Friday, December 20, 2013
The Big Short - Michael Lewis (2011)
The Big Short is a tough book to review for the same reasons it must have been a tough book to write. On the one hand it is certainly well-written, brisk, entertaining, informative, and intriguing; on the other it tends to leave the reader in the dust. It comes out of the gate with enormous energy--and the first 50 pages are about as good as any I've read. It also ends very strongly (I wanted to write "on a high note" but that wouldn't be accurate, content-wise). However, for the middle 180 pages or so it tends to run over the same ground with little or no development. Thus while I highly recommend this book, I do so with reservations, which I hope I can adequately articulate.
First of all, I need to get something off my chest: this book made me depressed. Okay, you say, the subject matter is depressing so no big surprise there. And actually it's not that depressing--it's really an incredible success story. However, I do not recommend this book for recent law school graduates who have mounting debt obligations and feelings of hopelessness with regard to their career prospects. This book is all about betting against homeowners who signed up for subprime mortgages. Of course, there is little reason to believe that people will be able to make their loan payments when the interest rate on their loan balloons after two years, but if these people knew what they were getting into, they must have believed that good things were going to come their way--that they would get a big enough raise two years from now to make much higher mortgage payments, or that the value of their home would continue to rise and they could refinance. Alas, when millions of people are packaged together in an asset-backed security or collateralized debt obligation, the odds are not in their favor. Such is life for law students, too, and people do not want to be sympathetic to our plight because we should have known better. It wasn't like there was fine print that we neglected to read because nobody reads that stuff anyways--we were going to be trained to write that fine print.
So yes, the future appears hopeless for many of us, and five years ago, the future appeared hopeless for millions of Americans. But things are gradually getting better, we're told. Interest rates are low and home prices are rising and jobs are being created. Unfortunately they are not getting better fast enough for many of us (law school enrollment rates are way down, finally).
So when you're poor and feeling hopeless, watching your bank account dwindle to the point where homelessness starts to feel inevitable, this is not a good book to be reading. You can't really laugh along with it.
It's not supposed to be comic, though:
"Writing this book, I bumped up early and often against a new discomfort: the material would not allow me to do what I naturally would like to do with it. It was as if I'd been asked to play basketball using only my right hand, or write a sonnet using only sight rhymes. It took me a while to understand the problem: I was accustomed to writing stories that were, at heart, comic. The story of the investors who made their fortunes from the collapse of the U.S. financial system had lots of funny bits to it, but it was, at heart, a tragedy." (265)
When I first started reading this book--the first ten pages or so--I mistook it for a work of fiction. I thought maybe it was a roman a clef. But it is non-fiction. It is the story of three hedge funds (Frontpoint Partners, Scion Capital, and Cornwall Capital) and the quirky people that started them and made a boatload of money. The story begins with Steve Eisman, and perhaps disaffected recent law graduates might seek a new path after reading about his:
"Eisman entered finance about the time I exited it. He'd grown up in New York City, gone to yeshiva schools, graduated from the University of Pennsylvania magna cum laude, and then with honors from Harvard Law School. In 1991 he was a thirty-year-old corporate lawyer wondering why he ever thought he'd enjoy being a lawyer. 'I hated it,' he says. 'I hated being a lawyer. My parents worked as brokers at Oppenheimer securities. They managed to finagle me a job. It's not pretty but that's what happened.'" (1)
As a side note, since Lewis references himself in the first sentence (as well as during the excellent prologue and epilogue), his background bears mentioning. I am straight-up jealous of Michael Lewis. I have not read Liar's Poker, but I have heard it is a very good book, and he mentions a couple times that Ohio State University students read it is a "how-to" manual for making money on Wall Street. It is apparently about his time working for the infamous Salomon Brothers partnership-turned-corporation in the 1980's. One presumes he made a boatload of money himself working for that company, and also that he has made a boatload of money off the book, to say nothing of The Blind Side and Moneyball. Now, apparently Brad Pitt owns the movie rights to The Big Short and I am sure that it will make for a great film that could potentially rival the iconic Wall Street. In case Brad Pitt is reading this, I would like to ask him for the chance to audition for a small part in the movie because I think I have undiscovered acting talent. I think I would like to play Charlie Leadley but maybe that is reserved for an A-lister. But I see I am getting ahead of myself.
