The Big Short by Michael Lewis

This book is either going to interest you or it’s not. It chronicles the financial crisis of 2007-2008, explaining the subprime mortgage markets that drove the economy into recession. In my opinion, it’s very technical. Most of the vocabulary and some of the concepts will be brand new to the reader. When writing this review, I realized it’s hard to talk about the subject because much has to be explained initially. Here’s my best shot:

A subprime mortgage is one that is less likely to be repaid by the borrower. These subprime mortgages were packaged together into bonds for large investors. For example, an individual subprime mortgage could be rated triple B, but when a group of them were packaged together they were rated triple A (same as a U.S. Treasury bond). Investors wanted more of this safe investment, so more subprime mortgage loans were giving out to less and less deserving borrowers. Borrowers were offered teaser rates: low interest rates for the first 2 years then it would jump up. And little or no documentation was required, credit scores were glanced over, there were no down payments. Basically loans were given to people who had no chance of repaying once the interest rate jumped up.

No one really questioned – or understood – what was in these bond packages. How likely were they to default? What if house values stopped increasing? How could a strawberry picker earning $14,000 a year pay off a $725,000 mortgage? Who would even give a loan for that?

I’ve tried to simplify the root of the problem. But truthfully, it’s way more complicated. Products were created that held a 100 of these subprime mortgage bonds. Things got so big and out of control way too fast. Companies earned millions of dollars and wanted more. This was all too good to be true and turned into a vicious, self-destroying cycle. You wonder how everyone could be so ignorant and not question what was going on. The few people who dug into the prospectuses and questioned others realized the whole system was going to blow up. They made hundreds of millions of dollars, some even made billions.

Out of all the books I’ve read this year, this was the hardest to read. There is so much new information that I found myself re-reading page after page. And I was reading it very slowly. You have to in order to take it all in. I don’t mean any of this as criticism; I think it’s important to read the book slowly in order to understand it. The book contains a lot of facts and information. For the most part, Michael Lewis leaves out his opinions until the end. From other stuff I’ve read or seen, I think The Big Short provides the best explanation of the crisis. I am not saying this is the only thing one should read, but it offers a great starting point to understanding the basics. After reading The Big Short, you ask yourself how did they not see this coming?

My rating for The Big Short: 5 stars out of 5. Get it here!

Note: Like I said, this book will not interest everyone. I personally found it fascinating.