 2005, if you were wondering…

[Later]
Chapter 4
…and now it’s 2006. Lewis has explained a few more things, and brought Eisman back into the story – but I’ll get back to him. Why are AIG FD so crap? Because their boss, Joe Cassano – even Lewis admits to him seeming like ‘a cartoon monster’ – is a bully who doesn’t understand the business. We’re into Evelyn Waugh territory now, and AIG employees treat Cassano like the Beast employees treat Lord Copper in Scoop: whatever he says they agree with, even when it’s clearly wrong. One top dealer simply has to leave and start up his own company. Ok.

The Wall Street bond dealers are portrayed as predatory, and a company where everyone is scared is a gift. So are companies where nobody seems competent: Moody’s and S&P, populated with assessors on five-figure salaries are no match for the Ivy League dealers whose salaries are in seven figures. (I’m paraphrasing Lewis’s world-weary take on it.) They are the ones who give triple-A ratings to appalling pools of loans, and in a report of a conversation between a Moody’s employee and two of Eisman’s men it’s clear how the company has been taken for a ride.

Eisman is back. He and his colleagues find it impossible to take Lippmann at face value when he comes calling, several times. It gives Lewis the chance to up the literary stakes: he wants us to know he’s not writing a potboiler here, this is quality. ‘Their meetings acquired the flavour of a postmodern literary puzzle: the story rang true even as the narrator seemed entirely unreliable.’ In other words, Wall Street is now operating within a logic that only makes sense in a warped fictional universe. And Eisman, finally, buys a little bit of what Lippmann is selling. I’m not sure, but I think he only does it to confirm that the system is now so totally fucked he needs to see it from the inside. He goes home to his wife – Lewis has obviously done a lot of talking to wives and colleagues, because whatever this book is about, it always aims to have living, breathing people at the centre of it – seeming more cheerful than he has for a long time. He thinks he’s in on a secret known only to a tiny handful of people, that the crash he’s been waiting for is going to happen at last. Alleluia.

Before I finish. The title of the chapter is ‘How to Harvest a Migrant Worker’, because now the subprime mortgage lenders are prepared to lend $750,000 to, say, Mexicans on $14,000 a year. Their defective formulae, which they stick to without thinking, make it seem all perfectly reasonable. Without thinking: that’s the key to all this nonsense. If one person does start to think – Burry. Lippmann, whoever – there’s no limit to the havoc he can wreak.

9 March
Chapters 5-6
I’m getting a bit bored. Michael Lewis carries on doing what he does but, basically, I’m finding it all a bit repetitive. Chapter 5 is about two new players, Charlie and Jamie. Their USP is their apparent amateurishness – but it doesn’t stop them making $30,000,000 by taking out insurance against future changes that seem unlikely but, as often as not, happen anyway. It isn’t random: if a company looks unfairly undervalued (as with Capital One), they bet that its stock will rise by a certain amount soon. They get wonderful odds because everybody assumes that things happen slowly. This might be true of the market but not, of course, individual stocks. Anyway, our happy gamblers look at their winnings and decide to retire, rich men who started with $120,000 between them only a couple of years before.

As if. What they really do, inevitably, is start to take a look at – guess. Unfortunately, they’re too small to buy into the subprime market, so a lot of the chapter is about how they have to disguise themselves as bigger players. And so on. They now have a partner, Ben. He once worked in the business and still does, sort of, and he shows them how to get an invite to the party. As so often, it’s who you know that counts. We’re not sure yet how their thread of the story is going to connect with Eisner and his cronies Vinny and Danny, except that they’re in the same market. And neither of these groups knows about the other: they think nobody else has seen what they can see.

Time for a set-piece chapter in Las Vegas. Lewis has a lot of fun with the acronyms and random-sounding names given to subprime portfolios, and in the casino he likens the traders in them to gamblers shooting craps – they have the illusion of being in control of the dice – and roulette players who think that patterns suggested by what has gone before help them predict what will happen next. Eisner, who is becoming ever more fully developed as a comic grotesque, gets to meet the people he’s betting against. And guess what? They are all idiots. In that way he has, Lewis makes it personal. So there’s Wing Chau, smugly pleased with the $26,000,000 he’s made and secure in his own mind that nothing is going to change. Or, a lone voice, there’s John Devaney, apparently drunk, making a speech about how they’re all going to hell. The other delegates are embarrassed and pretend they haven’t heard what he’s saying.

