The Big Short by Michael Lewis
Allen Lane, $45
Imagine the ultimate bet: a near-as-certain thing, offering odds of 100 to one, maybe hundreds to one, and a payoff in the billions.
This is the story of such a bet, and of a handful of people who recognised it, laid down their money and walked away rich.
This wasn't a bet on something but against something. That something was the American housing market. More precisely, the bet was against the financial instruments that Wall St created to feed the housing boom with ever-increasing amounts of credit.
Step back to the 1990s and early 2000s, when financial institutions realised that fabulous amounts could be made by lending to homebuyers with less-than-stellar credit records - "subprime" borrowers, in the euphemism of the times.
The discovery of this fountain of riches spurred the bankers to create an increasingly complex series of financial instruments.
"Mortgage bonds" were easy enough - they were just a lot of individual mortgages bundled together - but then came "collateralised debt obligations" (bundles of bundles) and "credit default swaps" (insurance on those bundles of bundles) and "synthetic collateralised debt obligations" (bundles of loans that don't really exist but would you like to buy some anyway?)
If it's hard to understand, the way Michael Lewis tells it, the bankers didn't understand either. And the main thing they didn't understand was that all their shiny financial structures were erected on a decidedly shaky foundation: millions of loans to people with very little capacity to repay them. And when enough borrowers slipped into default, those complex financial instruments would suddenly be worthless.
Lewis tracks down some of the few people who did notice this inconvenient truth, and who were prepared to bet on the market going sour. They're an oddball lot - a one-eyed (literally) fund manager with Asperger's, a comic book obsessive with socialist leanings, a couple of guys managing money out of a friend's garage - which is, of course, the point: the outsiders saw what the insiders had a vested interest in not seeing.
The details of how the bet played out may make your head hurt, but it's well worth sticking around. Lewis knows how to tell a story, and his cynical tone is a perfect fit for the events that precipitated the great financial meltdown.
And if you think you know how it ended, well: not quite. Yes, the markets did collapse. Yes, our contrarian heroes did make their fortunes. But it was a morally ambiguous victory - like taking out insurance on your neighbour's home and making a killing when it burns down. Even though you didn't strike the match, even though you warned people what was going to happen, you're not exactly hero of the moment.
Still, at least they exposed the folly of the markets and made sure such a disaster couldn't happen again, right? Don't bet on it.
Mark Fryer is editor of the Herald's The Business section.
