Monday, April 12, 2010

Book Review: The Big Short

The greatest virtue of Michael Lewis’s The Big Short is the human element. The greatest problem of Michael Lewis’s The Big Short is the human element.

Lewis is one of the better writers operating today, and it shows in The Big Short. Few writers are as good on a sentence-by-sentence level as he is, and certainly I’d love to direct several fiction writers to study his prose. But he’s good in a macro sense as well: drawing the characters, keeping suspense up (though strictly speaking there can be no suspense whatsoever—we know the subprime market will go boom), transitioning well…really, it’s a master class. Lewis makes a very good choice before he even wrote the book: rather than focusing on the Wall Street types, he focuses on the outsiders who shorted the Wall Street types. There are two benefits here: for one, they’re generally more sympathetic and interesting. For two, it reminds that the “Who could’ve known?” defense is utter BS.

It’s in Lewis’s tight focus on these characters to tell the story of the subprime market that the book is flawed. Well, I suppose it depends on your definition of a flaw. Problematic, perhaps. The Big Short is an excellent book to read as an introduction to the financial crisis or as a companion to your efforts on understanding the financial crisis, but it shouldn’t be the end of your understanding. Lewis—I assume—knows this, but it’s something worth keeping in mind.

We get a partial view of the crisis through this book: the human side of the shorts interacting with the Wall Street banks they intend to make money off of. This presents a problem. Reading the book, you’d get the impression that Wall Street is full of incurious idiots bumbling around in a decadent society, dancing on top of a rickety platform. This happens to be mostly true. But the problem is this: Orwell once said of Dickens that he believes that “if men would behave decently, the world would be decent.” This is a frustrating view, as decent chaps have always been in short supply. And well-meaning decent chaps often frustratingly get swept up in all sorts of manias and fads (see: oh geez, Toqueville, Wall Street, most of the noir catalogue…). So hoping for a better class of Wall Street moneychanger may not be the best solution to this crisis, though you might be left with that impression at the end of the book.

Practically the only suggestion Lewis has in the book is that investment banks should switch to a partnership structure rather than a publicly-traded corporation one, on the basis that a partnership would’ve never hired Lewis in the first place. Fair enough. But it’s also worth noting that the problems only really began with investment banks; you’d have to get to AIG, various hedge funds, and so on and so forth before you were done. This, again, appears to be unsatisfactory.

But as Lewis writes, you steadily get impressions of things you’d like to change, policy-wise, that serves as a substitute. For example, Lewis mentions three or four times the role that stagnant wages played in the crisis: a loan or a refinancing makes someone with a stagnant paycheck feel richer. Or, take Lewis’s description on page 62 of the bond market (which, in contrast to the stock market, is relatively unregulated)
The bond market, because it consisted mainly of big institutional investors, experienced no similarly populist political pressure. Even as it came to dwarf the stock market, the bond market eluded serious regulation. Bond salesmen could say and do anything without fear that they’d be reported to some authority. Bond traders could exploit inside information without worrying that the would be caught. Bond technicians could dream up ever more complicated securities without worrying too much about government regulation—one reason why so many derivatives had been derived, one way or another, from bonds.
Suggestive, no? There are similar paragraphs in the book about the operations of say, ratings agencies that are similarly so. Leverage comes in for a hit…many if not most of the usual suspects come in.

Well, except for politicians. They are absent, though understandably so for the story Lewis wants to tell. Nevertheless, they’re a critical part of understanding this whole story.

Ultimately, however, you can’t help but shake your head at the culture. A dichotomy: one of Lewis’s shorts is a man named Michael Burry who begins shorting in 2005. His investors raise hell throughout the years until Burry begins to complain of depression and anxiety. Burry makes his money, but he does so angry: he closes down the fund and exchanges angry e-mail with his investors. The events leave him more angered than triumphal. Meanwhile, we’re introduced to at least two traders who made twenty million dollars or so by buying subprime for their clients; after the crash, one of them was fired but kept his money—the other started up a new fund hoping to buy up dirt-cheap subprime loans off the hands of those he’d been managing for. I know of no regulations punishing incompetence in hindsight being proposed, and obviously they’d be difficult to make. Two investors in the book band together to try to sue the ratings agencies, but are told it’d be impractical. There’s no law against their brand of incompetence, as it turns out. Which I guess is the prevailing attitude to take: the stuff you’d really like to do turns out to be impractical, so maybe the best thing to do is to hope for a better class of moneychanger.

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