Michael Lewis, The Big Short, New York City, W.W. Norton & Company Inc., 2010,
The Big Short, by Michael Lewis, provides a fascinating and unique perspective on the subprime mortgage crisis of 2008. Lewis takes the reader on a journey of the events preceding the crisis. He examines the events leading up to the crisis from the perspective of Michael Burry, Steve Eisman, and Greg Lippmann. Although these were not the biggest players on Wall Street, they were some of the few that saw the insanity that had ensued in the housing market and foresaw the inevitable crash. Thus, Lewis’ account of the financial crisis is set apart from others not only for the eloquence and page-turning style of his writing, but because of the narrative approach of his work. This combination provides financial geeks with an entertaining read, and in addition can inform anyone who is seriously interested in learning more about the financial events that have shaped this generation.
During the period leading up to the financial crisis of 2008, the world of complex financial derivatives was a mystery to people on Wall Street, off Wall Street, and in Washington. Words such as Collateralized Debt Obligation, Credit Default Swap, and Subprime Mortgage Backed Security were in almost nobody’s vocabulary. Yet, it was due largely to these unknown financial instruments that the United States’ financial system was brought to its knees.
From the perspective of Lewis’ subjects, the danger of these new financial instruments was obvious. In short, a corrupt and overzealous Wall Street culture had created a system that was enormously profitable…while it lasted. Not only was this system enormously profitable, it was also extremely complex. Even for Lewis’ subjects, some of whom were very financially literate, getting down to the bottom of the mortgage meltdown proved difficult. Lewis’ account investigates the system from top to bottom: from the individual home owners who bought houses they could not afford, to the mortgage originators who concocted misleading and fraudulent loans, to the rating agencies who misjudged almost every mortgage backed security, to the biggest Wall Street banks who capitalized on the bubble and pawned risk off to unsuspecting clients. No stone is left unturned in The Big Short.
Despite the high praise that has been offered thus far, there seems to be one area where The Big Short did not live up to the rest of the book: the conclusion. Michael Lewis devotes all but the last 3 pages of his book writing an excellent fictional account of the events leading up to the financial crisis. In the final 3 pages, however, he offers his overall conclusion—the real reason why the financial crisis occurred. He concludes that the root cause of the financial crisis was that large Wall Street banks were no longer privately owned. Thus, the executives and CEO’s were no longer held responsible for the risks their firms undertook. Shareholders now bore the brunt of the consequences for faulty risk management. Although Lewis’ conclusion might not be altogether incorrect, I do not believe that it is entirely correct, either. As Lewis’ account depicted, there were many variables that contributed to the crisis. The non-privatization of Wall Street banks might have been part of the problem, it was not the entire problem.
Overall, The Big Short was a fantastic book. Although the conclusion is somewhat lackluster, it does not take away from the value of the book. Lewis’ work still provides invaluable insight into a world that had previously gone misunderstood, or not understood at all. The narrative style of his work not only makes for an informative read but an interesting read as well. Anyone who is interested in public policy, economics, politics, or just seeking to broaden their horizons should definitely read The Big Short.