Book Review - The Big Short, Inside the Doomsday Machine
by Michael Lewis I just finished reading The Big Short, Michael Lewis' thrilling account of three hedge funds that managed to see the crisis in the financial markets years before others had a clue as to what was going on. At a mere 250 pages, I was skeptical. I like my books to be fat and detailed, an obviously unscientific measure that failed miserably in the case of Andrew Ross Sorkin's Too Big To Fail. Sorkin's essentially journalistic account of the events of 2007 and 2008 compares poorly with Mr. Lewis' work. At the very least, The Big Short gives a fleshed out account of the events that exacerbated the financial crisis through the actions of four major players - big Wall Street banks from Goldman Sachs to Merrill Lynch, the three major rating agencies, hedge fund managers who predicted the crisis, and investors around the world who got suckered into buying some really shitty financial products that they did not quite understand. We've heard two of these stories in the last couple of weeks - the Magnetar trade as covered by This American Life and ProPublica and the SEC case against Goldman Sachs involving ABACUS and John Paulson's hedge fund.
The heroes of Mr. Lewis' account are a quirky group of hedge fund managers with rather unconventional backgrounds. It is testament to Mr. Lewis' abilities as a writer that you end up rooting for a bunch of guys who saw the delusion of the wider market and made hundreds of millions of dollars by betting against just about everyone. Dr. Michael Burry is a neurologist by training, has one functioning eye and suffers from Asperger's syndrome - he's the guy who saw the housing bubble coming back in 2003 and ended up making hundreds of millions through his fund, Scion Capital. Jamie Mai and Charlie Ledley were a couple of 30 year olds with no obvious training or talent in money management. They started a hedge fund from a garage in Berkeley and ended up making some legendary profits by successfully betting that the upper, double-A rated tranches of mortgage CDOs backed by subprime loans would fail. The third hedge fund manager, with a more conventional background was Steve Eisman of FrontPoint Partners. All of these talented but also lucky men were connected by another interesting character, Greg Lippmann of Deutsche Bank. If the idea of betting against the subprime mortgage industry was a virus then it originated with Dr. Michael Burry who infected Mr. Lippmann, who in turn spread it to a whole bunch of other money managers on and off Wall Street.
So far I've given the benefit of the doubt to the TARP rescue package and its necessity towards 'saving the American ecnomoy'. After reading The Big Short, I'm not so sure. There are passages in the book that inspire incredulous disbelief. I'm not a fan of populist anger at a single behemoth called "Wall Street" but it is hard not to feel disgust at the greed and incompetence of some of the most gilded names in modern capitalism. The Big Short is required reading for anyone wishing to understand what happened on Wall Street in the last three years. Highly recommended.
Additonal recommended reading and media
Dr. Michael Burry's April 2010 Op-Ed in the New York Times - http://www.nytimes.com/2010/04/04/opinion/04burry.html?scp=12&sq=burry&st=cse
Michael Lews and Dr. Michael Burry on CBS News' 60 Minutes - http://www.cbsnews.com/video/watch/?id=6298038n&tag=contentBody;housing
Dr. Michael Burry's "A Primer on Scion Capital's Subprime Mortgage Short", published in November 2006 - http://www.scioncapital.com/PDFs/Scion%202006%204Q%20RMBS%20CDS%20Primer%20and%20FAQ.pdf
Labels: 2010, april 2010, ben hockett, book review, charlie ledley, cornwall, finance, frontpoint, greg lippmann, history, jamie mai, michael burry, michael lewis, scion capital, steve eisman, wall street