Tuesday, June 1, 2010

Bag O' Books: "The Big Short" by Michael Lewis

Michael Lewis' great talent is to take abstractly nerdy topics and turn them into bestsellers by grafting a compelling human narrative on them. "Moneyball" took baseball stats revolution and made Billy Beane into a hero; "The Blind Side" took a look at football's left tackle position -- a position that even most die-hard fans don't watch that closely, except in slow-mo instant replays -- and turned it into an Oscar for Sandra Bullock. So it's difficult to read "The Big Short" -- a chronicle of the subprime housing market collapse, and how it nearly took the entire financial system down with it -- ­and not  think of the movie possibilities.

Certainly there's characters aplenty, each with wacky distinctiveness but who share a common bond: They were the few people who saw the collapse coming -- despite the "nobody could've known" rationalizations afterward -- and who got rich because of it. There's Michael Burry, a one-eyed former doctor with Asperger's syndrome whose condition gave him advantage: he was one of the few financial analysts obsessed enough to sift through subprime bond documents to discover how tenuous the market was. There's Steve Eisman, whose great talent in life was to be an asshole contrarian. There's Eisman's sidekick, Queens-bred Vinny Daniels, who entered the financial industry not from an Ivy League school but from SUNY-Binghamton. And there's Charlie Ledley, a "diletantte" who made his fortune with shrewd guesses about which companies would rebound from disaster better than others.

Cross the cast from "The Dream Team," maybe and stick them in "Wall Street," and "The Big Short" is what you get. (And it's probably no accident that two movies from the 1980s fit perfectly here: As Lewis makes clear, the subprime collapse marked the end of the exuberant "financial 1980s" some 20 years late.)

Only Lewis' cast of characters is real. And they got rich predicting the collapse of the subprime market because they did what very few individuals -- and even fewer big banking institutions -- did: They tried to make the subprime market explain itself. Why are subprime bonds given such good ratings? Why isn't there better information about the quality of loans that are bundled into the bonds? Why is the process so opaque? The answers they got didn't make sense, but nobody else was asking the questions because everybody was making too much money. Until they weren't. (The similarity to "Moneyball" is astounding, actually, except that the fate of capitalism itself rests in the balance.)

In the end, the success (until it failed) of the subprime bond market depended on a bit of weirdness: Housing prices had gone up, up, up for 60 years, and nobody thought they would ever go down. Combine that faulty assumption -- computer models used by big banks wouldn't even let you input a decline in home prices to see what would happen to the value of the subprime bonds -- with the collapse of lending standards, and, well, what happened was always going to happen. Lewis describes an immigrant strawberry picker who got a loan to buy a $700,000 house ... on an income of $14,000 a year. How did that happen?

One thing the book drives home -- something that we want to forget -- is how close the entire financial world came to collapsing in 2008. One of Charlie Ledley's partners calculates that the city of Chicago has eight days of chlorine available to treat the city's water supply -- a calculation he makes because he thinks it might be relevant. Other characters come to question the viability of democratic capitalism -- even as they're making a killing -- because the heart of Wall Street's (and thus America's) economic engine was dependent on opacity, near fraud and Ponzi-like scheming for success.

We're still fighting about how to regulate the financial markets, but Lewis doesn't offer much in the way of solutions -- only anger about the messed-up nature of the system. That's ok: movies don't need to offer solutions. And Matt Damon would be great as Michael Burry.


Notorious Ph.D. said...

I want to play Nerdy Analyst #3.

emawkc said...

Near fraud? I'd say more like blatant fraud.