If you read only one book about the causes of the recent financial crisis, let it be Michael Lewis’, “The Big Short”.
That’s not because Lewis has put together the most comprehensive or authoritative analysis of all the misdeeds and misjudgements and missed signals that led to the biggest credit bubble the world has known. What makes his account so accessible is that he tells it through the eyes of the managers of three small hedge funds and a Deutsche Bank bond salesman, none of whom you’ve ever heard of. All, however, were among the first to see the folly and fraud behind the subprime fiasco, and to find ways to bet against it when everyone else thought them crazy.
Nor would anyone - including Lewis, I’m sure - claim this is an even-handed history that reflects the differing views of investment bankers, rating-agency analysts and industry analysts, all of whom he holds up to ridicule for their arrogance, their cynicism and their relentless incompetence.
What’s so delightful about Lewis’s writing is how deftly he explains and demystifies how things really work on Wall Street, even while creating a compelling narrative and introducing us to a cast of fascinating, alltoo- human characters. From their tales, we learn that Wall Street banks think nothing of stealing the trading strategies of their clients and peddling them to other customers. We learn that the investment bankers knew as early as 2006 about the rising default rate on subprime mortgages but engaged in elaborate ruses to hide that reality from ratings agencies and investors. We learn that when investor demand for subprime mortgages outstripped the supply, Wall Street filled the gap by creating “synthetic” mortgage-backed securities whose performance would mirror that of the real thing.
For me, the most memorable chapter in Lewis’s tale involves Michael Burry’s struggle to keep his fund alive in 2007 and early 2008 as long-time investors lost faith in his strategy to “short” the housing market and began demanding their money back. Although home prices had begun to fall and mortgage defaults were rising quickly, Wall Street’s securitization machine had managed to prop up the price of mortgage securities while forcing down the value of the bets Burry had placed against them. And even after the market crashed and Burry’s strategy was vindicated with a $720 million profit, not a single investor called to say thanks.
There is nothing subtle about the dark portrait Lewis creates of the financial community. Through his lens, all bond salesmen are out to cheat their customers, all top executives are clueless and all ratings analysts are second-raters who could not get jobs in investment banks.
Even discounting for its generalizations and exaggeration and limited frame of reference, however, “The Big Short” manages to give us the truest picture yet of what went wrong on Wall Street - and why. At times, it reads like a morality play, at other times like a modern-day farce. But as with any good play, its value lies in the way it reveals character and motive and explores the cultural context in which the plot unfolds.
1. What is the primary concern of the author of this passage?
- To present a comprehensive analysis of the book.
- To highlight the role of the financial community in the genesis of the subprime crisis.
- To highlight the merits and demerits of the book "The Big Short".
- To make the reader understand the subprime fiasco through the medium of the book.
2. Why does the author feel that "The Big Short" is a book that a reader can connect with?
- It is a skillful analysis of the financial intricacies and the workings of the Wall Street.
- The story is told through the accounts of characters that were able to see the crisis much before others.
- The book brings together a comprehensive perspective of bankers and analysts.
- It is a comprehensive and authoritative analysis of the recent economic crisis.