By Scott Ronalds
Michael Lewis has a talent for writing about financial issues in a provocative and colorful manner. Having worked as a bond salesman for Salomon Brothers in the 1980s, he leans on his experiences and lessons learned on Wall Street to bring his readers ‘inside the tent’.
His latest work, The Big Short, is a narrative on the U.S. housing market crash. Unlike many books and articles on the topic, however, Lewis focuses his novel on a small group of investors who were on the ‘other side of the trade’ (i.e., betting that the rapidly escalating housing market would implode).
He tells the story of three groups of investors who were unwavering and obsessive in their bets against subprime mortgage bonds. And who made a whack of money because of it. He explains the birth and role of credit default swaps (CDS) and collateralized debt obligations (CDO) – those much talked about but little understood financial instruments that helped serve to bring down the likes of AIG, Bear Stearns, Citigroup and Lehman Brothers, among others. And he illustrates the colossal failure of risk management departments and rating agencies to identify and curb the risks that were growing in the system.
While the outcome is known in advance, Lewis’ take on the recent financial and housing market collapse provides many fresh and humorous (albeit dark) insights and observations. Aside from gaining a greater understanding of what was, and wasn’t, happening behind the scenes, a key takeaway is that investors who do their homework and who have a great deal of conviction in their strategies shouldn’t be afraid to run against the herd. Indeed, simply being one of the sheep can lead you to slaughter, as was the case of virtually every major Wall Street investment bank in 2008/09.
The Big Short is receiving some great reviews. One of my favorites is, “Michael Lewis doing what he does best, illuminating the idiocy, madness and greed of modern finance…Lewis achieves what I previously imagined impossible: He makes subprime sexy all over again.” (Andrew Leonard - Salon.com ). Canadian Capitalist also reviewed the book in a positive light in a recent blog. And who knows, we may even see it on the big screen in the future, given Lewis’ recent success with The Blind Side. It’s a fairly quick read, and last I checked it was on sale at Costco for about 40% off. So grab a 24-pack of popcorn and tuck in.
Related reading:
Book Review: Panic
Recommended Reading (The End)