Book Review: The Big Short by Michael Lewis, Inside The Sub-Prime Mortgage Doomsday Machine

by Rich Vetstein on January 18, 2011 · 1 comment

in Mortgage Crisis

I read The Big Short, by Michael Lewis a few months ago. Now after the U.S. Bank v. Ibanez ruling exposed possible widespread irregularities in the mortgage securitization industry, I thought it would be a great blog topic. If you are going to read one book about the market this year, read this one.

Back in 2005, credit default swaps, Alt-A tranches, and interest-only negative-amortizing adjustable-rate sub-prime mortgages were exotic pieces of the Wall Street mortgage securitization machine. Now, and after cases like U.S. Bank v. Ibanez, we know the dark and insidious side of the industry.

The Big Short teaches us that Wall Street bankers knew as early as 2006 about the rising default rate on sub-prime mortgages but engaged in an elaborate scheme to hide that reality from ratings agencies and investors. Lewis explains that when investor demand for sub-prime mortgages outpaced inventory, Wall Street came up with “synthetic” mortgage-backed securities whose performance would mirror that of the real thing. Then the bankers conspired to inflate the price of mortgage-backed securities well into 2007, even when they knew the true value was falling, only marking them down in value after their own hedging strategies were in place. And bank CEO’s knew as much as a 5th grader about the risks their organizations were taking.

Lewis is a great storyteller. He made the sub-prime mortgage meltdown riveting by following a handful of characters and personalities who bet on the collapse of the sub-prime mortgage market, and by extension, the entire U.S. housing market. My favorite was Steve Eisman, whose profanity laced diatribes were as legendary as his repeated tirades to anyone who cared to listen that the entire sub-prime industry was a fraud and a scam.

Thinking about the book in the aftermath of the recent U.S. Bank v. Ibanez case, I am not at all surprised to witness the “foreclosure fallout” and the exposure of major flaws in the U.S. mortgage securitization industry, given how much fraud, obfuscation, and greed went into creating the U.S. sub-prime industry in the first place. Lewis ends with two young hedge fund managers pondering that they “had always sort of assumed that there was some grown-up in charge of the financial system whom they had never met; now they saw there was not.” Is there some grown-up in charge now? I often wonder…

Please post your reviews if you’ve read the book!

Click here to purchase the book on Amazon.com. Click here for Apple IBooks version.

  • Yes, we now know there were major problems with the mortgage industry, but we are not through its impact on our economy, which is multi-faceted. Foreclosures are expected to set a record in 2011, and real estate prices to continue to decline.
    I will put this book on my list to read, thanks for the review.

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