The Big Short

Our book club assignment for this month was Michael Lewis's The Big Short (2010). I enjoyed it more than I expected to. Lewis is a great story teller, and he knows how to hang his rather complicated narrative of financial misdeeds on several fascinating characters, each of whom spots something funny going on with sub-prime mortgages and the perfectly legal Ponzi scheme the Wall Street investment bankers had invented called CDOs (collateralized debt obligations), which were bonds that gathered together bundles of sub-prime mortgages. When Michael Burry, Steve Eisman, Greg Lippmann, and a few others began to realize not only that the mortgages themselves were almost certain to go bad (were practically designed for foreclosure), but that the bonds (CDOs) Wall Street firms were selling would also fail soon after, they began purchasing CDFs (credit default swaps), which were insurance policies, shorts that would only pay off big if the bonds failed. It's rather complicated, but Lewis does a very good job of explaining the way the system works -- or in this case failed to work, and thus created the possibility for a big pay off for all those clever enough to see the problem, and a massive bail out for everyone else.

As Lewis observes at the end of his book, this was that rare gamble (better known as fraud) that pays off for both the winners and the losers, since the federal government came to the rescue and saved all the Wall Street executives and let them keep their millions (billions). That should come as no surprise when you realize that many key government officials were formerly employed by the very Wall Street firms they were rescuing. And who says it doesn't pay to have friends in high places. Besides which, Wall Street basically owns the federal government anyway, so not really a big surprise after all. Yes, a few firms went under, but the executives just walked away with their fat pay checks, an only a few unlucky grunts working in the offices were put out on the street.

I also watched the film version of this book, which came out late in 2015, and was actually a very good movie as well as a pretty faithful, although much condensed, version of the book. Some of the names are changed in the movie (Steve Eisman becomes Mark Baum, Greg Lippmann becomes Jared Vennett), but most of the essential character traits (and background stories) remain the same. One of the more interesting, although somewhat peripheral, characters in the book, a stock trader named Ben Rickert (Ben Hockett in the book) who helps a couple of freelance hedge fund operators get in on the big short, is well played by Brad Pitt. Ryan Gosling, who plays Vennett (Lippmann), and Christian Bale, who plays Michael Burry, are also excellent. And Steve Carell makes one of the most interesting and complicated characters in the book and movie (Steve Eisman/Mark Baum) come to life. In fact, if you don't read this book, you should probably see the movie. It will make you mad and also make you realize why the world economy is and likely will remain such a complicated mess, as well as a rigged game that always pays off for those on the inside, and only sometimes for the rest of us, if we're lucky and don't buy too many bogus financial instruments from investment bankers. Better yet, just become an investment banker, or go to work for the government, or both. Then you'll always come out on top.