You may have heard Michael Lewis’ book The Big Short, about the real estate crash in 2008, is now a movie. Apparently you can skip it. “Longtime Will Ferrell collaborator, former ‘SNL’ head writer and director Adam McKay, whose work usually isn’t even on the smart end of the comedy spectrum, co-wrote and directed ‘The Big Short,’ an inept and frequently idiotic take on Michael Lewis’ deeply engaging book, and it will largely be remembered for three things: bad haircuts, overacting and Margot Robbie in a bubble bath. . . .” writes Kyle Smith in the New York Post. Here’s what I wrote about Lewis’ excellent book in “The #1 Investment Book”:
Ironically, his new book, The Big Short, comes full circle. It is about the demise of the subprime mortgage-backed security bond market Solomon helped to create years ago. The characters alone make it worth reading. What you’ll learn, in addition to the workings of synthetic collateralized debt obligations (CDOs) and credit default swaps (CDSs), is that the market implosion was simply a matter of time.
Of course, now Goldman Sachs is facing civil fraud allegations from the government. Three years too late, I might add.
As Lewis explains in his book, Goldman Sachs was a big player in the CDO market and was eventually a big loser, too, since CDOs lose when subprime mortgages default. According to Lewis, Goldman held $16 billion in CDOs when subprime loans began defaulting and eventually incurred billions in losses, some of which it reduced with shady maneuvering. Hedge fund king John Paulson, among others, profited with CDS positions, which, on the other side of the bet, benefit from a default.
To blame just Goldman Sachs and Wall Street would be wrong. Government led by Republicans and Democrats pushing home ownership for all, easy-money mortgage lenders selling no-documentation loans, and speculative unemployed borrowers all share responsibility for the mess. Unfortunately, risks to investors will remain if toothless reform—and it is toothless—still supports a safety net for Wall Street and business as usual for the bloated Fannie Mae and Freddie Mac.
Until we see real reform, you’ll be wise to follow the lessons learned in Michael Lewis’s books and focus on value.
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