The Big Short. Movie Tie-in

In July of 2007 two Bear Stearns Hedge funds collapsed. The funds specialized in CDOs they used and insane amount of leverage (borrowed money) and the credit default swamps they bought to protect didn't pay off at the same time the subrpime CDOs tanked. That was the canary in the coal mine or microcosm of the 2008 crisis.

The 10 year anniversary got me nostalgic.

So the Big Short. I didn't read it back when came out in 2010 because I felt like I read through it all between the Financial Times, WSJ, NYT, etc. And of course of the vampire squid piece in the Rolling Stone.

Lewis' book saves you from reading all of that. He very clearly explains the subprime structured debt (CDO) and the insurance on the - credit default swaps. How people could short these "assets" by taking the other side of the insurance. You can understand how the CDS might not pay off as soon as the CDOs drop in value because they are set by two different market makers and have different conditions. Lewis explains how Goldman and others manipulated the rubes at Standard & Poor into calling a bunch awful mortgages Triple A (the highest rating - by the end of 2009 there was hardly a firm in all of America rated Triple A, yet these mortgages made to low income bad credit people were passing in 2007 as Triple A. These were the intrest only loans, the liar loans, the NIJNA loans, etc.). This is easier to understand then CDOs and CDS and synthetic CDOs. The rating agency incompetence is the second biggest outrage.

Lewis is a master story teller and gives you some interesting characters and exciting narrative along the way.

He starts with the Meredith Whitney research piece in October of 2007 - this is the biggest outrage - it stated the the bankers weren't greedy they were incompetent. Somewhere along the way they believed their own baloney or the left hand didn't know what the right hand was doing and they bought these terrible CDOs themselves because they were rated Triple A. They forgot they were really junk that was manipulated to Triple A or they made too much inventory and couldn't unload fast enough and had it on their books. In any case that's the whole meltdown.

Fantastic book. We are due for another crisis, so this a great way to prepare.

Terrifying? Sort of, yes, although in that forensic way that looking back on a human tragedy is frightening but also morbidly fascinating. In fact, I think Lewis could have done more throughout to emphasize the human disaster that was the early 2000s housing bubble and collapse. Instead, for much of the book you join Lewis in simply shaking your head at the combination of stupidity and greed that brought down a vast swathe of the global economy at the turn of the 21st century. It's easy to forget in retrospect the consequences of that greed and stupidity: so many lives ruined, while the architects of the disaster gave themselves healthy bonuses with taxpayer bailouts. A Captivating book? For me, yes, definitely: I quite literally couldn't put it down (insofar as that expression works for ebooks ... couldn't turn it off?). Lewis does an excellent job of explaining and personalizing the story of the 2008 crash. As both a political philosopher and a quantitative social scientist, I appreciated that Lewis took the high road, for the most part avoiding the (not unreasonable) temptation to bash economists and other social scientists ("no one saw it coming!!! you call that a science??" ... which makes about as much sense as berating police investigators and the justice system for not predicting the exact time and place of some ingenious heist: it's hard to do good predictive modelling and causal analysis when the key players are outright lying to you ... but I digress ...). In short, a really good read for anyone with even a passing interest in recent economic history.

For those who have seen the movie based on this book, I still think it is in your best interests to read the book. It's fascinating, to put it mildly. This isn't exactly a story where I can ruin the ending: the big investment banks created derivative products called CDOs based on subprime (meaning unlikely to be paid back) mortgages. The CDOs were insured (mostly by AIG) by Credit Default Swaps, and AIG and others happily allowed people without any investment in CDOs to buy Credit Default Swaps on their own (basically allowing the creation of a derivative of a derivative, the synthetic CDO). The financial rating institutions, like Moody's and Standard and Poor's, rated these CDOs as AAA, which meant that insurance companies and retirement funds could invest in them. (As a note: AAA means as safe as a government bond, and therefore, riskless). This was a catastrophe waiting to happen and it appears that the banks really had no idea what they were doing, despite being warned by at least a few people. While this all sounds very technical, Lewis manages to make it entirely understandable.

This is essentially a story about what happens when we let our financial institutions run amok through deregulation. Deregulation began with Reagan, and then continued onwards through the Bush Sr, Clinton, Bush Jr., and Obama administrations (I can only imagine it will continue through the Trump administration as well). This book is a perfect story of a perfect storm, and if it is missing anything, it is a call to action. But I think the call to action is implied by the very nature of the events Lewis describes.