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addabook - The Big Short
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The Big Short
Inside the Doomsday Machine
Michael Lewis
read on May 1, 2010

Michael Lewis' contribution to the 'books about the financial crisis' library is unique in that he chose to tell the story of the very few folks that saw the meltdown coming, bet the farm, and came out on top. The book follows a couple different groups of folks who all did the right research, had the proper skepticism, and came out ahead.

Most interesting to me was the story behind the folks at Cornwall Capital- a capital management firm started by two dudes in their early thirties who didn't want to work for anyone else. They had $130,000 in a Schwab account - and limited Wall St experience - and decided they could make a living off of making good investments. They were value investors, but their real talent was finding "event" based stocks (M&A targets, bankruptcies, litigation, etc)- and buying options on them which they believed were mispriced. Basically, they figured that the Black Scholes pricing model assumed a bell curve model of future price probabilities (ie, a stock is more likely to go up/down by a little than by a lot). In may event-situations, that is not true. The stock will either go up a lot, or down a lot after the event - but not a little. Anyway - these two guys turned their own $130k into a couple million with these good bets, then saw the impending crisis and bought mezzanine level subprime CDO default swaps, and made $80 million. Nice.

Anyway, through these different stories, Lewis exposes how rigged/idiotic the entire financial industry was, at least from the point of view of these guys, who of course turned out to be right. I liked especially the treatment he gave to the ratings agencies - who he correctly depicts as broken, ignorant institutions that played a massive part in this whole disaster, but that the mainstream press hasn't really paid any attention to. Frankly, I think the NRSROs are the single most important thing that need to get fixed in the aftermath of this crisis, but so far that hasn't been a talking point at all in Washington. Oh well, maybe next time!

Author Bio:

Michael Lewis has published many New York Times bestselling books on various subjects. His most recent works are Flash Boys, The Big Short, and Boomerang, narratives set in the global financial crisis. The Blind Side, published in 2006, tells the story of Michael Oher, a poor, illiterate African-American kid living on the streets of Memphis whose life is transformed after he is adopted by white Evangelical Christians. Before that he wrote Moneyball, a book ostensibly about baseball but also about the way markets value people. Both of his books about sports became movies, nominated for Academy Awards, as did his book about the 2008 financial crisis, The Big Short. His other works include The New New Thing, about Silicon Valley during the Internet boom; Coach, about the transformative powers of his own high school baseball coach; Losers, about the 1996 Presidential campaign; and Liar’s Poker, a Wall Street story based in part on his own experience working as a bond salesman for Salomon Brothers. Mr. Lewis is a columnist for Bloomberg View and a contributing writer to Vanity Fair. His articles have also appeared in The New York Times Magazine, The New Yorker, Gourmet, Slate, Sports Illustrated, Foreign Affairs, and Poetry Magazine. He has served as editor and columnist for the British weekly The Spectator and as senior editor and campaign correspondent for The New Republic. He has filmed and narrated short pieces for ABC-TV’s “Nightline;” created and presented a four part documentary on the social consequences of the internet for the British Broadcasting Corporation; and recorded stories for the American public radio show, This American Life. Mr. Lewis grew up in New Orleans and remains deeply interested and involved in the city. He holds a bachelor’s degree in art history from Princeton and a master’s degree in economics from the London School of Economics. He lives in Berkeley, California with his wife, Tabitha Soren, and their three children: Quinn, Dixie and Walker. In 2009 he published Home Game: An Accidental Guide to Fatherhood, about his attempts to raise them.