The non-fiction world first became aware of Michael Lewis’ immense talent for creating riveting, inviting prose about arcane subject matter with his first book, Liar’s Poker, a bestselling account of his stint as a bond salesman at Salomon Brothers in the ’80s. Even though his beat continued to be Wall Street, his books Moneyball and The Blind Side were embraced by sports fans (and the latter by Hollywood, who made it into a weepy drama by excising all the financial journalism). So it’s with a sense of relief that Lewis returns to his old stomping grounds 20 years on for The Big Short: Inside The Doomsday Machine, potentially the best book-length account of the financial collapse that started with overrated mortgage-backed securities a few years ago and ended with the failure of venerable investment banks and the worst economic contraction since the Great Depression. Unfortunately, Lewis has an easy time finding his thesis: Since the last time he wrote about the bond market, thinking it was the end of a crazy era, things have gotten so much worse.
The Big Short functions as a book-length annotation to This American Life’s Peabody-winning story “The Giant Pool Of Money.” Lewis adroitly pins his explication of complex financial instruments on several key individuals who realized that the assumptions governing mortgage-backed securities were bullshit: Namely that housing prices would never fall, and certainly not all at once. These folks—a trader at Deutsche Bank, a hedge-fund analyst, an Asperger’s-afflicted mutual-fund manager, an undercapitalized trio of investors operating out of a garage—started bugging the investment banks for instruments they could buy to short this market. When the Wall Street firms responded, at first reluctantly and then gleefully, by creating credit default swaps, the handful of people who put big bets on the line went through the looking glass. The insatiable global appetite for securities meant that American household debts were packaged and resold as a bond. Then those bonds were chopped up and resold to mask the massive risk that no money would ever make its way back to the lenders. And to feed the market in these securities, more and more mortgages had to be extended to less and less credit-worthy individuals—subprime mortgages with a low “teaser” initial interest rate that turns into an 18 percent adjustable rate two years in, “no-doc” mortgages where the borrower needed to show no proof of income to get the loan, interest-only mortgages where buyers could choose not to pay the principal down at all. In short, the kind of loans that allowed a Mexican strawberry picker with an annual income of $14,000 to own a $700,000 house.
In retrospect, the huge market in supposedly triple-A safe-as-cash bonds based on this madness seems unbelievable. But Lewis reminds us on every page never to underestimate financial markets’ desire to believe that the rules of the game have finally been suspended. It happened during the Internet bubble, and again during the housing bubble, when people like Alan Greenspan (for whom Lewis has nothing but contempt) remained willfully blind to the mass delusion, negligence, and arguably outright fraud that justified taking investors’ money for this junk. Have we finally learned our lesson, the way Lewis was sure we’d learned it after the debacle the ’80s left in its wake? The Big Short’s epilogue holds out little hope; our appetite for easy money and our desire to ignore how the sausage is made are both too great.