Review of Michael Lewis' "the Big Short"

The title of Michael Lewis’ “The Big Short: Inside the Doomsday Machine”, immediately sets the precedent for the non-fiction novel. The term doomsday machine implies a hyper scientific mechanism with the sole objective of effectively destroying the world. Nonetheless, Lewis’ narrative exposes a far more sinister doomsday machine. An “end of the world” machine denotes definitiveness; however, the machine that caused the stock market crash had detonated several times before, most recently in the 1980s. “The Big Short” chronicles the toxic interworking of Wall Street that led to the financial crisis in 2008.

The Wall Street doomsday machine operates in the darkest trenches of greed where intelligent – and heedless, men foresee the imminent fate of the United States stock market but are too paralyzed with fear to speak; here the unlikely heroes of Lewis’ book seized success. These intellectual opportunists understood the inherent risks and implications of subprime mortgages and efficaciously bet against the machine with the ultimate goal of success based on the failure of the market.

The countdown to detonation began when lenders began to make loans to individuals with low creditworthiness or little documentation – subprime mortgages. The subprime mortgage market was generating half a trillion dollars’ worth of new loans per year. Wall Street exacerbated the situation by turning subprime mortgages into toxic financial products through laundering and reselling. This action of highly leveraged trade derivatives continued to grow as the quality of the primary loans became doubtful. Wall Street churned these financial products as far as possible even after it became increasingly apparent that the housing bubble in the United States was going to burst.

Steve Eisman was the first character introduced by Lewis. Early in his career, Eisman realized that there was no conceivable way to audit giant Wall Street firms, which explains the phenomenon of the unchecked over-production of volatile financial products. With the help of Vincent Daniel, Eisman discovered that an entire industry existed to essentially cheat the unassuming, which infuriated Eisman, so, be began his quest to destroy the consumer finance industry.

The borrowers that Eisman empathized with were destined to default with no way to pay their debts. Thus, when Gregg Lippmann came to Eisman’s office and pitched his “Shorting Home Equity Mezzanine Tranches” presentation, it was the perfect opportunity for Eisman to work against the system. Eisman realized he could make a fortune by buying credit default swaps in the worst pieces of subprime mortgage bonds, as long as the rate of increase for home prices slowed and enabled the vast majority of Americans to default on their home loans.

Michael Burry, a doctor turned money manager was the next protagonist introduced to readers. Burry’s exploration into the financial market began with blogging. He learned every aspect about how money was borrowed in the United States. Burry was trying to determine how to short subprime mortgage bonds. He soon realized he could purchase credit default swaps on subprime mortgages because lending standards had declined so alarmingly. Using money from a settlement that his family received when his father died after misdiagnosis, Burry began a fund named Scion Capital, with a call out to investors with a minimum net worth of fifteen million dollars.

The last of Lewis’ central characters are Jamie Mai and Charlie Ledley, who begin a “garage band hedge fund” − housed in a shed in the back of a house − with a Schwab account containing one hundred and ten thousand dollars. By using cheap options to buy or sell to bet against anything with a price that was poised for dramatic change, Mai and Ledley brought themselves and their fund to Upper Manhattan, New York. Burry’s practice of purchasing credit default swaps in the subprime reached Mai and Ledley, who were both eager to bet against a new, but parallel system.

Steve Eisman, Michael Burry, Jamie Mai and Charlie Ledley were all very different, but they shared similarities that enabled their success. The most important mutual quality was dedication to self-education. They were college educated figures but the learning they did, which is directly attributed to their success, was done outside of the academic realm. Eisman for example, divulged himself into credit analysis on mortgages in order to fully understand the trends of borrowing market. Burry concurrently juggled medical residency, and a thorough blog on investing. He used all of his free time in his schedule to read books, articles and financial fillings.

By the end of 2007, Eisman’s fund FrontPoint had doubled in size, from $700 million to $1.5 billion. Likewise, by mid-2008, investors that had stuck with Burry had gained a net of approximately 490 percent. In 2007 alone, Burry made his investors at Scion Capital a total of $750 million. Mai and Ledley’s bet against subprime mortgage quadrupled its capital, from $30 million to $135 million. The time they committed to educating themselves enabled their successes in shorting the system.

Ultimately, history mandates that another detonation of the doomsday machine is inevitable. The stock market will fail again; it is just a matter of when it will happen. For this reason, the business practices used by Steve Eisman, Michael Burry, Jamie Mai and Charlie Ledley were amply lucrative and rewarding. They acknowledged the trend of periodic failure and found a way to make a fortune off of the inverse relationship of their bets and the subprime mortgage market. As Charlie Ledley put it, “’the best way to make money on Wall Street [is] to seek out whatever it [is] that Wall Street believed was least likely to happen, and bet on its happening. (Lewis, 108)’” Hence, the next time the market fails, you can bet there will be people there to collect from their big shorts because none of this would be possible without the motivation of greed.

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