The Big Short

The Big Short by Michael Lewis

I read Michael Lewis’ The Big Short a few weeks ago. This book is fantastic. I recommend! If you are time poor, the film with Ryan Gosling is also excellent. I watched the film twice and find myself re-reading the book in 2021. The Big Short discusses the financial reasons and foundations behind the housing crisis that precipitated the Global Financial Crisis (GFC) in 2008. In Australia we call it the Great Recession, but internationally it is known as the GFC and took more than a decade for the world to start to recover from, and then we suffered the 2020 pandemic recession.

The Big Short focuses on the perspectives of the few people that saw a problem in the way mortgages were being traded behind the scenes of the worlds major banks, and a pricing error on risk that lead to the biggest failure in the banking system since the Great Depression.

There are interviews with many people from both sides, but understandably more from the sides that were betting against the banks mortgage backed securities and the derivative products made with them. A derivative is something that is made from an underlying asset, and the underlying asset in this case was home-loans of people who would later come to be known as NINJA’s — no income, no job, no assets, as well as the home loans of people who had no paperwork to prove their income — “no-doc loans” and “low-doc loans” that mostly turned out to be NINJA’s too.

There is so much depth and detail that it takes a second reading really to take everything in. The access and interviews in the book are rare and interesting. It’s very well written and possible for someone with a non finance background to follow. All the financial jargon is explained well for a non specialist audience. I feel it is important reading now, with the US Fed buying mortgage backed securities and house prices in another boom.