Category: The Big Short

The fiscal crisis that hit Wall Street had far-reaching impacts globally. This financial crisis has drawn the attention of many scholars, economists, and stockbrokers. Lewis is one of the financial analysts that have tried to scrutinize the 2008 obscure financial crisis in the United States.

In writing his book, Lewis conducted an in-depth analysis of the financial trends in Wall Street. As the title of this book suggests, Lewis reveals how dozens of financial experts and investors created and benefited from loan schemes.

Lewis underpins his arguments with factual accounts of investors that gained and made irreparable losses during the financial crisis. Lewis also mentions how financial experts warned about the impending financial crisis, but investors ignored their advice.

Lewis contends that the 2008 financial crisis had its origins in the 1980s when financial institutions created composite monetary products such as mortgage derivatives.

He asserts that the financial products, which increasingly became complicated, were supported by unsecured mortgages that had flexible interest rates. Companies listed on Wall Street were able to conceal the risks of investing in unsecured mortgages by making them incomprehensible. Monetary institutions also manipulated the rating of bonds to attract more clients.

For example, some companies listed in the Wall Street bribed rating agencies to incompetently rate risky bonds. Lewis notes that most evaluation techniques were entrenched in the rising property prices, which gave a false impression of the future financial situation. For example, many people failed to pay their mortgages and made serious losses because they were misguided by lending institutions.

Therefore, this book has confirmed a popular assertion by Karl Marx that capitalism has its own contradictions that compel investors to take high risks. According to Lewis, an investor who fled the stock bazaar and joined the bond bazaar exemplified a small fuzzy creature reared in an island free of marauders, but unfortunately plunged into a pit crammed with pythons.

Lewis has also attempted to give a good clue of how the Collateralized Debt Obligations and Credit Default Swap were created by some investors. He notes that dominant financial institutions in the US invested heavily in sub-prime mortgage schemes. Sub-prime mortgages were consolidated and dubbed Collateralized Debt Obligations. These mortgages were auctioned in the bond market.

Many unscrupulous property developers hurriedly bought these mortgages without carefully evaluating their capacity to repay them. Some investors gambled against the Collateralized Debt Obligations and made profits; however, some individuals incurred serious losses.

The American Insurance Group was one of the companies that invested in the Credit Default Swap and made huge losses when the stock bazaar collapsed. Although many monetary institutions ignored government regulations, they insisted on being rescued by it when they plunged into crisis.

Lewis has shed light on the monetary calamities of the Wall Street through his nimble narration of the experiences of some investors, who gained or made losses in the stock bazaar. He has discussed how the pursuit for huge profits, idiocies and financial hypocrisy led to the financial crisis.

Although Lewis has revealed the challenges of the Wall Street market, he has not provided a macro perspective of the financial crisis. Based on this book, investors should learn that some individuals create innovative types of investments and make huge profits from them. Consequently, investors should be cautious when investing in the stock market.

What is your author’s central argument or thesis?

In ‘The Big Short: Inside the Doomsday Machine by Michael Lewis, the central argument revolves around the great stock market crash of 2008. The author examines the reasons behind this great plunge, one of them being the stark decline in property prices in the year 2007 when the real estate bubble burst. Lewis also explores the bond market and exposes the institutions, banks, governments, and people who were aware of the impending doom on the stock market and the crisis but chose to stay quiet due to personal greed, shock, or to protect the interests of their large financial houses.

The author centers the theme around four groups of subprime traders who were primary short sellers in the market and had foreseen the impending doom on the stock markets. The author exposes how the financial institutions exploited and misused one of the most reliable assets of the financial industry, bonds. Even banks were engaged in the shameful practice of selling subprime mortgage bonds to create default swaps in a bid to destabilize the entire economic system.

What is the author’s perspective or point of view?

Michael Lewis reflects his personal experiences in the book. Reporting the facts of the great stock market crash in 2008, the author shares his perspective based on his personal experiences during this great fall. The author truthfully speaks of the facts which led to this fall, providing a clear perspective of the selfish people who had foreseen the fall but had chosen to remain silent for their own personal reasons.

Being a stockbroker on Wall Street, Michael Lewis feels strong resentment for the selfish actions of the fund managers and bankers on Wall Street. During an investigation for the right investment opportunities for his clients, he had found that the bond market was artificially inflated and nearly valueless.

