The Big Short: Inside the Doomsday Machine
- Nov 23, 2018
- 3 min read
Updated: Jun 11
★★★★★
As we did last year, we found a cabin down in northern Arkansas’ Ozarks to spend Thanksgiving. I brought along my current read, Jeff Tweedy’s Let’s Go (So We Can Get Back), and lamented that I should have brought a second book along in case I finished that one too quickly. I needn’t have worried. Our cabin came stocked with a selection of books, everything from the intriguing (Soiled Doves: Prostitution in the Early West) to the absurd (The Adventures of Slim and Howdy by Brooks & Dunn — yes, that Brooks & Dunn) to the known (Louis L’Amour, Stephen King, David Sedaris, and Barbara Kingsolver). Neither obscure nor expected, Michael Lewis’s The Big Short: Inside the Doomsday Machine caught my eye for a couple of reasons. First, I’d followed the 2008 mortgage crisis and ensuing fallout pretty closely at the time. Second, I’d seen the movie and enjoyed it, but it didn’t quite stick with me. I wondered whether the book might uncover the story better (of course it would).
Between daily coverage on NPR and Marketplace and longer investigative pieces by Planet Money and This American Life, I understood, perhaps more than most, exactly what happened in 2008. (Just writing “2008” seems absurd; we’re talking about a ten-year-old catastrophe that feels like yesterday). But neither real-time contemporaneous reportage nor the long-form investigative journalism that followed really brought the calamity to life. Which is exactly what Michael Lewis does. The Big Short is, in short, an exhilarating read. It’s a real-life, character-driven story that also manages to dig deep into an incredibly complicated web of financial instruments and arcane terminology and explain it all without making the reader’s eyes glaze over—no easy feat.
In case you haven’t been paying attention, everything about Wall Street is, if not absolutely corrupt, at least morally bankrupt. The preposterous and dangerously cavalier approach we now accept as “normal” didn’t happen overnight, but its genesis can be traced back to 1981 when CEO John Gutfreund turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. The result? Risk was transferred from the firm to the shareholders, and the shareholders who financed the risk had no real understanding of what the risk takers were doing. As the risk taking grew ever more complex their understanding only further diminished. The moment Salomon Brothers demonstrated the potential gains to be had from turning an investment bank into a public corporation and leveraging its balance sheet with exotic risks, the psychological foundations of Wall Street shifted, from trust to blind faith. After all, what privately-owned investment bank would have leveraged itself 35-to-1, or bought and held $50 billion in toxic assets?
We all know how the story ends. Nearly everyone on Wall Street got rich—on both sides of the toxic asset equation—even those who drove their companies into bankruptcy. Hardly anyone was arrested or charged, and nobody went to jail. The federal government let Lehman Brothers fail, but then intervened in nearly every way imaginable to prevent others from doing so. And when it was clear that $700 billion wasn’t enough to deal with the troubled assets acquired over the previous few years by Wall Street bond traders, the feds stepped in yet again and actually bought bad subprime mortgage bonds directly from the banks. By early 2009, the risk and losses associated with more than $1 trillion worth of bad investments were transferred from big Wall Street firms directly to American taxpayers.
Lewis’s book could—and should be—seen as a cautionary tale, even as a prime example of the necessity of financial reform and regulation, but it won’t be. As with other Wall Street scandals and fallouts before, the events contained herein were preventable, if anyone had wanted to look. Nobody did. In an economy no longer driven by manufacturing, we now make our money from money. When this much money stands to be made, who wants to crash the party? Though ten years old, The Big Short is still as fresh as it was the day it hit bookshelves. If you haven’t read it, and are remotely interested in the insanity that was the 2008 mortgage crisis, you’ll love every minute of this fascinating story.
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