Betting Against the House

The Big Short: Inside the Doomsday Machine by Michael Lewis
My rating: 4 of 5 stars

“Be fearful when others are greedy and greedy only when others are fearful.”
- Warren Buffett

Some of the most valuable financial lessons I ever learned came from comic books back in the ‘90s when a bubble fueled by idiotic speculation on crappy books marketed as ‘collector’s editions’ eventually burst. It left me with several copies of all the variant covers for Jim Lee’s X-Men #1, and the realization that something is only as valuable as what someone will actually pay you for it. It was also eye opening to discover that a large company like Marvel would cut its own throat in the long term by compromising quality which alienated its most loyal readers for a short term gain and resulted in the company filing for bankruptcy in ’96. (Don’t worry. They landed on their feet.)

A decade later I didn’t pay much attention to the real estate market because I wasn’t a home owner at the time, but occasionally I’d see or read some news about the fantastic housing market that was booming. People were seeing the value of their homes skyrocket, house prices were soaring, they were still selling, and a whole lot of people were getting very rich as analysts promised that the gravy train would roll on forever.

“Well, that’s not gonna end well,” I’d think remembering all those bagged copies of The Death of Superman and Image comics sitting in my parents basement. Sadly, it didn’t occur to me to try and capitalize on those idle thoughts, but I’d like to think that if I had met any of the guys featured in this book about that time I’d have drawn on that experience and handed them my every dime I had to bet on the whole thing falling apart.

Michael Lewis has written a succinct and fascinating explanation as to why and how a handful of people recognized the coming financial crisis years before it hit and found ways to profit enourmously from it. Some were smart and cynical Wall Street insiders who knew that a whole lot of people in their industry didn’t even realize the risk that their institutions had taken on when they were buying up blocks of subprime mortgages. An eccentric former medical doctor turned hedge fund manager was sure mortgages being handed out to anyone who asked would became a wave of defaults when the low teaser interest rates expired after a couple of years. A couple of outsiders who had made a small fortune by playing stock market longshots saw the upside in laying out a relatively low amount of cash that would pay off big if things went south.

You might wonder at why no one sounded an alarm if they saw the collapse coming, and the short answer is that they couldn’t get anyone to listen to them when they tried. It was so inconceivable to the banks and Wall Street that the real estate market might collapse that these people pretty much had to invent ways to bet on it happening. Even the ones who could see the writing on the wall would find themselves frequently shocked at the levels of greed and stupidity they’d encounter as well as the utter lack of government oversight that might have prevented it.

There’s a lot of fascinating human elements behind all of these stories, and Mike Burry, the doctor turned financial guru, is a particularly interesting person to read about. Obviously there’s many complex financial pieces that have to be explained and much of it was so complicated that even the people involved didn’t understand all of it. So there's a few parts where I found myself scratching my head. However, just as he made the story of finding new ways to measure the performance and value of baseball players in Moneyball interesting Lewis also manages to make his explanations of things like credit default swaps readable.

It’s slightly depressing to read since it’s a reminder of the whole meltdown in 2008, but it’s nice to hear that at least a few deserving people got something out of the whole mess.

I’d also highly recommend the film adaptation of this which mined the story for black humor and found very clever ways to explain the financial pieces.

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