‘The Big Short’ Tells Fascinating Tales About Market Meltdown

‘The Big Short’ Tells Fascinating Tales About Market Meltdown




Now that about 1½ years have passed since America’s financial system nearly collapsed, is there anything left to say about what went down?

Turns out there is.

In The Big Short: Inside the Doomsday Machine (W.W. Norton & Co., $27.95), best-selling author Michael Lewis (Liar’s Poker, The Blind Side and Moneyball) delivers fascinating tales of how a few specialized investors foresaw the collapse of the subprime mortgage market and then pocketed millions from their big bets.

Each of the players is something of an oddball:

•Steve Eisman, the book’s star, is a blustery stock-analyst-turned-hedge-fund-investor who’s inclined to Cassandra shout-outs in public forums. “already on Wall Street, people think he’s rude and obnoxious and aggressive,” says his wife, Valerie Feigen. “He’s not tactically rude. He’s sincerely rude.”

•Michael Burry, a money manager and former neurologist, is an obsessive loner with a glass eye and Asperger’s Syndrome, a developmental disorder that can affect a person’s ability to socialize. “My character is not to have friends,” Burry says. Lewis notes that Burry wore the same shorts and T-shirts to work for days on end and refused to use watches, his wedding ring or shoes with laces.

•Charles Ledley, Ben Hockett and Jamie Mai started their “garage band hedge fund” in a discarded behind a friend’s house in Berkeley, Calif. Hockett is apocalyptic, with an secluded farm where he and his family can hunker down, if necessary.

Each saw the bubble by a different lens. Eisman felt the subprime mortgage bond market “seemed mainly stupid or delusional.” Burry thought it “looked increasingly like fraud” perpetuated by bond trading desks. Ledley and his team believed the financial system was corrupted by “a cabal of Wall Street edges, rating agencies and government regulators.”

Each found ways to short the market and lay enormous bets that the bonds would crater – by purchasing credit default swaps on them. A form of bond insurance, credit defaults swaps could be purchased without owning the inner bonds.

In some situations, the players had to beg Wall Street firms to let them buy the swaps, because few bankers could understand why they’d want them.

Making these enormous bets didn’t always go over well with the funds’ impatient investors.

Burry was a hero when his Scion Capital wildly outperformed the market (up 242% over the first half of the decade, while the Standard & Poor’s 500 was down 7%.) But his investors turned after he shorted mortgage-backed securities that wouldn’t tank closest. “You know a lot of people are talking about withdrawing funds from you,” one investor said.

Those who held on profited big time. By June 2008, an investor who had stuck with Scion from November 2000 earned 489%, after expenses, compared with the S&P’s 2% return.

Like Charles Gasparino does in The Sellout, Lewis spreads the blame for the nation’s financial meltdown:

•Bond raters Standard & Poor’s and Moody’s misrated subprime bonds, magically turning BBBs into AAAs.

•Lax accounting rules let mortgage companies assume their loans would be repaid.

•The Securities and Exchange Commission ignored inflated valuations of collateralized debt obligations (CDOs), the structured finance vehicles that acted as viral agents spreading the American crisis to the global economy. The SEC “didn’t know anything about CDOs” when Hockett and Ledley complained to the agency, says Ledley.

•Wall Street firms were clueless about the enormity of their subprime woes. “They didn’t know their own balance sheets,” Eisman says.

•Insurer AIG, a major seller of credit default swaps on subprime mortgage bonds, didn’t believe home prices could fall across the country simultaneously.

Like Liar’s Poker, The Big Short views its subject cynically.

While the prescient investors made millions shorting the subprime market, the Wall Street firms made out pretty well, too. Most of the CEOs kept their jobs and the Federal save bought the edges’ bad subprime bonds, sparing them from having to recognize losses.

As Lewis writes, “Pretty much all the important people on both sides of the gamble left the table high.”




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