What 'The Big Short' Is Missing

Includes: DIA, QQQ, SPY
by: Rolfe Winkler, CFA

As Felix points out, Michael Lewis has done well in his new book “The Big Short” to describe how the subprime crisis metastasized into the larger financial crisis. And in profiling some of the traders that made money in the process, he puts a human face on the short side of the trade. But Lewis pulls one crucial punch, undermining the value of the book.

First the good. Lewis breaks news by naming the guy behind the losses that nearly brought down Morgan Stanley. A bond trader named Howie Hubler, who escaped with a rich exit package despite nearly bankrupting his employer, thought it wise to short low-rated tranches of CDOs against higher-rated tranches. He didn’t realize the CDOs were entirely worthless, including the AAA tranches, because they were simply repackaged subprime detritus. A pile of garbage is still a pile of garbage, whether it’s AAA-rated of not.

What Lewis doesn’t do as well is make the connection for readers that his protagonists, i.e. the guys who spotted the subprime crisis early and shorted it via CDS, actually harmed society. Felix puts it well in his review:

What these men did was not “socially useless,” to quote the chairman of the UK’s Financial Services Authority, Lord Turner. It was worse than that: it was actively harmful, since they provided the fuel which kept the subprime mortgage furnace burning even when the country was running out of new junk mortgages to write. In most financial markets, bearish bets act as a dampener; in this one, they were a necessary part of the subprime-mortgage machine, and a Deutsche Bank mortgage trader named Greg Lippmann ended up making billions of dollars for his employer — not to mention a $50 million bonus for himself — by aggressively going out and finding fund managers to put on the short bets needed to keep the market ticking.

Smart readers can make the connection, but Lewis fails to criticize them directly as, ultimately, they provided the source material for his book.

One of these guys, Michael Burry is featured in the 60 Minutes piece on Lewis’s book. Seems like a nice enough guy, but he’s smart enough to know that in making his killing betting on CDS, he was helping to destabilize the financial system.

I’ve read the book and, overall, it is very good. Lewis is a fantastic writer capable of making abstruse material accessible to a broad audience. But he should have gone farther. He should have criticized his subjects for perpetuating a market that they knew was harming the country.

Here’s Part 1 of 60 Minutes’ piece:

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And Part 2:

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