Michael Lewis’ The Big Short

The Big Short: Inside The Doomsday Machine

Sadly this book provides part of the basis for a valid complaint. This book doesn’t give you any solutions but it will start the process to make you informed enough to intelligently evaluate the discussion. I can’t think of many books I would recommend above this one for a place on your permanent shelf and for an immediate read. The book also tells of the owner of an investment company that shorted the home mortgage business, and the investors in his company wanted their money back. They thought he was crazy to bet against house prices continuing to go up.

The Big Short: Inside the Doomsday Machine

A financial crisis is a situation where the value of assets drop rapidly and is often triggered by a panic or a run on banks. Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market and bond markets, among others. By the summer of 2008, the carnage was spreading across the financial sector.

Is The Big Short Based On A True Story?

Some even tried to warn legislators and corporations at risk just how crazy the bubbling market had become. I suppose it should come as no shock that short-term gain, even if based on insanity, will always triumph long-term rationality if it means reducing the next quarter’s profits. My advice to everyone is to really KNOW your finances. Don’t assume that a banker or accountant knows what is best for you. Don’t over leverage yourself under the assumption that you will make more money in the future.

A few years later, he quit his job and went to work for a giant hedge fund called Chilton Investment. He’d lost interest in telling other people where to put their money. He thought he might be able to remain interested if he managed money himself and bet on his own judgments. Having hired Eisman, Chilton Investment had second thoughts.

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It’s a good synopsis of the greedy and heedless culture that existed with the big investment banks and rating agencies. Lewis weaves an entertaining tale that is told with literary flair and that will keep you riveted.

The film stars Christian Bale, Steve Carell, Ryan Gosling, and Brad Pitt. When this happened, many of these CDSs and CDOs began to pay out and many of the Wall Street banks discovered they had no realistic idea of what this meant. Morgan Stanley found itself in debt to Deutsche Bank for $1.2 billion. Eventually the bank would take a hit of more than nine billion dollars due to the CDOs an enthusiastic bond trader sold through their bank. In typical Michael Lewis fashion, “The Big Short” is fast-paced, entertaining and difficult to put down.

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The book also highlights the eccentric nature of the type of person who bets against the market or goes against the grain. A mortgage-backed security is an investment similar to a bond that consists of a bundle of home loans bought from the banks that issued them. The titular “big short” in The Big Short refers to the trading/investment practice of shorting, or selling short. When you short something—usually a financial security, like a stock—it means you borrow it and sell it on the open market, with the aim of buying it back later at a lower price and pocketing the difference as a profit. Traders and investors sell short when they think that a security will decline in value. Other examples are deliberately irreverent, using everyday metaphors and terms.

Just watched the movie yesterday and I thought it was pretty clever how they converted the book to the big screen. i definitely recommend this book and have been eyeing some of Michael Lewis’s other books, as well. as if the authors are belaboring the point in a desperate attempt to fill up 200 pages. I mean, really, why does it take 200 pages to present the “5 Steps to ”. But “The Big Short” reads like good fiction, complete with a fascinating plot line and well developed characters. I have no idea how the likes of Goldman Sachs et al does business or make their money. This book did not help educate me at all on these things.

The Big Short: Inside The Doomsday Machine Introduction

Without giving away too much of the story – let’s just say the book is enlightening as to how the real estate bond market and its variety of derivative financial instruments operate. By early 2005 Eisman’s little group shared a sense that a great many people working on Wall Street couldn’t possibly understand what they were doing. The subprime mortgage machine was up and running again, as if it had never broken down in the first place. If the first act of subprime lending had been freaky, this second act was terrifying. Thirty billion dollars was a big year for subprime lending in the mid-1990s. In 2000 there had been $130 billion in subprime mortgage lending, and 55 billion dollars’ worth of those loans had been repackaged as mortgage bonds.

The Big Short: Inside the Doomsday Machine

It’s slightly depressing to read since it’s a reminder of the whole meltdown in 2008, but it’s nice to hear that at least a few deserving people got something out of the whole mess. I must just have a thing for any work having to do with the “Doomsday Machine” that was our economy at and around the Great Recession. Not only did I thoroughly enjoy this book–and learned a hell of a lot from it as well–but I also would put Carousel Court, a fictional account of the Great Recession, in my top 5 reads of 2016.

Lewis finds the very few investors who predicted and profited from the sub-prime mortgage meltdown and follows their journey from initial realization of the impending disaster to eventual payout. Following these eccentric characters and their interactions with the big Wall Street investment banks is at turns laugh out loud funny and head shaking incredulous. Lewis knows how to turn a phrase and does a good job teasing out the dark humor of the situations. He also does a very good job at explaining the essence of very complicated financial transactions and gives the reader a good understanding of the whys and hows of the financial meltdown. Nonetheless, this is still both an important and entertaining book. A much larger percentage of these mortgages defaulted than usual for mortgage-backed bonds.