What evidence does the author provide to support her/his central argument?

In the book, Lewis relates several short stories about the short selling on Wall Street and the resultant collapse, which affected the lives of many in 2008. Lewis tells the personal stories of his chosen traders, reflecting the flaws in the stock trading system.

In each chapter, the author provides several pieces of evidence to support his central argument. Lewis demystifies the working of Wall Street with the help of human characters such as Steve Eisman, a Wall Street broker, Michael Burry, a physician turned into a stock picker, and Greg Lippman, a bond salesman at the stock market.

For example, in chapter 2, Lewis gives very comprehensive descriptions to validate his points. For instance, his compelling accounts about the Greece economy busted the many myths about the country’s repute as a holiday paradise. Lewis exposes the greed and corruption of the Greek government, which borrowed money from the Greek banks and misused it. Lewis presents a stark picture of reality showing the corruption, greed, and infighting within the country’s top government financial institutions. Lewis exposed the real nature of the Greeks, who avoided paying taxes to the government. The parliamentarians cheated their country by creating false value of their real estate properties.

Would you recommend this book to others? Why or Why not? How valuable is this book?

Yes, I would recommend this book to others. It is a valuable book for understanding the dynamics of an economy. The book reveals how reputable banks can conspire to increase prices even when the value of securities is low. Lewis gives a clear and truthful account of the corrupt practices occurring at the highest financial levels in nations and how executives are either unaware of the malpractices or choose to remain silent to protect their institutions, putting the innocent public at risk. Indeed, ‘The Big Short’ provides the reader with a true and honest account of the great crash of 2008. The book reveals the character and motive of individuals and financial institutions, busting the myth surrounding them.

Michael Lewis uses his book “The Big Short” to analyze the events that led to the credit bubble in the United States in the late 2000th. He gives the book a subtitle “Inside the Doomsday Machine”. Symbolically, this compares a credit bubble to a doomsday machine. Thus, ”being inside” refers to the process of understanding how the credit bubble happened and who caused it to happen. He uses evidence to describe what actually took place during the event.

When analyzing the evidence involved in the credit bubble and the eventual burst up, Lewis features the lifestyles of some of the biggest fans, analysts and spectators of the bubble. In his analysis, he features the Meredith Whitney, Cornwall Capita and Burry. These people, in one way or another, contributed to the bubble or to the burst up.

They were also affected positively or negatively by crashing of the market which happened because some of them, like Cornwall were, able to make huge gains due to the crashing while others, like Meredith Whitney, were the ones who predicted the collapse of the giant Citigroup.

Lewis also uses financial evidence and summaries of the investors that happened to suffer the highest losses due to the crashing of the market. These investors were Merrill, Howie Hubler and Cassano. The loses suffered were $300, $9 and $99 respectively.

The analysis by Lewis on collaterized debt obligation (CDO) is vital in determination of mortgages and the market finances. Lewis presents various evidences to support his claims. He explains how the Wall Street contributed to the failure of the market through the creation of risky mortgages to earn more profits.

He further explains how the agencies used flawed ratings to market the risky assets, thus leading to an avalanche of CDOs. The saving of the collapsing market by the United States government led to increase in the taxes charged to the citizens thus leading to a very high debt that led to the recession later in 2000s.

Lewis’ explanation and evidence are clearly seen through the failure of the big firms to withstand the crunch. These firms included American International Group Inc. and Royal Bank of Scotland. According to Lewis, none of the participants in the market was capable of seeing such a thing. Although Meredith Whitney was an exception as it was able to foresee a possible collapse of the Citigroup.

The use of the title “The Big Short” is also a means to portray the evidence to the reader. In the real sense, the term which is used is “The Big Shot” meaning being someone with the necessary knowledge in a particular area.

This did not happen during the credit bubble as they fell short of their ability in predicting the possible collapses that might have prevented the failure of the same. Hence, Lewis choses the title “The Big Short” referring to their lack of proper usage of their skills.

The book is relevant to the course because it aids in understanding the basics of reviewing, reading and understanding the author’s message. The analysis of this book “The Big Short”, shows how to relate evidence to conclusion in any research article.

The book is important to the course because it makes sure that enough knowledge is gained in understanding the causes and effects of the credit bubble. Such lessons applied in future will prevent a similar occurrence from taking place.