The Big Short: Plot
Michael Lewis’s The Big Short recounts in a vivid and accessible way the events leading up to the near disastrous 2008 Wall Street crash following the unraveling of the subprime real estate, bond, and derivatives market. The book uses three basic modes to guide the story: 1) the descriptions of the main characters—their thoughts, personalities, lives, insights, and actions relative to the subprime bond market; 2) the history and ongoing developments that led up to and drove the events of 2008; and 3) the explanation (as much as possible) in layman’s terms of the complex financial concepts and instruments that provide the basis of the story. Lewis also attempts to set forth the broader social, political, economic, and moral implications of the events in question, but he does this mostly in a subtle way that is interwoven with the story and its characters.
The Main Idea The main gist of Lewis’s story has to do with the intersection of Wall Street and the subprime housing market. Before that time, the world of high finance had always been closed to the lower-income masses of Americans; but now, the lending institutions and Wall Street investment banks had devised ways of maximizing the minimal income and debts of the lower and middle classes. Home loans were being made to people who couldn’t afford to repay them; teaser rates were being offered for two-year periods, to be followed by higher, unaffordable interest rates; floating-rate mortgages encouraged increases in the principal until payments became too expensive; and on and on. Suffice it to say that the lending practices were irresponsible to the point of being ridiculous, and it was on this shaky basis that Wall Street decided to build its equally shaky and perhaps even more dubious mortgage bond and derivatives industry. That industry, which few people genuinely understood (least of all, the CEOs of the Wall Street firms), included credit default swaps and collateralized debt obligations composed of misrated subprime bonds that were destined to fail, though they were presented as being relatively riskless. The whole situation spelled obvious disaster, but Wall Street’s traders were evidently blinded by greed, because no one within Wall Street seemed to see it. Those who did see it, most notably, Scion, FrontPoint, Cornwall Capital, and Greg Lippmann, bet against it and made significant profits—although in almost every case those profits came with their own less easily definable price. Most of the rest of the financial world didn’t catch on until the last minute and had to be bailed out by the U.S. government. Yet somehow, even though billions were lost and a number of firms either went bankrupt or nearly bankrupt, a lot of people still got rich—no matter which side they bet on. That was one of the stranger aspects of the story.
Lewis’s Writing Style Speaking of stories, Lewis does an excellent job of creating a colorful and interesting tale out of a potentially confusing and dull subject. Do not, however, expect an immediately clear understanding of the concepts and events. One of the techniques Lewis uses in The Big Short is mystery: he gradually guides us into an understanding, apparently so that we can experience the same confusion and initial disbelief that those involved must have experienced during the actual unfoldment of the crisis.
Finally, no summary can encompass the vividness and human touch created by the many personal details that bring the book to life. Even if you have no interest in finance, the book is well worth reading for its human interest and for its broader implications for both American and global social and economic issues.