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#3 The Big Short

The Big Short

By Michael Lewis
W.W. Norton, 2010

I used to know a pair of aspiring plutocrats who’d occasionally trade books about rich investors managing, through their cunning, to get even richer. “He’s a very interesting guy,” the first would say, handing over the book with a knowing squint; “… he’s doing very interesting things.” The other would nod, knowingly. Even more then these backseat investors wanted knowledge of the market, or useful tips, they wanted a sense of being in on the deal, at the table, planning the big heist with their compatriots; and The Big Short is a book made with this kind of reader in mind. I wish I still knew those guys, because I’d be curious to know how they fortified themselves to read it through. They were not bad people, unlike every single person in The Big Short, all of whom are repellent, and all of whom – most disturbingly – are still at work in the financial world.

As Michael Lewis shows, perhaps intentionally, all of the traders and hedge fund managers and analysts involved in the subprime mortgage fiasco and its worldwide meltdown are possessed of a crassness, crapulence, dishonesty, and most of all a cynicism that has real power to shock; this is true even of those characters I’m forced to guess were meant to be The Good Guys (“good” because they end up profiting in the end). “The fixed income world dwarfs the equity world … The equity world is like a fucking zit compared to the bond market.” So says a bond trader, one of the many we meet in this book.

“All of them were, by definition, odd,” says Lewis, who attempts to draw these ghouls as Thurber might, with their mismatched socks and endearing tics. He’s not a bad writer, but his task might have been easier to perform convincingly if the creatures in question weren’t morally repugnant. I kept wishing this book were political, I kept wishing it were a call to arms. But it’s a caper story, and that’s why it’s selling out all over.

In 2007 the world economy collapsed, as we all know. As we also know, this was due to the fact that big Wall Street investment firms had been brokering deals involving the extension of home loans to people who could not possibly ever pay them off. Once those loans were on the books, Wall Street firms figured out a way to bet on and bet against them and to profit hugely regardless of what happened. This is called hedging. The trouble here (aside from the fact that such loans even existed – for which you can thank both opportunistic loan sharks and the widespread mentality of what George W. Bush dubbed The Ownership Society) is that so many bets and hedges existed there was not enough money in the world to pay every gambler when the wheel stopped. Well then why would the house (or houses) allow so many bets? Because cynical and dishonest people had created an architecture of legal language and mathematics to conceal even from themselves what was happening so that there would be no deterrent. The most informed analyst, writes Lewis, “concluded there was effectively no way for an accountant assigned to audit a giant Wall Street firm to figure out whether it was making money or losing money.” One of Lewis’s characters is a one-eyed man, and he makes the obligatory “land of the blind” pun, but the joke falls flat.

Again and again, we hear comparatively honest analysts voicing admissions like, “in the bond market it was still possible to make huge sums of money from the fear, and the ignorance, of customers,” or “that’s when I decided the system was really, ‘fuck the poor.’” Subprime lenders were even making equity bets on mobile homes – and mobile homes do not appreciate in value, ever. The reader doesn’t even know what to do with this information and so just keeps reading on, numbly.

Lewis does succeed in explaining things well, as below, where he describes the safety of the economy as predicated not on a stable housing market or a rising one, but an irrationally rising one:

Since 2000, people whose homes had risen in value between 1 and 5 percent were nearly four times more likely to default on their home loans than people whose homes had risen in value more than 10 percent. Millions of Americans had no ability to repay their mortgages unless their houses rose dramatically in value, which enabled them to borrow even more … [analyst Eugene Xu produced] a chart illustrating default rates in various home price scenarios: home prices up, home prices flat, home prices down. [Investor Steve] Lippmann looked at it … and looked again. The numbers shocked even him. They didn’t need to collapse; they merely needed to stop rising so fast.

So a bunch of investors, who I suppose we’re intended to be rooting for, devise a shrewd way to bet against the firms that are betting on the subprime housing market (sort of) and wind up rich. How rich I can’t say, because after shutting The Big Short, numbers that end in zeros no longer feel real to me. And if a few hours of reading can have that effect on a reasonably intelligent and reasonably worldly person, I can only imagine how unreal those numbers seem to the people who push them around and tack zeros on. I don’t know how much money these people think is “a lot” or “enough” – maybe such sums don’t exist.

I’ve read about bankers before and I’ve even been close friends with a few, but The Big Short showed me a world that was surprisingly dark and strange to me, and I feel more than a little sullied and unsettled by it. Everyone’s a “guy” and everyone’s on the make and everyone cusses and bitches as they lie. Lewis knows who they are and describes them well, which is to his credit, but he errs in trying to turn this world of sad and angry people into the setting of a goodtime caper story. Take the little anecdote that analyst Danny Vincent tells below. Read once, it’s fun; read for 250 pages, it’s not fun anymore:

When a Wall Street firm helped him to get into a trade that seemed perfect in every way, [Danny] asked the salesman, “I appreciate this, but I just want to know one thing: How are you going to fuck me?”

Heh-heh-heh, c’mon, we’d never do that, the trader started to say, but Danny, though perfectly polite, was insistent … And the salesman explained how he was going to fuck him. And Danny did the trade.

John Cotter is an editor at Open Letters. His first novel, Under the Small Lights, was recently published by Miami University Press.

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