A vital book explaining the essential causes of the Great Recession in a style so readable that virtually anyone could wrap their head around it.
The book was adapted into an excellent film in 2015 which i can say, completely unashamedly, that I have watched about seven times (and which I would say had been robbed of the academy award for best picture, if the other nominations that year hadn’t been just as good). Like many others, I’d gone into the film with a ‘vague soundbite you repeat so you don’t sound dumb’ but not much more, and the insight it imparted made me want to really get my head around the whole catastrophe.
I got the book wondering whether the movie had at all been cut down or exaggerated, but in general it appeared surprisingly true to the original text – things that I had assumed were added for the sake of characterisation ended up being mirrored in actual, real life events (such as Vennett/Lippmann’s quant, and the ‘he doesn’t even speak English’ line – not simply added by the director, Lippmann really is that much of a conniving pos). Perhaps more importantly, however, very little is left out of the explanation of how CDOs work, and how they contributed to the crisis.
For me, herein lies the main value of the book (as someone who had already seen the film): restating concepts in different ways, such as to solidify your understanding. While my experience of the films did take me from basically nothing to a rudimentary analysis, I still found myself struggling with some aspects (I found the Jenga tower, used to explain tranches in the film, was more confusing than it was enlightening); the book instead utilises different approaches to conceptualising these derivatives, strengthening comprehension – it made far more sense that the BBB rated tranches of the mortgage bonds were on the bottom of the tower if the risk is imagined as a flood, which you are naturally protected from the higher up you go, and also if you consider the dividends paid from the bonds pouring from the top down. I similarly found the explanation of synthetic CDOs far more useful – the visceral response l had to realising the sheer scope of the overvaluation in the movie didn’t need an explanation, but understanding exactly how a synthetic CDO worked (and their relation to credit default swaps) was much easier with the author’s guidance.
What’s more, Lewis’s analysis of the situation is enlightening and spot on throughout – this is exemplified by a conversation he has with the former CEO of Salomon Brothers in the epilogue, where the former CEO puts the crisis down to greed while Lewis recognised that the whole issue is far more structural; there are no ‘bad apples’, because replacing all the ‘greedy’ people in the various institutions would have given the same result as they were simply doing what seemed in their best interest at the same. He correctly identifies that the issue is with the financial system as a whole and it’s perverse incentives which lend itself to these crises repeating themselves over and over.
This analysis runs throughout the book, making it a joy to read as each page seems to impart a far greater understanding than the last. Additionally, the medium of text gives it far more scope to cover how the experience affected the main characters – depicting Christian Bale popping indigestion pills in response to stress is good filmmaking, but doesn’t compare to Michael Burry viscerally describing how his insides ‘felt like they were dissolving’. There is also greater context given to most actions – such as the muted response from investors in Scion capital, despite their absurd gains due to Burry’s genius – which gives a more holistic picture of how the run up to, and aftermath of, the collapse affected those who predicted it.
This book is not only excellent down downright necessary for anyone who is trying to understand how the world has changed – and continues to change – in response to one of the worst economic downturns in history, as well as how it came about in the first place; the author’s comment that stagnant wages could be overlooked by cheap loans seems very prescient now that we have neither wage growth nor cheap money. If you watched the film and weren’t blown away, you probably wouldn’t get that much out of the book – but if you enjoyed the film, or even if you haven’t seen the film but are in a state of ignorance about the actions which culminated in the events of 2008, this book is a must-read.
5/5
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Originally posted on Goodreads, 28/12/18