The amounts of money involved are not millions but billions. Lewis draws from emails, letters, interviews and conversations and provides a context filled with striking metaphors and surprising drama. The one issue I’m left with is Lewis’s take on his protagonists, a group of men who all “shorted” the sub-prime market industry. He treats them as heroes, as isolated voices of sanity in an increasingly insane world. But if they hadn’t acted as buyers for sub-prime market insurance, there couldn’t have been sellers, either. They ended up earning billions of dollars, and this type of finance is a zero-sum game. Their gains meant the losses of the sellers, and, ultimately, the American taxpayers.

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Lewis tells the distinct stories of three groups of little-known financiers, who ended up being short several hundreds of million dollars of sub-prime mortgage securities in 2008. They are Steve Eisman and his friends at a hedge fund called FrontPoint; Michael Burry of Scion Capital; and Charlie Ledley and his friends of Cornwall Capital Management. These words indicate a moral, not an economic decision. However, when a government fears that a firm’s failure will have a devastating impact on an entire industry, or worse, an entire economy, they can choose to step in to save the firm. The U.S. Government decided to save the financial industry. The same financial industry that had created financial instruments so complex that virtually none of the people creating them even understood them. Because if they understood what they were trading in, buying and selling, they never would have put themselves in such a ridiculously poor position—a no-win.

This book focuses on the handful of brokers who could see the crash coming and decided to bet against homeowners being able to make their payments. It was dicey because if the government stepped in and shored up those home loans, they would lose their bet. One of the problems with most loan officers is that they really don’t understand the loans they are writing. I had one property that had a house with a trailer house on the same lot. I could almost hear the pop in the banker’s head when he realized there was a trailer house involved. I explained that the trailer house needed to be considered personal property; I had plenty of equity in the house to meet the criteria for the loan.

”Interest only ARM mortgages were only 5.85% of the pool in early 2004, but by late 2004 they were 17.48% of the pool, and by late summer .34% of the pool. To say that everything was getting out of balance was an understatement. If the real estate dipped or remained flat, the whole, forgive the pun, house of cards, was going to come down. Home owners had to keep gaining equity to stay afloat.

  • He strips away the ambiguities of Wall Street “market speak.” A collateralized debt obligation was actually the smoke and mirrors backed subprime bond.
  • That opened the door to Act II, Household Finance Corporation’s reincarnation as an aggressive home equity lender.
  • I’d recommend this book to those interested in trying to understand the last financial crisis.
  • Men and women who once made us laugh now make us shudder.
  • It makes one think twice about trusting one’s paycheck and savings to banks.

You get the main summary along with all of the benefits and lessons the actual book has to offer. Notify Me By clicking “Notify Me” you consent to receiving electronic marketing communications from Audiobooks.com. The Big Short is a rich tale full of vibrant characters— individuals with excess hubris on one side and skeptics on the other—that comes across as a David v. Goliath match-up. Lewis excels in detailing the financial alchemy that went into creating and selling complex financial instruments and how a select group of individuals fought the odds and maintained their belief that the “doomsday machine” would ultimately wreak havoc. No one writes with more narrative panache about money and finance than Mr. Lewis… does a nimble job of using his subjects’ stories to explicate the greed, idiocies and hypocrisies of a system notably lacking in grown-up supervision. I read it, marked it up for my staff, underlined it, made copies and asked them to read it. Oppenheimer was among the last of the old-fashioned Wall Street partnerships and survived on the scraps left behind by Goldman Sachs and Morgan Stanley.

The Big Short

In 2005 there would be $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Half a trillion dollars in subprime mortgage–backed bonds in a single year. Subprime lending was booming even as interest rates were rising—which made no sense at all. Even more shocking was that the terms of the loans were changing, in ways that increased the likelihood they would go bad.

Much as he enjoyed bashing the less viable companies, he accepted that the subprime lending industry was a useful addition to the U.S. economy. His willingness to be rude about a few of these subprime originators was, in a way, useful. It lent credibility to his recommendations of the others. One of the best business books of the past two decades.

“You don’t even own stock in your company,” said Eisman, after the typically elaborate Japanese businessman introductions. When the crash of the U.S. stock market became public knowledge in the fall of 2008, it was already old news.

To do this, money manager Dr. Michael Burry approached multiple banks to buy credit default swaps, or CDSs. This was like a type of insurance against the default of these mortgage bonds. If the borrowers in these bonds paid their mortgages as expected, the investor, Burry, would lose out on a set amount of money he paid semiannually in premiums. However, if the borrowers defaulted on their loans, the investor stood to gain multiples of his basic investment. That was the moment it first became clear that Eisman wasn’t just a little cynical. He held a picture of the financial world in his head that was radically different from, and less flattering than, the financial world’s self-portrait.

Yanis Varoufakis is the Greek Minister of Finance and an MP for Syriza. He is also Professor of Economics at the University of Athens and Visiting Professor at the University of Texas. Born in Athens, 1961, Varoufakis completed his secondary education in Greece before moving to England where he read mathematics and economics at the Universities of Essex and Birmingham. He has taught at various British Universities , and spent twelve years teaching at the University of Sydney .

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