THE VERY BIG SHORT

THE BIG SHORT

Lewis, Michael (2010) The Big Short, New York:

W.W. Norton

Although defined as non-fiction, Lewis builds a narrative of individuals who made a great deal of money by "shorting" or betting against a financial instrument. That means there are those in the market place who bet that a stock or bond will go down while others  hope that it will go up.

Although the book is filled with economic jargon there is generally a following sentence describing what it is and does in the market place. However in the middle of the book, there is one long paragraph apologizing for all the definitions that are explained, but may be lost in this extremely interesting narrative.

So you have some individuals that are all small time and make millions betting against the market. Most do not have business degrees, but before they start shorting, they by necessity get the "feel and smell" of the market.

In the main, they find sharks in suits. However, those suits

in their learning process  never question what they were doing which ultimately was screwing people out of their lifetime savings. Nor, was there a question about how they were making money. They knew the jargon and the

continuous new jargon for financial instruments. They learned to talk laboriously and vaguely when explaining what they were doing. MBA's were quickly tossed from firms if sales slowed or they asked too many questions. In other words, if there is God, he doesn't like losers. It was a raw vulgar form of Calvinism.

So in each instance, our cast of characters saw around them ruthless, one dimensional, savants that called themselves "capitalists."

The 20th century had illustrated that clearly markets work better than planned command economies. That some of the largest Communist country had turned away from their ideology to the market. They also saw that there was really not much around except Social Democrats in Europe and Scandinavia. Although they were capitalist countries, they had elaborate social nets and regulation. Further, socialism that was democratic was adopting capitalism. Yet the new socialism was really a form of capitalism All this added to their hubris.

Thus, God was a social Darwin and the enemies

of the country was the threat from within in the manner of the liberal and moderate capitalists or social democrats. Not only would they harm the country, they would secretly try to add regulations and nationalization.

So the heavy hitters plunge money into Fundamentalist Christianity along with Fundamentalist Capitalism.

Even before Reagan, the liberal-left started  shooting themselves in the all the wrong places.

So the sharks took over and created junk bonds, and later CDO's. Very briefly, a CDO is a Collaterized Debt Obligation which is made up of loans that should not be given to people because they did not have the money (subprime.) These new purchasers bought their home loans with little money down in what is called an ARM. That is an adjustable rate mortgage. So a small house payment very quickly turned into a big payment. With just a few brain dead regulators on the street the sharks knew they could create illusions. The rating agencies knuckled under and started

giving triple or AAA ratings that were junk from the lowest level (or tranches.) However, they were smart enough to mix really good loans into the brew.

When the sales force was out there selling this stuff they may or may not have figured that they were bad, but they knew what they had to sell. Further, the length and wording of explanations were very hard for even purchasers with the right academic background to understand. What was easier to know was that your buying a new financial instrument that was super safe

that had mainly good mortgage loans in them and were bundled with some risky loans that could skyrocket upwards or downwards. However, the majority of the product was safe

to protect the consumer from losses. Further, all of this was then bundled with more CDO's and then more until the paper value of this was in the billions, but could be purchased for less.

The leaders of Iceland got so excited that they

bought a lot and when the market crashed Iceland defaulted (a country announces that they are bankrupt.)

Further, American CDO's spread or metasized  like cancer around the world. Billions than trillions started

roaring in to the street that was very bullish. The Fed (Federal Reserve System) kept interest  loans for too little and too long.

Now come our friends in the BIG SHORT. One has a capital fund that sounds great, but was located in his back garage. Technology was there to buy and sell and to send e-mails or

cell phones to communicate. Generally customers were anonymous and had purchased junk from companies that had financial planners. So they were pretty far removed

from the original purchaser.

They kept buying and shorting the market. They looked for really lousy loans that were over priced and bet against them (shorting.) Thus when the lousy loan fell they sold to make even more money.

About one year before the crash, the sharks knew that soon the hustle would be revealed. Thus their explanations got even more obtuse and finally the big banks fell. Millions lost their jobs and as this is being written the market is slowing climbing out of the dark.

Not only do you learn much about the stock market you find an interesting story of folks

who bet against the best when common sense told them not to do so.

The book ends with our anti-heroes coming  out just fine in the biggest crash so far of the 21st century. A glossary of definitions would have been nice at the end of the book, but this does not make this a bad buy. I found it enjoyable and a real page turner. (I got through the crash

too. I started planning for a big crash when President Regan  started talking about Cal Coolidge and non- regulated capitalism.)*

*All thes human frailities can apply also to college professors.

Prof. Joel Snell

Kirkwood College