FNArena Book Review: The Big Short by Michael Lewis; Penguin Books, 2010

By Greg Peel

They sat together on the cathedral steps for an hour or so. “As we sat there we were weirdly calm,” said Danny. “We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs? Who was going to rent these buildings after all the Wall Street firms had collapsed?”

“They” had just learned of the collapse of Lehman Bros. “They” had just made hundreds of millions of dollars between them from selling short the toxic mortgage derivatives which had ultimately led to Lehman's collapse.

“It was like feeding the monster,” said Eisman. “We fed the monster until it blew up”.

With The Big Short, author Michael Lewis comes full circle and closes the long-running tale he began with the 1989 release of his first book, the much celebrated Liar's Poker. That book, which introduced the world to the astonishing inner workings of a Wall Street defined by Oliver Stone in 1987 with the phrase “Greed is Good”, sold millions of copies worldwide.

Lewis had been a trainee bond dealer at heavyweight Wall Street firm Salomon Bros in the eighties. A former colleague is credited with creating, in 1987, a mortgage derivative instrument known as a collateralized debt obligation. The story of the CDO could have been written by Mary Shelley. It starts innocently enough, but soon things start to go terribly wrong. By 2008, Steve Eisman and his co-believers came to realise they had been “feeding the monster”.

The Big Short explains how the US mortgage derivative market went from boom to bust through the eyes of a handful of unusual characters who could see what others failed to see, did not try to see, were too ignorant to see, or were too reluctant to see until it was too late. It traces the course of the CDO from credible mortgage security to flagrantly exploited security to a security synthetically generated so Wall Street firms could make millions out of Main Street saps. In so doing, it goes along way to explaining to those experienced in financial markets, and to the complete layman, just what the Global Financial Crisis was really all about - why Lehman Bros collapsed, why the US government was forced to rescue AIG, and why, indirectly, Goldman Sachs has since been forced to settle a case of alleged fraud.

Lewis is an entertaining narrator who has a the knack of carrying the reader along on a rollicking ride full of wry humour while at the same time explaining complex concepts which even those completely ignorant of and confused by financial markets can understand.

If you want to appreciate why the GFC occurred, this is a Must Read. If you want to enjoy a good story which just happens to be true, this book is a Must Read anyway.

The Big Short by Michael Lewis is not available through the FNArena Investment Shop. However, for those readers looking to purchase the next investment book at a discount, we have lined up the Top Ten of Best Selling Books:

- Shares and Taxation

- Shares to Buy And When

- Trading from Your Gut

- Top Stocks 2010

- Way of the Turtle

- Trade Your Way to Financial Freedom

- Catherine Davey CFD Twin Pack

- Trading For A Living

- Trading in the Zone

- Secrets for Profiting in Bull and Bear Markets

For more information on these books/discounts available, see http://www.moneybags.com.au/default.asp?d=0&t=1&c=148&a=171

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