It’s January 2007 now, and Lewis is beginning to drop in reminders that it really is all going to hell, soon. September of that year is the date, and some big names – like the company headed by the apocalyptic-sounding Delany, to say nothing of the ‘now-dead’ Lehmann Brothers – will be no more. So it goes. The other thing Lewis keeps dropping in, with only slight variations – and this is what I’m finding repetitive – is our guys’ constant amazement that nobody seems to be aware of the coming rash of defaults. In Vegas the two groups finally come to understand that in countless different ways Wall Street is set up to believe its own stories, not to predict any possible changes. Eisman alone is appalled by what it means for the millions who have been offered loans they will never be able to repay. As far as I can see, everybody else sees the billions of dollars in entirely abstract terms, as if they really are in a casino.

10 March
Chapters 7-8
Chapter 7, ‘The Great Treasure Hunt’, is impenetrable for whole paragraphs. At some point earlier in the book I knew what the acronyms stood for and, at a fairly basic level, understood what the different players were doing with them. In Chapter 7 I nearly gave up. But I didn’t, and now I’m glad I stuck with it.

I suppose that Lewis’s problem in trying to make an entertainment out of this stuff is that we know what’s going to happen. In Chapter 8, for instance, it’s the defaults that start to happen, two years into the mortgages after the low ‘teaser’ rates come to an end. This is exactly what Burry had been predicting in Chapter 2, when in 2005 he was saying the big problems for the lenders would start in 2007. (Lewis reminds us of this by having Burry sending off rafts of emails to this effect when his investors get to a stage a long way beyond twitchy. ) So what’s an author to do? He carries on with the personal stories. In Chapter 7 it’s Eisner who’s on the Treasure Hunt – and the chapter ends when he finds what he’s looking for. It’s in the form of an article in the dry-as-dust Grant’s Interest Rates Observer. (Lewis even makes this publication seem human by having one of its researchers tell the story of how he concluded it’s impossible for anybody to know what any bundle of subprimes – the CDOs – actually consist of.) Anyway, Eisner reads the article which describes what he’s known for years, and says later that he ‘almost had an orgasm.’ Phew.

The other big thing in these chapters is the dinosaur-like slowness of the traders to respond. All the time, Eisner and his team are waiting for them to cotton on. Nope. In Chapter 8, when we’re back with Mike Burry, he can’t believe how slow they are either. Even after he’s realised that it’s in the traders’ interest not to believe in the Doomsday scenario – because they work for the big companies that are in charge of issuing information about how the CDOs are performing in ways I didn’t really understand even as I read about it – it’s still impossible to understand their blindness after things really start to go wrong. All the middle chapters of the book have had this fact at their heart: the dealers can’t see anything beyond what they are familiar with from past experience. As Burry says near the end of Chapter 8, ‘It makes me wonder what a Wall Street ‘analyst’ does all day.’

Chapter 8 is less analytical than 7, and more people-oriented. Burry discovers, when reading about problems his own son is having, that he has Asperger’s. Well, duh. It makes him understand why he prefers to lock himself away – and why, well, he’s right when everybody else is wrong. Meanwhile Eisner goes to visit a woman at S&P, and realises she really never has known what’s been happening. (Her company and Moody’s have been taken for a ride by Wall Street players, that’s what. But we knew that already.) We haven’t heard much from Charlie, Jamie and Ben for a while… but at the end of Chapter 8, when the crisis is becoming apparent in June 2007, Lewis reminds us of them, and the other handful of people who foresaw it all and cashed in. Burry is miffed that the Bloomberg News service is crediting only one man with having seen it coming: Greg Lippmann – ‘the guy that essentially took my idea and ran with it.’

