Michael Lewis’s “The Big Short”

I am reading Michael Lewis’ “The Big Short” — the story of the 2008 Wall Street catastrophe. The book follows the stories of several who saw it coming and called their shots.

Lewis is a good story teller and portrays the players well. He comes at things from all perspectives; he does not dodge complexity but explains it well. His overall image of modern Wall Street is dark. Warning: one must follow some of the details about the instruments (CDOs & CDSs) to enjoy the drama of the later chapters.

I am on page 50 (mid 2005) and Lewis proceeds chronologically with the story. I don’t know what final judgements he will make on players such as Mike Burry but I want to insert here my own judgement, based on what I have learned so far from the book, and also what I have read in subsequent news stories. Short sellers such as Burry increase the pain in the short term but decrease the total pain in just about any longer run. The sooner you terminate a Ponzi scheme the less total damage it does. The events of 2008 are not due to a Ponzi scheme and Burry didn’t actually short, but the analogy still holds.

Lewis has a keen sense of economic cause and effect so often lacking in New York Times reports and even the Wall Street Journal. This lack is manifest in reporting situations that cry for explanations of how other components of the situation respond. If there is a dire shortage of zots, what effect of this has there been on the price of zots and the suppliers of zots? Lewis does not leave the reader long in the dark here.

On page 130 I see answers to some questions that I wondered about here a year ago—“What are the assets that back this instrument?”. The information was indeed hard to get in 2006.

On page 131 we learn that CDOs are recursive which, as any computer scientist will tell you, means that they are mutable. Otherwise each CDO would be composed solely of older CDOs thus precluding circularity. This is not in itself fraudulent but makes fraud easier. Some years ago Tymshare embarked on charting the ownership of companies in the oil business. There was considerable circularity there too. The information was hard to get. Transparency is critical.

2010 note by Burry
A Review; and another