I got myself a copy of The Big Short after reading Michael Lewis' take on the euro crisis. Lewis really has a nag for unearthing some great stories. In The Big Short Michael Lewis tells the story of the financial crisis through the lens of three largely unknown hedge funds, which, at an early stage, placed bets against the U.S. subprime mortgage market. At the time they were derided by their peers and found it difficult to attract investors, but eventually their contrarian views paid off handsomely. Lewis only briefly mentions John Paulson, who was late to the game, but made the biggest bet and subsequently the largest profit.
The Big Short is a great journalistic narrative. Even though the material is familiar to me I enjoyed reading it. So, if you're still looking for a good read about the financial crisis, I can recommend The Big Short. Despite its narrow focus it manages to put a finger on much of what was wrong in financial markets in the years preceding the crash. And if you read between the lines you can learn a lot about the world of finance.
In case you wonder where I myself fit in, I was mostly a bystander, my expertise was in equity, equity derivatives and statistical arbitrage. From that I drifted more in the direction of "global macro", which is why I've been reading all those books about big history and current affairs in recent years.
I remember how around 2000 people started moving into credit derivatives, which at the time was still a niche market, as banks began setting up their own structured finance shops. While I understood the concept behind securitization and synthetic CDO's, I never understood why it became so big or why all the slicing and dicing and repackaging created a package that, as a whole, had a better risk and return profile than the underlying securities. In my view somewhere along the line some risks were mispriced. Colleagues whom I queried about it over lunch dismissed my qualms as evidence that I just didn't get it. I never traded on my doubts or beliefs like the cast in The Big Short. Like the people who worked in M&A or other corners of finance I just concentrated on my own work and, of course, my private intellectual and artistic pursuits.
As to the banking system as a whole, I've always thought the party wouldn't last forever, I mean, from an economic point of view it makes no sense for the banking sector (or investing) to be more profitable than other sectors of the economy for years on end. However, I didn't expect the whole system to collapse. This, in fact, is what got me interested in finance again. Intellectually, the current economic and political disarray has made the world more interesting.
Michael Lewis, When Irish Eyes Are Crying. Vanity Fair, March 2011.
Michael Lewis, Beware of Greeks Bearing Bonds. Vanity Fair, October 2010.
The book has been made into a movie starring Christian Bale, Steve Carrell, Ryan Gosling and Brad Pitt.