The story of “The Great Recession”, as many are calling the current economic crash, is in the process of being told. There are so many angles and players that it is difficult to tell the story in one single work. Each article and book that comes out focuses on one aspect of the crisis (e.g. it’s origins, particular firms, government players, etc), leaving others to fill in the missing pieces. So far, the best account I have read on the run up to the collapse and the actions taken by both banks and the government during the crash is Sorkin’s Too Big to Fail. However, Sorkin’s tome does not focus on the very origins of the collapse; namely, the unholy trinity of subprime mortgage-backed securities, collateralized debt obligations (CDO’s), and credit default swaps (CDS’s). Michael Lewis, acclaimed author of bestsellers such as Moneyball and Liar’s Poker, fills this gap.
Lewis’ new book, The Big Short, focuses on the instruments of the crisis as well as those few individuals that profited from the crash–those who shorted not a particular company or sector, but the entire system. On the way back from a meeting today I heard Lewis talk about the book on NPR’s Fresh Air. His account sounds fascinating, to say the least. In typical Lewis fashion, he focuses on a few protagonists and uses their stories to explore a larger, more complex story–in this case, how the financial industry become enamored with mortgage-backed securities, the process of selling (through CDO’s) and insuring them (through CDS’s), and how that lead to the exponential increase in systemic risk. In the case of The Big Short, Lewis introduces us to a few of the contrarians who realized early on that the market was set for failure. As Lewis explains:
“Everybody [on Wall Street] was working with the same set of facts about subprime mortgage lending — about how subprime mortgage loans were turned into bonds and repackaged and turned into CDOs and so on and so forth,” Lewis tells Terry Gross. “[And] the vast majority of the people in the markets took those facts and painted one kind of picture with it; it was a very pleasant picture. And a very small handful of people took the same facts and painted a completely different kind of picture with it. [I wanted to find out] ‘What is it that enables [the people who bet against the market] to paint that picture?’ and ‘Why do these people look at the world differently?”
“This is the story of human perception as much as it is anything else. And their attitude toward the financial markets was peculiar,” Lewis says. “It was peculiar to be running around the world looking for unlikely things that might happen. … And it told you something about Wall Street and … the way the markets were functioning when they were dysfunctional. There weren’t enough people thinking this way. There weren’t enough people taking into account the real likelihood of extreme change in the world.”
I’ve got The Big Short on my to-read list (there are currently two books ahead of it in the queue). I’ll be sure to post a review once I’ve finished it.
You can listen to the entire interview here.