Michael Lewis's THE BIG SHORT, visiting the econopocalypse through the lens of LIAR'S POKER

Penguin* was kind enough to send me a copy of Michael "Liar's Poker" Lewis's The Big Short: Inside the Doomsday Machine yesterday, and I've just finished it, having stuffed it up my eyeballs as fast as I could.

Lewis is a gifted chronicler and debunker and demystifier of the world of finance. Twenty-odd years ago, in Liar's Poker, he revealed the crucial story behind the junk bond debacle, turning it into something human-scale for those of us who don't live and die by the pink sheets.

Now he's done it again, with The Big Short, looking at the econopocalypse with its unimaginable sums and (literally) incomprehensible financial instruments, and unravelling it into a story that, for the first time, really made sense to me.

The Big Short follows a handful of prescient contrarian investors who doubted the subprime bubble and sought out ways to bet against it (called "going short" on Wall Street). Contrarian investment is an old institution, but these people aren't just contrarian in their views on the market -- they're genuinely a little odd. Most of them are proudly obnoxious, one realizes halfway through that he has Asperger's, all are tough as nails, some still manage to be sweet, and all are, ultimately, likeable (if only slightly, in the case of the bond salesman who set out to find people willing to bet against the bubble that his employer had created).

In Lewis's book, these individual investors -- many of whom never come into contact with one another -- are financial detectives, each with his own specialization. One is convinced that it's all a fraud because he knows the people involved, personally, and thinks that they're crooks. Another has read the impenetrable prospectuses that accompany the exotic derivatives and realized that people are investing in garbage. Others are investigating the bond-rating agencies and coming to understand the institutional failures that lead them to be criminally negligent when it comes to rating these investments.

As each detective investigates his corner of the puzzle, Lewis pulls together the whole story, explaining how a combination of genuine fraud, negligence and dereliction (of the firms and their regulators), greed and groupthink turned the economy into a socialized casino where profits always ended up in the hands of a few institutions and their cronies, and the losses were absorbed by the rest of us.

Lewis is an extraordinary writer, and the people and stories he brings to life here had me as engrossed as I would be by a top-notch novel (I shocked someone on the plane this morning by doubling over with laughter at one particularly wild scene). But he's also a great explainer, and the story that he spins here turns the opaque markets into something that make a certain twisted sense -- something that's helped by his clear delineation of the parts that simply didn't make sense, the parts that were just bullshit, and designed to make you feel stupid.

The Big Short: Inside the Doomsday Machine

* Published in the US by WW Norton



  1. So why this sudden outbreak of “groupthink” all over the place? (WMDs in Iraq, economic bubbles, NASA quality control) Lack of critical thinking? Lack of individuality? Too many unqualified people in positions of power? Lack of integrity?

    Whatever it is, the world is paying a high price for it.

    1. I would say “all of the above,” much of it traceable to the active dismantling of the American educational system since the 1980s.

    2. “So why this sudden outbreak of “groupthink” all over the place?” Because there is ALWAYS groupthink all over the place. Behavioural economists show that we are often influenced by the herd, and often irrationally, and that this behaviour can be measured and predicted. Shiller (he of the famous Irrational Exuberance and Case-Shiller housing index) discussed this many times – this article is one I found accessible and cogent “How a Bubble Stayed Under the Radar”, NYTimes, March 2, 2008, http://www.nytimes.com/2008/03/02/business/02view.html?_r=1&ref=business&pagewanted=all

    3. “groupthink” is not a sudden phenomenon. It actually a pretty common human behavior. Charles Mackay wrote about this in his book Extraordinary Popular Delusions and the Madness of Crowds. It talks about group hysteria like witch hunts and economic bubbles of the past like Dutch Tulip bulbs and The Mississippi Company. To quote Mackay “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” They book is online and can be read at project Gutenberg http://www.gutenberg.org/etext/636

    4. Hypothesis: as systems and social networks become more and more complex, our rational mind’s capacity for dealing with them gets strained to the limit – and past a certain level of complexity, we simply find it easy to fall back on group consensus than to throw brainpower at a problem that’s probably over our heads anyways.

      It starts with only certain members of any group doing this, but as complexity increases, the percentage of people falling back on simple group-reinforcement behavior rises. Once a certain threshold is reached, the group-reinforcement behavior starts out-competing actual analysis, and the whole organization locks into self-protecting groupthink.

  2. I love the part where Bush directs Paulson to “lotto our way out of this son-of-a-bitch”.

  3. It’s more than a little disheartening to know that these same characters are now the ones running the “cap & trade” scheme that’s supposed to save us from greenhouse gases.

