The Big Short – Here are My Lessons and Takeaways


The Big ShortLast Friday, I presented my synopsis of The Big Short: Inside the Doomsday Machine by Michael Lewis at our January Frist Friday Book Synopsis.

It was one of the more challenging asignments I have tackled. We present two synopses each month (Karl Krayer, my colleague, presents one, and I the other), and we try to do this in just over 15 minutes each. The Big Short is mostly narrative, and books that are mostly narrative are always a challenge in our format.

But, it is a genuinely important book. Mr. Lewis begins the book with this quote from Leo Tolstoy:

The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.

Why is this book so important? Because, the financial crisis of 2008 was a very, very big deal, and the ripple effects are still being felt. And because, we would be foolish to think that we have learned all of the lessons we should have learned. In other words, this could very much happen again…

Here are a few excerpts from the book:

“There was so much confusion about the different terms,” said Charlie. In the course of trying to figure it out, we realized that there’s a reason why it doesn’t quite make sense to us. It’s because it doesn’t quite make sense.” … “The Wall Street firms just got the ratings agencies to accept different names for it so they could make it seem like a diversified pool of investments.”

More amazing was their circularity: CDO “A” would contain a piece of CDO “B”; CDO “B” would contain a piece of CDO “C”; and CDO “C” would contain a piece of CDO “A”! Looking for bad bonds inside a CDO was like fishing for crap in a Port-O-Let: The question wasn’t whether you’d catch some but how quickly you’d be satisfied you’d caught enough.


Vinny: “In Vegas the question lingering at the back of our minds ceased to be, Do these bond market people know something we do not? It was replaced by, Do they deserve merely to be fired, or should they be put in jail? Are they delusional, or do they know what they are doing?… There were more morons than crooks, but the crooks were higher up.”

To Charlie Ledley at Cornwall Capital, the U.S. financial system appeared systematically corrupted by a cabal of Wall Street banks, ratings agencies, and government regulators. To Steve Eisman at FrontPoint Partners, the market seemed mainly stupid or delusional: A financial culture that had experienced so many tiny panics followed by robust booms saw any sell-off as merely another buying opportunity. To Michael Burry, the subprime mortgage market looked increasingly like a fraud perpetrated by a handful of subprime bond trading desks. “Given the massive cheating on the part of our counterparties, the idea of taking the CDS(s) out of the side pocket is no longer worth considering,” he wrote at the end of March 2007.

And, here are my lessons and takeaways from the book:

#1 – Stupidity, and unethical behavior, can both have massively negative consequences. (Where was/is the training?)

#2 – In too many instances, for too many people, the profit motive really does eclipse all other motives.


#3 – If the profit is great enough, many will use people (i.e., prey on people) to make such great profit.


#4 – If people don’t have enough, they will “borrow enough.” To their own detriment.


#5 – There really are some very bad people out there — who find, and invent, ways to avoid being held accountable.

#6 – It is a mistake to let anyone off the hook – there really was plenty of blame to go around.

#7 – And, a word about the ability to explain the complex in simple, understandable ways (Michael Lewis talks about his mother. From the book: “Dear Reader: If you have followed the story this far, you deserve… a gold star…” – this was actually “an apology to my mother”).

I chose not to see the movie until after I made my presentation. I have now seen the movie, and here is my recommendation – if you have not yet read the book, see the movie first, then read the book. If you do both, you will have a pretty good grasp of what happened.

And then, after you do both, you might feel like A.O. Scott, who wrote the review of the movie for the New York Times:

I don’t condone mob violence and I’m supposed to keep my political opinions to myself, but as soon as I’m done writing this I’m going out to the garage to look for a pitchfork.

——————–

There are other books worth reading that deal with the 2008 crisis. Like: All the Devils are Here, and This Time is Different, among others.. This was a big enough crisis that it helps to read as much as we can about what all went wrong.

(You will be able to purchase my synopsis of The Big Short soon, on our companion web site, 15minutebusinessbooks.com. We have synopses available of many good business books.).

I created this graphic after reading the book the first time a few years ago.  Take a look:

Click on image for full view
Click on image for full view

 

 

 

 

 

 

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