The Big Shortrs: After my review of Michael Lewis’s new book was posted on Friday, Sandrew asked for a bit more detail on... people who shorted the subprime mortgage market.... The point... is that credit bubbles, like all bubbles, feed on trading activity and upward momentum. If you look at the history of the subprime mortgage market, it started off small and then slowly sped up as Fannie and Freddie started accepting increasing amounts of subprime paper. Then banks started selling private-label subprime CDOs directly to investors, bypassing the GSEs; a lot of the profits in that activity came from taking the unattractive lowest-yielding tranches and insuring them with AIG. Then, after AIG exited the market, everything should have ground to a halt. But it didn’t, because banks continued to build synthetic subprime CDOs out of the credit default swaps which were being bought by Greg Lippmann and others. The demand for those CDOs from investors like Wing Chau was enormous, and helped to ratify the valuations that everybody else was placing on their own subprime assets.... My review got quite a lot of attention elsewhere, too, largely because of the last line, where I call Lewis’s book “probably the single best piece of financial journalism ever written”. It is a very good book, but at the same time there’s a faintness to the praise. As I wrote back in 2002,
With the possible exception of Michael Lewis at the New York Times Magazine, the financial journalism which appears in the generalist press (John Cassidy in the New Yorker; Joseph Stiglitz in the New York Review of Books) aspires more to authoritativeness than it does to any kind of lasting style.
Lewis’s achievement with The Big Short is that he’s written a book that a huge number of people will love to read.... It’s pretty much the first crisis book about which that can be said, because Lewis has expended enormous effort on the kind of things that most financial journalists consider optional extras: carefully-structured narrative, intimately-colored characters, beautifully-written prose. The churlish pushback against Lewis’s book, then, is misplaced, especially because The Big Short is a book-length refutation of the notorious column that Lewis wrote in January 2007, where he called the subprime bears wimps, ninnies, and pointless skeptics.... The Big Short isn’t ambitious in the sense of trying to explain everything that happened over the course of the financial crisis, but it’s very ambitious in the sense of trying to get a great book out of the crisis — one which can compete not only with finance books but also with fiction and non-fiction books more generally. I just wish that someone other than Michael Lewis would share that ambition.