    1. That’s not the purpose of cap & trade. It’s just another mechanism of wealth transfer. The costs get passed on to anyone who buys energy or products that incorporate energy. (ie. Everything.) It’s a sales tax by another name. This sales tax will then be used to fund a new market (ie. casino) which will be manipulated by the usual suspects for the benefit of the same. When the FIRE economy collapses, you turn it into a FIRE+CC economy. Whatever else these people are, they aren’t dumb, and they don’t want to trade their Maseratis for tractors, as Jim Rogers suggests.

    2. It’s more than a little disheartening to know that these same characters are now the ones running the “cap & trade” scheme that’s supposed to save us from greenhouse gases.

      I think you’re starting to get it… :)


      I’m not sure this is a recent phenomena. “Group think” seems to have been with us since recorded history began, and one could speculate even earlier. If one were trying really, really hard to be optimistic, you could argue that the fact that many people are finally noticing it is a positive development.

    1. RE: lack of kindle version.

      Gives this quote on Amazon for it’s Kindle product a dash of irony:

      “This is the future of book reading. It will be everywhere.” Michael Lewis, author of Moneyball and Liar’s Poker.

      ‘Everywhere’ you say Michael, I’m sure there will be some exceptions..

    2. Well, while I’m not particularly of the persuation that one is entitled to have anything at any price that one wants and all that…

      … the book is in ePub format at Penguin Books at 25 pounds, which is a bit … pricey… I think.

      Pity cause I really want to buy it.

  4. In Liar’s Poker Lewis pointed out that while there was a law concerning trading on inside information in stocks there wasn’t such a law for bonds.

  5. But I heard on talk radio that the reason that there was a big melt down was directly connected to Fannie Mae and Freddy Mac having to give loans to people who couldn’t pay them! They want their listeners to look at their less fortunate neighbors. They don’t want their listeners to look at the Wall Street players.

    1. It’s not a dichotomy. Bad loans issued to people who couldn’t pay are the weak foundation of a huge, rickety structure. If they’d been good loans issued to people who could pay, then there would have been nothing fraudulent about the high ratings attached to those securities, they never would have gone bad, so credit default swaps sold against them wouldn’t have been called in, and bankers would not have to play games with their balance sheets to stay solvent.

      Some people got loans they couldn’t pay, others magnified the effect of those loans through complex financial instruments. There’s plenty of blame to go around.

      In my opinion, the chief blame lies with the lenders who discarding the traditional debt-to-income ratios and credit standards that served to protect the interests of both consumers and financial institutions. That is the traditional job of lenders, and they abandoned it completely. Bankers got paid to rubber-stamp loan applications. That is itself a form of fraud, no different than a “no show” job.

      1. If they’d been good loans issued to people who could pay, then there would have been nothing fraudulent about the high ratings attached to those securities, they never would have gone bad, so credit default swaps sold against them wouldn’t have been called in, and bankers would not have to play games with their balance sheets to stay solvent.

        And if me mam had wheels instead ‘o legs, she’d be a wagon.

        Yes, the loans were given to people with poor credit, but only an idiot stops here without wondering why there was such a demand for these loans. It’s because the banks were paying people to make them so they could market them. There’s a short supply of good credit out there, and the credit market, if it was opened to people with bad debt could explode. And it did.

        No one is denying that the loan companies issued bad loans, but the banks that flooded the credit markets with them knew exactly what they were buying. No one forced them to market those debts. In fact, most of the drive to create those bad loans came from banks that were flooding the market.

    2. Apparently, Fannie and Freddie put guns to the heads of all of those wall street execs, forced them to buy the bad debt, then forced them to lie to investors about how stable the market for bad debt was. I heard it was Bill Clinton who held the actual gun, even.

  6. The round earth thing is groupthink if you’re a flat earther. And let’s not even get into the Evolution echo chamber. ZOMG SHEEPLE! Don’t drink the koolaid!

  7. I’m not sure why he’s ‘Michael “Liar’s Poker” Lewis’. Shouldn’t he be ‘Michael “Moneyball” Lewis’. That book made a way bigger splash.

  8. Went to see him speak at Politics and Prose (DC bookstore) today.

    Big take away was when someone asked if anything’s changed since the market crash (like better regulation, or more responsible corporate behavior). After he got done laughing, Lewis said no, basically nothing’s changed. It should, and it might if we agitate enough for it.

    Bought the book after the talk was over.

  9. I actually bumped into lampposts and such immersed in this book while walking to work. Wrote this review:


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