What can you do, eh?

12 March
Chapters 9-10, Epilogue, Afterword
As the world ends – or, as we later come to realise, doesn’t end at all – Lewis needs a monster. He is Howie Hubler, and his story takes up more than half of Chapter 9. He’s built like a brick shit-house and barges his way through all the normal protocols at Morgan Stanley, where he’s a bond trader. He works behind closed doors with his own little team, is able to bet billions of the firm’s money on as many subprime bonds as he likes – and his ignominious demise is as satisfying in Lewis’s telling as the death of the bad guy at the end of an action movie. ‘Howie Hubler was no longer employed at Morgan Stanley.’ As one of his elite team describes it: ‘Howie was on this vacation thing for a few weeks… and then he never came back.’

Except he isn’t dead. Like so many traders who end up losing their bosses literally billions of dollars – the slow emergence of how many billions is one of the features of these chapters – Howie keeps the tens of millions he earned while the going was good. This is what makes the last 40 or 50 pages of the book so depressing: almost everybody gets away with it, and the people who are in charge of cleaning up the mess are the same people who didn’t see it coming. In Chapter 9, Hubler stands for all the traders that Lewis’s heroes – what are they in Lewis’s version if not heroes? – have been betting against, and winning. But his kind win back the field of play very soon afterwards. Go figure (a phrase I think Lewis himself uses).

I was at a book group discussion about The Big Short, and one bloke there regretted that in order for a book about one of the worst frauds in history to be published it has gto be written like this. It’s a bit like the gonzo journalism of the 60s and 70s: get the readers in by getting them interested in the experiences of people – not the journalist himself this time, but people who were there, people who lived the dream or the nightmare. Ok. So the rest of Chapter 9 focuses on Jamie, Davie and Ben – with local colour added as Ben spends all day (or is it two days?) using the only internet connection in Exmouth to take his profits – and on poor old Mike Burry, making tens of millions for his investors and getting no thanks for it. There’s always something clownish, some absurdity that makes this book a variation on the theme of lad-lit. Ok, again.

So what else do we get? Set-piece skirmishes within the long game our guys are playing, in which we can cheer them along in their unlikely victories. Lewis even refers to Frasier versus Ali in Chapter 10, when he turns his attention to Eisner again. The most memorable set piece takes place during the precise moments when the price of Bear Searns shares goes into free-fall. Bill Miller, the voice of the establishment, gives a laid-back three-minute spiel about how the problems in the subprime market will not cause a major crash. As he speaks – and as Eisner gives his own much longer spiel, not laid-back at all – the invited audience can’t take their eyes off their Blackberrys. Lewis punctuates it with ticker-tape-style updates as Bear Stearns’ value is slashed by more than half in 20 minutes…

…and so on. All the big Wall Street firms end up making losses like 50 billion dollars although they’re very good at hiding such things so nobody really knows. Lehmann Brothers goes bankrupt, but the effect on the market is so diabolical the government never lets it happen again – which is why, basically, all the sums of money that had seemed so abstract for a whole book turn out not to be abstract at all. Who pays? We pay.

And what about our lovable bunches of guys? Davey or Jamie, I forget which, isn’t really interested in the money, it was the principle. Eisman is only interested in revealing the corruption of the system. Mike Burry is so pissed off with the lot of them he stops trading and the last thing we know he’s getting fascinated by guitars. So they all give their money away and get proper jobs. Well, perhaps they do in an alternative universe, but not in this one. Our brave boys have succeeded in making money, and if there’s one thing Lewis has shown us it’s that money has to come from somewhere. However… all his anger, if that’s not too strong a word – is reserved for big business. Is it just part of his version of the American dream that if you’re a maverick you aren’t judged by the same rules?

This is one book written in the style of another. It isn’t popular economics – I often found the nitty-gritty impenetrable – it’s human interest feature-writing. The novelistic things that Lewis does – the set piece scenes, the memorable characters – are brilliantly done. But really, I’m with that friend of mine who said what a pity it is that an explanation of how our finance system is sick has to be written like a kind of novel.