Ten years ago, few people were familiar with terms such as “subprime mortgage” and “credit default swaps.” Fewer still understood how they worked and the astounding potential they had to undermine the country’s entire financial framework.
It is those perceptive few who did understand — and the journey their insights took them on — that Michael Lewis (“The Blind Side,” “Liar’s Poker”) chronicles in his latest book, “The Big Short.” He focuses on the leaders of three small financial companies, all of whom realized early on that something was profoundly awry with the subprime mortgage business and the way the loans were being packaged and sold off to investors. Lewis traces the men from their first inkling that something was very, very wrong on Wall Street to their reactions when the economic meltdown proved them very, very right.
He begins by introducing his main characters: Steve Eisman, the tactless skeptic who regularly alienated more conventional bankers; Michael Burry, whose Asperger’s Syndrome makes him both awkward and obsessive; and brash and boastful Greg Lippmann.
The portraits Lewis paints of these men are appealing, threaded through with colorful anecdotes and telling, well-written details. At a Japanese dinner during a conference in Las Vegas, for example, Eisman double-dips his edamame as he talks with an investment manager “with a Wall Street belly … the discreet, necessary pouch of a squirrel just before winter.”
Lewis follows these figures (and several others) as they discover the weaknesses in the subprime machine and figure out how to exploit them by buying credit default swaps, essentially insurance policies that pay off if the mortgages go bad. We watch as they wait anxiously to see if their bets (the “big short” of the title) pay off.
Lewis works with a fine brush, parsing each move, outlining each actor’s emotions as the markets evolve, detailing the reactions of the financial mainstream to the unconventional and pessimistic ideas pushed by these outsiders.
As he goes, Lewis — who worked as an investment advisor for Salomon Brothers in the 1980s — also provides a basic course in mortgages, securities and the machinations of the bond market. His explanations are lucid and helpful, guiding the uninitiated through a complicated tale of balance sheets and market movements. At one point, when Lewis explained the nature of the synthetic collateralized debt obligation, I even scribbled in the margins “My mind has been officially blown.”
What is troublesome about Lewis’ account, however, is the way he describes — or fails to describe — the moral dimensions of his characters’ actions. He gives full vent to their moral indignation at the careless ways of many big Wall Street banks. After the conference in Las Vegas, Eisman and his associates wonder “Do (subprime bond traders) deserve merely to be fired, or should they be put in jail?”
And Lewis repeatedly shares his subjects’ thoughts about their own heroism. Lippmann, Lewis writes, saw these investments as a battle between the “Wall Street machine” and “his noble army of short sellers.”
The problem is that even the short sellers were, undeniably, also cogs in the machine. Investment firms made money by letting Eisman and Burry and their ilk buy insurance on subprime loans. In some cases, the very insurance bought by those on the short side was repackaged into new securities and sold yet again to overconfident investors. Lewis acknowledges as much when he writes “Wall Street needed (Eisman’s) bets in order to synthesize more of them.”
And yet the book raises no questions about the ethics of making deals that kept the gears of the machine spinning. Lewis indulges his subjects’ moral righteousness but ignores the ethical dimensions of their own choices. Near the end, when one man hints at moral uncertainty, he is quickly dismissed.
That is not to say that the two sides of this matter are ethically equivalent; in a situation as complicated as this financial crisis, there are no easy answers.
But “The Big Short” would have been a much stronger book had Lewis at least asked the questions.
This review was published in the Cape Cod Times on May 16, 2010. Read the review and an excerpt from the book at CapeCodOnline.com.