Michael Lewis doesn't just win Sandra Bullock Oscars; he writes books about market inefficiencies. This is especially true of Moneyball, his bestselling book about Billy Beane and the overachieving Oakland A's teams of the early 2000's. The shorthand that developed around Moneyball was that a high on base percentage (OBP) is the prerequisite to winning—that and Billy Beane was a genius while the other GMs were stupidheads. (This is why Billy Beane will be played by Brad Pitt in the upcoming feature and GMs-you've-never-heard-of will likely be played by actors of whom you've never heard.) But the reality was far more nuanced: according to Lewis, Beane recognized that OBP was undervalued by the market and exploited this inefficiency to cheaply acquire talented players. Today the so-called Moneyball teams hold that run prevention is undervalued and sign strong defensive players (see the Red Sox bringing in Mike Cameron). It's a classic story of a business recognizing something that other businesses don't, succeeding, and creating a new paradigm.
Now, in the wake of The Blind Side's cinematic success, Lewis is back with The Big Short. Superficially a look at the oddball investors who recognized the growing instability of subprime mortgage loans and the bonds and derivatives they supported, The Big Short is nothing less than a full-out assault on the efficient-market hypothesis, the idea that the market assimilates all available information and accurately prices commodities. As Lewis sees it, the bond and derivatives markets functioned by making things so opaque that no-one, not even financial professionals, could understand what was going on. The financial industry became one giant black box: money went in and more money came out, but everything in between was hidden. You just had to take their word for it.
Lewis' writing is engaging throughout. His books excel because of his gift for storytelling, and The Big Short is no exception. It's not exactly a book about the credit crisis, but you'll leave with a greater understanding of why the crisis happened than you will with books that focus on the proximate causes (Hank Paulson's memoir comes to mind); he doesn't explicitly make the case that derivatives should be traded on open exchanges like the stock market, but every page implicitly demands it. Lewis does a great job of explaining obtuse financial instruments like credit default swaps, and if his prose struggles while explaining collateralized debt obligations it's probably because such things were designed to be beyond the comprehension of mere mortals.
The heroes of the book are the few people that refused to listen to groupthink and did their own research on bonds and credit default swaps, demanding to understand this new market. They placed huge bets on the idea that the entire financial system was inefficient—and they won. As in Moneyball, Lewis recognizes that the best stories are found at the margins (you won't find Nassim Taleb in The Big Short and only traces of John Paulson). Instead, you'll get a one-eyed doctor turned expert stockpicker, pessimists with almost irrational fears of exuberance, and a small start-up fund. These aren't the "big swinging dicks" Lewis wrote about in Liars Poker; these are deeply flawed human beings who find success is not everything it's cracked up to be. And, more importantly, they're terrific characters.
The Big Short is a great story told by a great storyteller. And it is, so far, the best book we've read about the financial crisis.
add to digg
add to stumble upon
add to reddit