By this point, I feel like every responsible North American adult ought to be able to tell you the basics, the absolute bare bones, of the subprime mortgage crisis. Am I one of those people? I’d like to think so. But I really don’t know. I listened to that special This American Life episode, back in 2008, and felt like I got it—then it promptly collapsed in my head into a heap of acronyms and financial jargon.
Now I’ve read The Big Short, Michael Lewis’s light but illuminating overview of those select few traders who saw the collapse coming, and who profited enormously as a result by betting against the U.S. housing market. I’m still not sure I understand the subtleties of the situation all that well, but one of Lewis’s theses is that that was exactly the point: the subprime mortgage industry was set up to be as convoluted as possible. It was never meant to be fully understood by mere mortals or even, frequently, the people making the trades in the first place. It was, in essence, a pyramid scheme.
The Big Short is a personality-driven book, and Lewis does a fine job depicting the inquisitive, outsider mentality of his subjects. There’s Steve Eisman, who has a habit of interrupting Wall Street executives’ speeches and listing the ways in which they’re delusional; there’s Mike Burry, who has one functioning eye and Asperger’s syndrome, and who squirrels himself away for hours at a time while coming up with the idea for a credit default swap on subprime mortgage bonds; and there’s the two guys from Cornwall Capital, a flyspeck money management firm run out of a friend’s shed in Berkeley, California.
These men, not the most seasoned or well-connected, by any means, ended up obscenely rich once the thousands of rickety mortgages being doled out to couldn’t-have-known-better Americans started to go bad. But they weren’t lucky—far from it. They just asked the questions that the other yes-men in Wall Street wouldn’t. Pretty basic questions, actually. Questions like, “What kinds of loans, exactly, are contained in these bonds?”
“Why would a $724,000 mortgage, owned by a Mexican strawberry picker making $14,000 a year, be rated as virtually risk-free?”
“Does anyone know how all of this works?”
It turns out they didn’t. So this small group of renegade traders was able to make gigantic bets against towers of bad mortgages, as well as other towers composed of the single worst layer of the previous towers (this being an unbelievably dumb concept called a collateralized debt obligation, or CDO). These trades were snapped up by the big, unthinking Wall Street firms, because nobody considered the possibility that the housing market would decline. Nobody even thought that its rate of increase would slow down. Why? Because it hadn’t ever happened before.
This led to what amounts to a fraud of almost unthinkable proportions. “One trillion dollars in losses had been created by American financiers,” Lewis writes, “out of whole cloth, and embedded in the American financial system.”
Lewis, miraculously, makes this messy, opaque story fairly easy to understand. His imagery is simple and effective: a tower (the subprime bond) made up of individual floors (tranches), on which you buy flood insurance (credit default swaps). His prose is accessible, approaching folksy; when introducing a new character, Lewis will write, “a fellow named so-and-so.” He’s also a gifted storyteller. There are downright cinematic descriptions of a conference at the Venetian Hotel in Las Vegas, as well as the boardroom where Eisman delivers a damning speech to Wall Street hotshots at, coincidentally, the exact same time that Bear Stearns stock begins to plummet.
One disadvantage of being so clear, so accessible, is that you run the risk of seeming unserious. More than once I had the feeling of, “Well, this can’t be the definitive book about the subprime crisis—it’s so fun to read.” At a scant 250 pages, the book is also quite short. Think of it more as an unusually likable entry point; I’m sure we’ll be inundated with 600-page technical snoozers in the years to come.
Another potential problem with displaying so much breezy charm—and this is the one I have a much harder time resolving—is that, in the end, aren’t these guys kind of villains? Not as bloodthirsty as the Wall Street executives, sure, but opportunistic in their own way? When millions of Americans were kicked out of their homes, they each walked away with tens of millions of dollars. In fact, their payday depended on this happening.
Lewis explains their justification several times over, how the only way to punish Lehman Brothers et al was to bet against them. (A tug-of-war metaphor is deployed here—you need people pulling on the other end of the rope. This kind of makes sense to me.) Mostly, though, it just illustrates how twisted a mindset you need to have to survive in high finance. These guys hear about an impending social crisis, one that will affect their own friends and family firsthand, and their first reaction isn’t to pack up their shit and find a new, less disgusting industry to work for.
Their first reaction is, “How can I make a bet on that?”
WW Norton, 266 pp, $35, hardcover