I don’t know much about the intricacies of Wall Street and the world of subprime mortgage bonds, collateralize debt obligations (CDOs) and credit default swaps, but Michael Lewis’ The Big Short does a excellent job of highlighting what went wrong in the last decade that led to our economic crisis.
Many people lost homes they shouldn’t have held mortgages on in the first place, and the banking and finance industry was rewarded for its carelessness with a whimsical, multi-billion dollar government bailout. You finish The Big Short realizing the financial industry is one big sausage factory whose end product is something you’re not really sure what’s inside, but tastes great until you discover it might actually be bad for you.
In many ways Wall Street is a lot like legislation in Washington, DC, where no one completely understands what’s happening, but somehow everyone makes money off the deal.
Two excerpts best summarize the book’s gist:
The line between gambling and investing is artificial and thin. The soundest investment has the defining trait of a bet (you losing all of your money in hopes of making a bit more), and the wildest speculation has the salient characteristic of an investment (you might get your money back with interest). Maybe the best definition of “investing” is “gambling with the odds in your favor.” The people on the other side – the entire financial system, essentially – had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich.
More to the point, from former Salomon Brothers CEO John Gutfreund, featured prominently in Lewis’ first book Liar’s Poker:
It’s laissez-faire until you get into deep shit.
There’s a great 60 Minutes interview with Lewis and others featured in the book: