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Clif's Book World

Adventures from reading books captured within short reviews.

The Big Short: Inside the Doomsday Machine - Michael Lewis, Jesse Boggs This is the best description so far of the inside story about the sub-prime mortgage crisis. Reading this book is like riding a time machine back a couple years, walking into the Wall Street offices and asking them, "What in the world were you thinking?" The story is told from the view point of several investors who were betting against the sub-prime mortgage industry. But there were so few other people who saw it their way that they kept second guessing their position because they couldn't understand why so few other people agreed with them. It's apparent that the vast majority of "experts" were totally oblivious to impending doom.

The book tells of one individual who visits numerous investment companies trying to get them to bet against the sub-prime mortgage industry, but almost nobody was willing to believe him. He even had a complete power point presentation explaining how buying credit default swaps (betting against sub-prime mortgages) was a virtual sure thing. Still, he convinced few people.

The book also tells of the owner of an investment company that shorted the home mortgage business, and the investors in his company wanted their money back. They thought he was crazy to bet against house prices continuing to go up. He refused to give their money back because he was highly leveraged and would experience large losses if he gave their money back. So the investors sued him. In the midst of this rancor the housing market collapsed and suddenly their investments increased 70 fold. In other words, a million dollar investment was suddenly worth 70 million. His investors had gone from a position of asking for a big loss to a position of receiving a tremendous gain. After it was over, not one of his investors apologized, said thank you, or said "You were right and I was wrong."

The narrative of the book is structured to build suspense in the mind of the reader even though we all know what happens in the end. Michael Lewis did a good job writing this book. In the end he sums up by speculating why so many smart people were so stupid. It can be blamed on incentives and shedding of risks.