Jun 02, 2010
The Big Short: A different book about the housing crisis
02 Jun 2010
Posted by Andrew Kantor
A friend of mine is always pointing me to interesting books, and he turned me on to Michael Lewis with Moneyball and then The Blind Side, both of which I enjoyed a-plenty.
Lewis’s latest book is The Big Short. It’s about — as you might expect — the financial crisis. But it’s not Yet Another Book About How It All Happened. Instead, just as The Blind Side gave insight into football by telling the story of Michael Oher, The Big Short tells the story of the Great Recession by telling the story of money manager Michael Burry.
Burry, in a nutshell, actually looked at financial statements and realized that a big bubble was about to burst. He found a way to short the market, and bet against the bonds that were backed by the worst mortgages. And he made a ton of money.
The amusing thing, in a twisted sort of way, is that Burry couldn’t understand why no one else was seeing what he was seeing.
But as early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry’s view, standards had not just fallen but hit bottom.
“What you want to watch are the lenders, not the borrowers,” he said. “The borrowers will always be willing to take a great deal for themselves. It’s up to the lenders to show restraint, and when they lose it, watch out.” By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.
(That comes from the Vanity Fair excerpt of the book, btw.)
[A] lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to justify handing them new money. “It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” Burry said. He could see why they were doing this: they didn’t keep the loans but sold them to Goldman Sachs and Morgan Stanley and Wells Fargo and the rest, which packaged them into bonds and sold them off. The end buyers of subprime-mortgage bonds, he assumed, were just “dumb money.”
So if you’re still interested in this financial crisis that is playing havoc with your life, but are tired of those “expert” books explaining it all, you might want to give The Big Short a shot.