The Big Short: Inside the Doomsday Machine by Michael Lewis - Book Report/Review Example

Book Analysis Table of Contents I. Introduction 3 II. Book Analysis 3 Works Cited 9 I. Introduction This paper presents a book analysis of The Big Short: Inside the Doomsday Machine by Michael Lewis. In this book, Lewis basically examines the inside story of how the derivatives and bonds market for housing mortgages to the lower middle class and poorer sections of American society led to the financial crisis that it triggered off, leading to the crash of the stock market in the US in the fall of 2008. The book is a story of whos. It is the story answering the question of who, among those in the know, saw that there were risks inherent in assuming the rising of prices for real estate, and that those risks escalated further due to the artificial instruments of trade that were the derivatives and bonds tied in a loose way to the underlying and increasingly bad mortgages (Google). II. Book Analysis From the point of view of the book as literature, it is highly entertaining, the book being written from the perspective of traders with very human qualities and characteristics that are to be seen as flaws, and unlike the stereotypes of Wall Street bankers as being cool, collected, sophisticated, and having it all. These heroes essentially went against the grain of what was then, on hindsight, a madness that the establishment propagated, in the form of trades. There is much to like for instance in Steve Eisman, who is like a character straight out of a Bruce Willis movie, who speaks with much profanity, and who nevertheless is spot on about what is wrong with the mortgages and derivatives system that was in effect a machine for laundering the bad loans made by ordinary people to buy homes, provided by people who then fed the bad loans into a machine that made them look like they were tradeable securities, and to be traded very profitably and well, that is until the bubble burst and the loans began to default. Eisman in the book was smart-alecky, brilliant, and street-smart, and not like the staid corporate types who ate well and dressed smartly as is the common stereotype of people in that line of work in Wall Street. His genius lay not in the way he was able to isolate himself because of his poor social and people skills, but his early insight into the non-sustainable nature of that derivatives and bond market for what has come to be called as subprime mortgages. Essentially, subprime mortgages were mortgages made by people with questionable, less than stellar, and therefore risky credit profiles. In the book, the laughable bit of fact is that a stripper had five such mortgage loans, aggressively peddled to that stripper by a system that somehow trusted that the people further down the line would be able to find a way to launder the risk, and make it acceptable through the complex derivative trades that nobody really understood. It was a voodoo like faith in the math of derivatives, and the ability of the system to miraculously turn things around and make gold out of what was essentially lead. That bit of fact highlights the insane nature of the trades for mortgages of that nature, and also highlights the brilliance of the storytelling of Lewis and the value of the book not just as an accessible account of the financial crisis and its roots for the layman, but more so as a specimen of good literature. As literature it depicts people as people, with flaws, manipulating and using/exploiting the system for their own greedy gain, and in that Lewis is merely retelling the same old story of humanity in a modern setting. That setting is Finance, supposedly the bastion of the kind of smarts that mints millionaires and which is indispensable to the serious business of running the economy and governing the use of money in society. The book, in this sense, is good literature, and as literature, Michael Lewis shows that humanity and its follies and absurdities shine through even in the places where “smart” people congregate. In fact, what is clear from the book and the tiny details about Eisman, the hooker, the traders, and the rest of the people in the system is that what we consider to be “smarts” is really a kind of technical smarts, and as far as human nature goes, the morally bankrupt, the greedy, the vain and boastful, the sociopaths, and those who personifies all the conceivable negative aspects of being human, the smart people set have them in their midst by the truckful. The systems rah rah boys, the investment bankers, the regulators, the insurance companies, the traders, the mortgage peddlers, the support people who profited with day jobs, all of them were flawed and driven by very understandable human weaknesses and impulses. Those who crafted the derivatives system, and who approved them even though they had an inkling that it was not sustainable, they were also presented as silly people, pompous and sure of themselves, flawed and worth mocking, they too were all too human. The heroes too, who saw that the system was a sham, that the emperor had no clothes so to speak, they too were far from being the flawless moral characters, but were themselves flawed in very fundamental and mundane ways. They were afflicted with very real psychosocial diseases, and they too profited from the system in a negative sense, by betting that the system would collapse. The real hero would have tried to put a stop to the whole system altogether rather than trying to make a killing out of the silly arrangement. On the other hand, these people saw the flaws in the derivatives system as an opportunity to make money, not by getting on board the bandwagon, but by watching in the sidelines and making bets that the system would collapse, all the while eating popcorn and watching with amusement at the sidelines, taking advantage of trading opportunities against the system at every possible turn. Minus the technical jargon and the smokescreen finance pyrotechnics, this is a very human tale (Krupa and MacDonald; Buchan). The book as a discussion on the technical aspects of the crisis, on analysis, is one that is not exhaustive, but revealing, and sufficient for the purposes and aims of the book. On analysis, that aim is not to present a thesis about what