The Big Short: Inside the Doomsday Machine

The Big Short: Inside the Doomsday Machine, published in 2010, examines the causes of the 2008 financial crisis, one of the greatest debacles in American economic history. Like many of financial journalist and author Michael Lewis’s other works, including Liar’s Poker and Moneyball, The Big Short is a bestseller. It becomes a sourcebook during Congressional hearings into the disaster.

The crash results from years of financial malfeasance and incompetence among the top salesmen and executives at the largest Wall Street banks. At the center of the storm are subprime mortgage bonds, securities that package lower-quality home loans as investments. These bonds become increasingly risky, but the danger is hidden from investors so cleverly that it fools even the banks that sell them. When the bonds fail, hundreds of billions of dollars in securities become worthless, toppling major investment banks and forcing the government to step in to save the economy from collapse. The Big Short chronicles this story and the efforts of a small number of investors who realize a catastrophe is brewing and try to profit from it.

Chapters 1 through 3 introduce the independent investors who discover the flaw in the subprime mortgage bond market: Steve Eisman, who turns his anger at bond traders’ dishonesty into a crusade; Michael Burry, an autistic medical doctor with a penchant for financial research and original thinking; and Greg Lippman, a bond trader who learns of the danger from Burry and urges investors to get rid of their subprime bonds. It dawns on each of them that the much-touted bond market is likely to crash.

In Chapters 4 to 7, the independent investors dig deeper into the mysteries of subprime bonds and their hidden pitfalls. They learn that bad mortgages are being bundled into bonds that somehow receive the highest rating. It becomes clear that the banks that sell these bonds don’t fully understand what they’re pushing.

The independents begin to make bets against subprime bonds. Chief among their tools is the credit default swap, a type of insurance that pays off only if the bond it protects goes bad. The investment teams expect that many of these bonds will become worthless. A new team of investors, Cornwall Capital, joins the hunt and searches for opportunities in the increasingly perilous market. They and the other independents are stunned to discover that virtually no one on Wall Street thinks there is any danger. Alone in their belief that the mortgage market is headed for a calamity, they press on.

The final chapters narrate events leading up to the financial meltdown and its aftermath. Major banks implode and the government spends more than $1 trillion to rescue them. The independent investors make spectacular profits, but for some the victory is shallow: How could the captains of finance have been so foolish? And what does it mean for America and the future of Wall Street?

The Big Short tells a tale of chicanery and foolishness at the highest levels of American finance, and of the few clever and persistent investors who outsmart the crooked banks but are unable to stop the headlong rush toward disaster. The book is written in an engaging and humorous style; it clearly explains a number of arcane financial mysteries that investment banks would prefer to keep obscure.

Included are an index and a new afterword for the paperback edition.