The Big Short is a text by Michael Lewis. It is a piece of nonfiction that deals with the financial crisis of the early 2000s. Lewis examines a number of the most important issues and players in the financial crisis, looking into the major reasons that the credit and housing bubbles burst; Lewis takes a slightly different approach to the issue, however, because he is heavily concerned with the personality of the individual who bets heavily against great odds, as some financial analysts did in the time leading up to the financial crisis and the burst of the housing and credit bubbles.
The Big Short follows a number of important people who predicted the crisis itself. One of these people, Meredith Whitney, even went so far as to predict the downfall of some of the biggest players in the market. Lewis is very concerned with people like Whitney; he is curious as to how they arrived at their predictions and where they got their information from. He also postulates that all the signs and symptoms of the coming burst bubble were there, but that many people in the industry were unable or unwilling to predict the market’s downturn, for fear of triggering it.
Lewis is no newcomer to Wall Street. He was well-acquainted with the atmosphere on Wall Street, as he worked there for many years, beginning in the 1980s. The Big Short examines the ways in which Wall Street encourages greedy behavior from those who are meant to be acting as stewards; his writing style is very interesting, because he is primarily a sports writer. He utilizes this engaging style and keen understanding of games and game theory to weave the tale of the greed and corruption that took place on Wall Street in the years leading up to the housing and credit crises.
Lewis says one of the biggest problems on Wall Street in the years leading up to the crises was the issue of ego. “Too big to fail” became one of the phrases that was bandied about when the markets crashed, but it was an attitude that led investors at the highest levels into trouble in the first place.
Investors on Wall Street, Lewis says, were encouraged to bet big on the markets; when they lost, their losses were chalked up to a normal part of the Wall Street investing game. However, Lewis postulates that there’s nothing normal about a $9 billion-dollar loss on a single trade, something that Lewis states should never happen in a system that is working properly.
Another individual that Lewis talks about at length is Michael Burry. Burry is an investor who saw the bubble in the sub-prime mortgage market, and began to bet against the success of the market. As a result, when the market crashed, Burry made a significant amount of money on the failure of the market.
Lewis asks Burry and others like him how they found the holes in the market before other analysts did. Burry and the others like him-- those who foresaw the impending crisis and bet against the market-- all said similar things: there were patterns of significant decline in the market, and symptoms of huge bubbles, particularly in the credit and subprime housing markets; financial analysts simply did not want to bet against a market that was doing well.
Lewis notes that the individuals who were able to foresee the credit and housing bubble crises shared some defining characteristics. First, he said, they all had traumatic or otherwise trying experiences in their lives that made them self-sufficient and self-reliant. Secondly, they are all obsessive about patterns; they collate, quantify, and track patterns that other people cannot see. Another trait that they all have is that they have the ability to understand that the future holds change, and that drastic change can and will happen suddenly.
Lewis is adamant that we learn from the financial crisis, and he provides all the tools necessary to do so. However, he notes that there must be some serious changes to Wall Street if we are to avoid similar problems in the future.
References
Lewis, M. (2011). The big short: Inside the doomsday machine. New York: W.W. Norton.
