THE BIG SHORT:Inside the Doomsday Machine, by Michael Lewis. Norton, 266 pp. $27.95. If you read only one book about the causes of the recent financial crisis, let it be Michael Lewis' "The Big Short."
That's not because Lewis has put together the most comprehensive or authoritative analysis of all the misdeeds and misjudgments and missed signals that led to the biggest credit bubble the world has known. What makes his account so accessible is that he tells it through the eyes of the managers of three small hedge funds and a Deutsche Bank bond salesman, none of whom you've ever heard of. All, however, were among the first to see the folly and fraud behind the subprime fiasco, and to find ways to bet against it when everyone else thought them crazy.
Nor would anyone - including Lewis, I'm sure - claim this is a fair and balanced history that reflects the differing views of investment bankers, rating-agency analysts and industry analysts, all of whom he holds up to ridicule.
In many ways, this is the same smart-alecky Lewis who brilliantly exposed and skewered the ways of Wall Street 20 years ago in "Liar's Poker." But, as he says in his introduction, those days of $3-million salaries and $250-million trading losses look almost quaint compared with the sums made and lost by the most recent generation of Wall Street fraudsters and buffoons.
What's so delightful about Lewis' writing is how deftly he explains and demystifies the way things really work on Wall Street, even while creating a compelling narrative and introducing us to a cast of fascinating, all-too-human characters.
We meet Steve Eisman, a second-generation Wall Streeter whose foul mouth and total lack of social grace made it easy for others to dismiss his relentless criticisms of the subprime mortgage industry, which he characterized as nothing more than a Ponzi scheme.
There's Michael Burry, a physician-turned-stock picker with an anti-social personality (later diagnosed as Asperger's) who becomes the first money manager to buy a credit default swap on subprime mortgage bonds.
There's Greg Lippmann, a prototypical bonus-grubbing Wall Street bond salesman who early on sees the potential of the subprime swaps market and becomes the leading evangelist for betting on the housing market's collapse.
And there's Charlie Ledley, Jamie Mai and Ben Hockett, three young financial hustlers from Berkeley, Calif., who set up a hedge fund in a Greenwich Village art studio, go looking for a long shot and find it in supposedly AAA-rated securities cobbled together from BBB subprime junk.
For me, the most memorable chapter in Lewis' tale involves Burry's struggle to keep his fund alive in 2007 and early 2008 as longtime investors lost faith in his strategy to "short" the housing market and began demanding their money back. Even after the market crashed and Burry's strategy was vindicated with a $720-million profit, not a single investor called to say thanks.
"What had happened was that he had been right, the world had been wrong and the world hated him for it," Lewis writes.
There is nothing subtle about the dark portrait Lewis creates of the financial community. Through his lens, all bond salesmen are out to cheat their customers, all top executives are clueless and all ratings analysts are second-raters who could not get jobs in investment banks.
Even footnotes drip with sarcasm. Of a less-than-forthright statement by Morgan Stanley chief executive John Mack to investors, Lewis writes, "It's too much to expect the people who run big Wall Street firms to speak in plain English, since so much of their livelihood depends on people believing that what they do cannot be translated into plain English."
Even discounting for its generalizations and exaggeration and limited frame of reference, however, "The Big Short" manages to give us the truest picture yet of what went wrong on Wall Street - and why. At times, it reads like a morality play, at other times like a modern-day farce. But as with any good play, its value lies in the way it reveals character and motive and explores the cultural context in which the plot unfolds.
What Lewis writes of two of his characters, young Ledley and Mai, might just as well apply to Lewis himself, or to us:
They "had always sort of assumed that there was some grown-up in charge of the financial system whom they had never met; now they saw there was not."