Thursday, April 1, 2010

Michael Lewis' new book on the GFC: The Big Short

'The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him'. (Leo Tolstoy, 1897)

In the late 1980's Michael Lewis wrote Liar's Poker, an expose of Wall St that became an instant classic. It is one of the great business books of all time. Now he's followed that with The Big Short, an utterly absorbing story of the origins of the Global Financial Crisis, the incompetent and deluded (but very rich) Wall St morons who caused it, and the handful of savvy, smart outsiders who saw it coming but were universally panned, condemned and ignored.

The book is full of some 'compulsively fascinating characters' as the blurb says. But the real joy of the book for me is that it so clearly explains all the complex financial instruments that were at the heart of the sub-prime mortgage problem. By the time you get to page 140 you can immediately comprehend the following sentence and appreciate the real drama behind it:

'Only now did he fully appreciate the central importance of the so-called mezzanine CDO - the CDO composed mainly of triple B rated subprime mortgage bonds - and its synthetic counterpart: the CDO composed entirely of credit default swaps on triple-B-rated subprime mortgage bonds'. 

The Big Short is a must read - in so many ways a fable of our times.

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