Book Review: The Big Short by Michael Lewis

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This is a fascinating book about the financial crises that hit the U.S. economy full force in 2008. Describing the many people and institutions involved, Lewis eloquently presents the complex system of calculation errors, lack of attention, and greed that drove the collapse. At the time a few people kept asking questions and challenging the assumptions, in fact these people purchased insurance that the real estate loans would default. These few people were immensely rewarded for their insight, a bittersweet reward seeing the loss on the other side of the equation. Lewis does a great job teaching the reader the complex configuration of the sub-prime mortgages and bond structuring. He has a way of making the reader feel smarter after reading his explanations.

Lewis unfolds this account through the views of three hedge fund managers. These individuals are not big players in the financial market, yet they were part of a very small group of people who saw the fallacy in the situation. The book introduces Steve Eisman, a Wall Street regular whose reputation for rudeness and social ineptitude was renown. People braced for his insults and endured his criticism of the sub-prime mortgage structure from the very beginning. Another individual introduced in the book is Michael Burry. Burry’s education was as a physician, but his knack for researching and picking stocks led him to investing. Later he learns he has Asperser’s Syndrome, accounting for his antisocial behavior. Through his diligence and quest for value investments, Burry becomes the first to purchase insurance against the mortgage defaults. Greg Lippman is a Wall Street salesman and promoter of purchases insurance against the collapse, seeing how the structure was not sustainable. The last group is a young hedge fund company in California, owned by Charlie Ledley, Jamie Mai and Ben Hockett. They stumble onto the opportunity and question why no one else sees it as they do. All of these players become wildly rich with the fall of the financial market. Getting rich in this manner is something that Lewis describes as difficult for them because of the devastation that occurred.

A book like this provides a number of lessons for its reader. Clearly the reader learns about real estate, mortgages, and the financial business of re-packaging mortgages for investors. For me this was fascinating and answered a number of questions I had regarding the recession and the sub-prime mortgage market. However the bigger lesson is on leadership. As leaders we have to understand how our organizations work, what is the underlying mechanism for what we do, and they way the company fits into the community. In addition we need to attend to the people who question the foundation. That is not to say that every question is accurate or should cause the organization to change course. However, we cannot disregard rational thought. I was impressed by the diligence of research these people had in understanding companies before they made investments. We need to do the same with our own companies; understand what is really happening. I will dig deeper in the future.