Steve Eisman started Frontpoint Partners. There is a very interesting episode that takes place in 2002 involving Household Finance--a kind of prelude to the subprime lending boom. He is also really into comic books, Spiderman in particular. There is also a nice point about his political persuasion:
"In his youth, Eisman had been a strident Republican. He joined right-wing organizations, voted for Reagan twice, and even loved Robert Bork. It wasn't until he got to Wall Street, oddly, that his politics drifted left. He attributed his first baby steps back to the middle of the political spectrum to the end of the cold war. 'I wasn't as right-wing because there wasn't as much to be right-wing about.' By the time Household's CEO, Bill Aldinger, collected his $100 million, Eisman was on his way to becoming the financial market's first socialist. 'When you're a conservative Republican, you never think people are making money by ripping other people off,' he said. His mind was now fully open to the possibility. 'I now realized there was an entire industry, called consumer finance, that basically existed to rip people off.'" (20)
After Eisman is introduced, Michael Burry follows. Burry started Scion Capital. While Eisman is certainly quirky, Burry takes it to another level. First, he only has one eye. Second, instead of law school he went to medical school:
"Investing was something you had to learn how to do on your own, in your own peculiar way. Burry had no real money to invest, but he nevertheless dragged his obsession along with him through high school, college, and medical school. He'd reached Stanford Hospital without ever taking a class in finance or accounting, let alone working for any Wall Street firm. He had maybe $40,000 in cash, against $145,000 in student loans. He had spent the previous four years working medical student hours. Nevertheless, he had found time to make himself a financial expert of sorts." (36)
What is interesting about Eisman and Burry is that they appear to disprove the Efficient Capital Markets Hypothesis, which basically states that you cannot "game" the stock market, because everyone else has the same information as you (the exception being insider trading). I'm sure not just anyone can do what they did, but it is nice to see an "outlier" make good when the consensus says otherwise:
"Right from the start, Scion Capital was madly, almost comically, successful. By the middle of 2005, over a period in which the broad stock market index had fallen by 6.84 percent, Burry's fund was up 242 percent and he was turning away investors. To his swelling audience, it didn't seem to matter whether the stock market rose or fell; Mike Burry found places to invest money shrewdly. He used no leverage and avoided shorting stocks. He was doing nothing more promising than buying common stocks and nothing more complicated than sitting in a room reading financial statements. For roughly $100 a year he became a subscriber to 10-K Wizard. Scion Capital's decision-making apparatus consisted of one guy in a room, with the door closed and the shades drawn, poring over publicly available information and date on 10-K Wizard. He went looking for court rulings, deal completions, or government regulatory changes--anything that might change the value of a company." (44-45)
Burry is also diagnosed with Asperger's Syndrome later in the story, and while Asperger's may be a difficult thing to live with, it seems like everyone who is a genius has Asperger's. So maybe it is not the worst diagnosis to get.
Finally, the story features Jamie Mai and Charlie Leadley, who started Cornwall Capital:
"Jamie Mai was tall and strikingly handsome and so, almost by definition, had the air of a man in charge--until he opened his mouth and betrayed his lack of confidence in everything from tomorrow's sunrise to the future of the human race. Jamie had a habit of stopping himself midsentence and stammering--'uh, uh, uh'--as if he was somehow unsettled by his own thought. Charlie Leadley was even worse: He had the pallor of a mortician and the manner of a man bent on putting off, for as long as possible, definite action. Asked a simple question, he'd stare mutely into space, nodding and blinking like an actor who has forgotten his lines, so that when he finally opened his mouth the sound that emerged caused you to jolt in your chair. It speaks!" (108-109)
Basically, the human side of the story is told very well by Lewis, but again, most of the middle of this book seems to get repetitive.
You could sum up the middle of the book with one phrase: basically nobody knows what's in a CDO!
And that is my major complaint about this book. It's very hard to write an interesting story about these ridiculously arcane financial instruments. Lewis does the best job he can--and at times, he can be rather lucid:
"A couple years earlier, he'd [Burry] discovered credit default swaps. A credit default swap was confusing mainly because it wasn't really a swap at all. It was an insurance policy, typically on a corporate bond, with semiannual premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a ten-year credit default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for ten years. The most you could make was $100 million, if General Electric defaulted on its debt any time in the next ten years and bondholders recovered nothing. It was a zero-sum bet: If you made $100 million, the guy who had sold you the credit default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table; but if your number came up you made thirty, forty, even fifty times your money. 'Credit default swaps remedied the problem of open-ended risk for me,' said Burry. 'If I bought a credit default swap, my downside was defined and certain, and the upside was many multiples of it.'" (29)
However, after the instrument in question has been defined once, Lewis expects the reader to be fluent in what it means. Of course it would be annoying and pedantic to keep reminding the reader what he was talking about, so it is a hard balance to strike. Still, at a certain point in the middle, it almost seems as if he throws up his hands in the air and says, "No one knows what it means anyways!"
I am particularly sensitive to this problem because I had the same issue when I took a Corporate Finance course in law school. True, I felt I learned a lot in it--but it was also my worst grade in law school (tied with two others). I still don't really understand how "selling short" works, but I think it has something to do with options--calls and puts.
These instruments are complex, and part of the problem with Wall Street is the "doubletalk"--the hope that retail investors won't really understand what brokers are talking about, so they'll either stay away or invest blindly. I personally don't have any money to invest. I'd like to do it, but it seems very intimidating for this simple fact.
There are some nice moments in the middle. For example, the chapter that details a subprime bond market convention in Las Vegas is particularly entertaining (and will probably make for the best sequence in the film). But my criticisms stand.
Would it have been possible for Lewis to write a better book? Maybe, but I can't say for sure. You can get kind of lost in the characters (apart from the three principal hedge funds) and the financial lingo. But if you really want to learn about this industry, and you take the time to read very slowly, you will probably get a lot out of it. If you want to breeze through it, I think you will find it reasonably entertaining but it will all start to seem like a blur.
That's what I did. I read the first 50 pages very slowly, and then read pretty quickly through the rest (though it took me a long time--almost two months--mainly because my life is pretty much a huge mess right now). So maybe that colors my interpretation of the text. And again, the recent law school graduate depression thing certainly affected my enjoyment. If I had disposable income, I would probably like this book a lot more.
One other thing I found hilarious: Michael Lewis is married to Tabitha Soren. I had completely forgotten about her until I saw the "take back MTV" episode in Portlandia and find it awesome that the house where Fred and Carrie went to recruit Tabitha was the house where Lewis lived. All I have to say is that I still want to be a rich and famous author after reading this book.