was wrong with the derivatives market. There are other books on Finance to deal with that. Moreover, the assumption is that that the system was broken and unsustainable is a given and something that has been proven by the financial market collapse. Lewis did not write another finance book, nor did he try to repeat what had been discussed to nausea in the different mainstream publications and academic papers. No, his aim seemed to transcend the mere technical exploration of the inner workings of the system. His aim was to humanize the crisis, and to make sure that Wall Street was accurately depicted as somewhat dysfunctional, and somewhat out of touch with ordinary reality, somewhat unregulated by the very technical and specialist nature of their work, and somewhat inclined to follow their worse, self-serving instincts when left to their own devices. Another simplified take on the whole book is that it is a retelling of an age-old story of boys left to their own devices marooned in an island. Left on their own, how would the boys conduct themselves? In the book the island is the Finance ecosystem and the world of derivatives and financial instruments removed from the rest of humanity by virtue of their unfathomability and the highly secretive and specialist nature of the professionals who handle our money. There is an air of mystery that allows the insiders to essentially make their own rules. The lack of regulation makes for a kind of free for all, as the book implies, and that free for all allowed for the insiders to kind of live in an island of their own making, beyond the reach of ordinary people, and beyond the reach even of the regulators and the government authorities. This is the setup for instance in that perpetually popular book The Lord of the Flies by William Golding. In this present version of that story Lewis depicts a modern day boys club that left to its own devices degrades into barbarism, ruled by the baser instincts of man. The crisis was a free for all money grab on the part of the insiders, knowing that the loophole exists and that it was not sustainable in the long run, they tried to make money while the sun shone, while the system was in place and holding up in other words, aware that at some point the whole arrangement would collapse. At that point, having made money, the collapse would no longer be their problem, but the problem of those who are supposed to police the system and save it, namely the government. In the end, indeed, it was the government that was left holding the empty money bag, and it was government that was tasked to fix the system. The boys have had their fun in the sun, and now it was left for government to fix the mess. This is Lewis take on the mythical story that the Lord of the Flies also tried to put into the form of a story. This was in the end one of the key aims of the book, to tell the tale that needs to be told, and to expose the whole financial mess not as a technical course in Finance, but as a human tale, accessible to everyone, and all too familiar. It was told like a good story, a cautionary tale, mythical, biblical, full of morals, a very good story (Krupa and MacDonald; Buchan). The technical aspects of the tale are almost secondary to the human aspect, which is the key thing in Lewis, but it needs to be told to complete the analysis of the book. It is dry and useful only in so far as it attempts to educate as well as to provide a cautionary tale to the naive. It is also included to give credibility to Lewis ability to grasp with intelligence and clarity the inner technical workings of the Finance behind the crisis. Yet even here the dry technical details become more accessible because of the human element. Strippers and farm workers are issued mortgages that amount to very risky loans that they cannot hope to pay with their measly and unstable incomes. These risky loans that are almost sure to become bad loans, due to default at some future point, are lumped together to form a security that can be traded. They become debt obligations backed by collateral. The ratings agencies designate the securities as being investment grade, and therefore can be traded like other securities. It is from the trades that the insiders made their money in good times, not caring that at some future point they will have to deal with the fact that the laundering will not hide the fact that the underlying base transaction, the granting of the loan to a risky borrower, was that, a high-risk proposition. The money in the trading of those securities was good, the arrangement was holding up in the short term, and so the system had no other way to go but back to the source, and that meant issuing more risky loans to more and riskier borrowers, so that in Lewis; story the stripper was loaded with five different mortgages even though she had no foreseeable means of being able to repay any of those loans. It was a bomb waiting to explode, but no one had reason to complain while the going was good and the money was good. The regulators, the investment banks, the insurance firms, and the ratings agencies were all in on the mess, and their stamp of approval meant that when things imploded and the whole arrangement collapsed with a deluge of mortgage defaults, someone else would be left holding the mortgage-backed derivatives and bonds. In this case the investment banks and the big financial institutions were the ones left holding them. Their collapse meant the collapse of the foundations of the economy of America, and of course government had no choice but to intervene and take on the debts and the risks that the big boys took on and played with while the going was good. It was childs play on hindsight, and not complicated at all. The big boys found a loophole in the system and exploited it like there was no tomorrow, leaving it up to government to clean up the mess after (Krupa and MacDonald; Buchan). Works Cited Buchan, James. “The Big Short: Inside the Doomsday Machine by Michael Lewis”. The Guardian. 27 March 2010. Web. 3 December 2012. . Google Books. The Big Short: Inside the Doomsday Machine by Michael Lewis””. Google Books. 2012. Web. 3 December 2012. Krupa, Joel and Braden MacDonald. “Shorting Our Future”. The Oxonian Review. 18 October 2010. Web. 3 December 2012. Read More