[Front Cover of The Big Short]

The Big Short is Michael Lewis’ engaging tale of a handful of investors who saw the madness in lenders offering toxic mortgages (such as, and I’m not making this up, the interest-only negative amortizing adjustable-rate subprime mortgage) and rating agencies handing out triple-A rating on these mortgages like candy on Halloween Eve. The subprime mortgages were then sold to investors around the globe who, perhaps blinded by the pristine credit rating, were glad to bear the risk in these securities for little more than a few basis points premium over Treasury bonds.

Some savvy investors found a way to make explicit bets against subprime mortgages through credit default swaps that investment banks, often the same ones that had assembled the subprime mortgages into bonds and sold it to other investors, were only too happy to put together. As a rule, these individuals were Wall Street outsiders — one was Michael Burry, a one-eyed doctor with Asperger’s syndrome who had launched a hedge fund with initial capital raised primarily on his postings on Internet message boards. Michael Burry invested mainly in stocks and managed to handily beat the S&P in his initial years but in 2004, he started noticing the decline in lending standards and started hounding investment banks to sell him credit default swaps on the crappiest subprime mortgages eventually building a $1 billion short position, which was costing him just 2 percent annually (i.e. for a premium of $2 per year, Michael Burry could collect $100, if the underlying bonds defaulted). When the bonds eventually defaulted, as Michael Burry was sure they would, he realized profits of about $720 million.

It must have helped that the author has a background in bond trading because he does a good job in explaining the mind-numbingly complex derivatives brewed up by Wall Street’s finest that almost brought down the global financial system. I read this book on the recommendation of a reader (Thanks Gaby) and I’m glad I did. Though this book is not really about what caused the credit crisis, it is best one I’ve read so far on the events that led to the financial meltdown of 2008. The book retails for about $17.50 on Amazon.

Also see: Jon Stewart’s interview with Michael Lewis on The Daily Show. Canadian Business magazine recently interviewed Michael Lewis.

60 Minutes interview with Michael Lewis is embedded below (Part 1 and Part 2). Hat tip to Invest in the Markets.

Vanity Fair magazine ran a lengthy excerpt from the chapter In the Land of the Blind. Hat tip to Guinness 416.

Watch CBS News Videos Online

This article has 10 comments

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  2. That is an excellent read I’d recommend to anyone who wants to better understand the 2008 crisis… I’ve posted a CBS News interview with Michael Lewis on my website this week (Tuesday and Thursday). It’s worth a watch… Thanks for highlighting this great book!

  3. There’s a (long) extract from this book, focusing on Burry, on Vanity Fair’s website if anyone’s interested. It’s a very good read but then Lewis could make a book about his first holy communion engaging.

  4. Canadian Capitalist

    Thanks Doctor Stock and Guinness. I’ve included the links to the video and excerpt you mentioned. I agree that Lewis can make the most common subject come alive.

  5. I haven’t read it but I did read Gregory Zuckerman’s “The Greatest Trade Ever”, which documents how John Paulson pulled off the bet of a lifetime and transformed his hedge fund from a rather small player in the M&A arena to a $30 billion powerhouse as a result of the trade on subprime mortgages. Paulson & Co. is now one of the largest hedge funds in the world. The book examines not just Dr. Burry but also Geoffrey Greene, Andrew Lahde, and the mastermind of the CDS that Paulson purchased, Deutsche Bank’s Greg Lippmann. I found it to be a very entertaining read. Zuckerman is a reporter for the WSJ and one of leading commentators on hedge funds and the subprime crisis.

  6. It should also be noted that the rate of return for those who invested in Burry’s fund that shorted the CDOs was around 620%. Burry himself would make $70 million by the time he collapsed his fund even though he could have made much more.

    • Canadian Capitalist

      @Lior: Paulson is not in this book but Greg Lippmann, Steve Eisman and Cornwall Capital are. I heard about The Greatest Trade Ever from the WSJ just the other day. I’ll probably try and get it from the library. Thanks for the suggestion.

  7. I finished it in two days and I don’t usually read this quickly. That’s how much I liked it 🙂

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