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Debt shall have no dominion

If you want a simple, jargon-free account of the reasons for the financial crisis that has gripped the West, written like a thriller and filled with a cast of extraordinary characters and their amazing stories, then this is the book for you.

books Updated: May 01, 2010 00:13 IST
Manas Chakravarty

The Big Short
Michael Lewis
allen lane
Rs 599 pp 266

If you want a simple, jargon-free account of the reasons for the financial crisis that has gripped the West, written like a thriller and filled with a cast of extraordinary characters and their amazing stories, then this is the book for you.

Michael Lewis tells the tale of the meltdown in sub-prime mortgages through the eyes of a group of oddballs who realised that the whole complex financial edifice erected on housing loans to poor Americans who could barely make both ends meet, in the forlorn hope that rising home prices would take care of the risk, was doomed to crash. One of them was a doctor with a glass eye who shunned people and preferred finance to medicine. Another was a lawyer who liked picking stocks. And another worked out of a shed in the back of a friend’s house in Berkeley, California, and believed the best way to make money was to bet on something that Wall Street thought was least likely to happen.

These people had one thing in common — they wanted to bet against, or short, the sub-prime mortgage industry. They were also all rank outsiders. Their initiation into the world of big finance and their voyage of discovery into the world of securitised mortgages are the stuff of this story.

It’s an incredible trip. Lewis takes us through the evolution of the industry right from the early days of securitisation, when banks found they could aggregate sub-prime mortgages, cut them up according to varying degrees of risk and by a process of financial alchemy contrive to get the best triple A rating for a portion of these loans. These were called collateralised debt obligations, or CDOs. Not content with that, they then started selling insurance against these CDOs defaulting, through instruments they called credit default swaps. And when they ran out of sub-prime loans, Wall Street created synthetic CDOs, which were nothing but bets on other CDOs.

But the nub of the story lies in the questions it raises. Lewis asks, “Why were supposedly sophisticated traders at AIG FP [the insurance company that lost billions of dollars selling credit default swaps] doing this stuff? If credit default swaps were insurance, why weren’t they regulated as insurance?... Why, for that matter, were Moody’s and Standard & Poor’s willing to bless 80 per cent of a pool of dicey mortgage loans with the same triple-A ratings they bestowed on the debts of the US Treasury?” This is not just an engrossing story, it also conveys, in graphic detail, the rot in what Lewis calls “the beating heart of capitalism”.