In financial parlance, to short something is to bet that it will fail. If I were to short your grades this semester, for example, I would be gambling that you’ll sleep through one final and bomb the rest. You get a 2.2 and I get a fat check.
If, on the other hand, I had shorted the market for subprime mortgage-backed securities a few years ago, a lone visionary betting my money on a seemingly impossible global financial meltdown, today I would be a very wealthy man. I’d also likely be featured in The Big Short, Michael Lewis’s new book on the financial crisis.
While Congress and the public spent the past two years hunting for the villains responsible for the collapse, Lewis was looking for its prognosticators. After Wall Street came apart at the seams, there was no shortage of Johnny-come-latelys claiming to have predicted the disaster. The people Lewis profiles are the real thing, though. Not only did they see the impending disaster, but they bet big on it. They shorted the system.
Lewis finds an eccentric bunch, from the one-eyed California fund manager with an Aspergers-fueled obsession for fine print to the rude but brilliant financial analyst convinced the goal of the system is to “fuck the poor” and the Wall Street snake who saw the tidal wave approaching but only wanted to sell flood insurance.
Watching the crisis unfold through their eyes certainly has its advantages. Lewis’s guys were the only ones who knew what was going on as Wall Street churned out a mountain of worthless paper, stamped AAA by the rating agencies, that later imploded upon itself in spectacular fashion.
What seems so obvious now—that lending $800,000 to a broke grandmother isn’t a good idea, and betting many times that amount against her defaulting is a worse one—was understood by very few as it unfolded. Lewis tells their stories with a fluency and ease that takes the edge off the dry inner-workings of collateralized debt obligations.
The downside is that focusing on people who stand to benefit as the world around them crumbles gives us a twisted perspective on the global financial catastrophe. Reading this book, it’s hard not to await the eventual disaster with a morbid excitement, its widespread devastation distorted by the billions upon billions the protagonists stand to gain.
Then there’s the larger issue that all of these characters are, to a certain extent, outsiders on Wall Street. They can explain the how of the crisis, but the why eludes them, and it eludes Lewis too.
On one hand, it’s hard to fault him for the narrative. After all, if you imploded the global financial system with a compact incendiary device of your making, you’d be unlikely to rehash your mistakes with a reporter over drinks in the Village too.
But greed, stupidity and hubris can only go so far in illuminating the psychology of those who caused this crisis. Some day, perhaps, the Ivy League-educated dolts who crashed the system, took billions from the federal government, and still run the banks today will come clean. Until then, we’re left with these ballsy loners who saw through Wall Street’s bullshit—and called them on it.