Running head: THE BIG SHORT INSIDE THE DOOMSDAY MACHINE
The Big Short Inside the Doomsday Machine by Michael Lewis
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THE BIG SHORT INSIDE THE DOOMSDAY MACHINE
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The Big Short Inside the Doomsday Machine by Michael Lewis
In 2010, The Big Short Inside the Doomsday Machine by Michael Lewis which raised a
topical theme of the reasons for a global financial crisis 2008 was awarded a title The Book of the
Year among the top-10 rating including Amazon, The Economist, and Bloomberg. The story is
inspired by real people from Wall Street who succeeded in making billion dollars, whereas
experienced experts failed. The financial catastrophe 2008, according to Lewis, was predictable and
expected, but inevitable due to the mutual agreement between the U.S. banks and some American
authorities.
Michael Lewis, a famous American author of 13 books, was interested in mysterious and
always growing losses of several big banks from Wall Street in the sub-prime mortgage market. His
book is about four traders who managed to game some big banks at Wall Street and even earned
money during the 2007-09 financial crisis. It is a story of success of four financial novices who
were totally unaware of mortgage and debentures, but could break the existing financial system and
gain income. The atmosphere of chaos and total collapse caused the brightest and the most selfish
employees to commit mass suicides due to their personal tragedies and evoked the main heroes to
find a unique way of escaping the financial disaster.
The book contains one interesting thought about the fresh perspective of newcomers. They,
according to Lewis, can find a way out where others will see only the dead end. Lewis also reveals
the main reason of the collapse – the absence of enough regulations in financial sphere by greedy
state bodies as well as irresponsibilities and short-sightedness of American management. Although
Wall Street is recognized as a territory of avarice, Lewis argues that greed was the real reason for
the collapse. Moreover, both banks and investors were chasing easy money, whereas American
officials were indulging the financial institutions' actions.
Lewis explains why crisis affected the whole world and not just several U.S. banks and
mortgage companies. In Lewis’ viewpoint, American market of mortgage securities was
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significantly larger than the market of treasury notes or bonds (2010, p. 250). In particular, during
only 2005, more than $500 billion out of $625 billion sub-prime loans were turned into mortgage
bonds (Lewis, 2010, p. 290). It resulted in American economy’s dependence on the constant growth
of real estate prices, and, therefore, all large investment banks got stuck in a bad quality mortgage
operations.
One more financial instrument affected the size of a financial catastrophe which was synthetic
collateralized debt obligations (CDO's) that consisted of mortgage bonds (Lewis, 2010, p. 94).
CDO’s were made up by banks as the way to earn more money on mortgage obligations, and they
were used to turn poor rating obligations into high rating ones. Such trick attracted large
institutional investors, such as retirement funds and insurance companies that were forbidden to buy
risky assets. Nevertheless, CDO’s themselves were the riskiest assets ever, but rating companies, as
Michael Lewis claims, fully comprehended the degree of risks still estimated them as high as
possible due to the fear of losing the most profitable customers – investment banks (Lewis, 2010, p.
210). “The rebellion by American youth against the money culture never happened. Why bother to
overturn your parents' world when you can buy it and sell off the pieces?” Michael Lewis said
(2010, p. 6).
Lewis reveals that from $200 to $ 400 billion were spent on bond issuance without real
security (2010, p. 276). The mechanism used by American banks required to attract the third party
who would be ready to purchase a credit default swap or CDS: a cheap insurance in case the loaner
cannot pay off his or her mortgage loans. Such an insurance did not conform to the huge risk
threatening all financial system (Lewis, 2010, p. 86). In contrast, those investors who recognized
the elements of risk sold short and made a living. As a result, CDO’s repeatedly reenacted the worst
mortgage bonds which laid to the foundation of the financial pyramid to be broken one day.
At the beginning of 2007, a decline in the real estate market became statistically apparent.
Real estate prices stopped growing as well as loaners could not bear the strain on the credits and
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stopped paying off their credits and started the countdown for the bankruptcy of mortgage
obligations’ holders, one of the largest of which was an investment bank, Bear Stearns (Lewis,
2010, p.8). Another big player, Merrill Lynch, suffered huge losses and was purchased by Bank of
America (Lewis, 2010, p. 46). It resulted in the downturn of the United States’ stock indices and
then in the broad spread of financial crisis. Consequently, since the days of Great Depression, the
world economy did not feel so bad and could survive only due to the U.S. taxpayers money, emitted
to support the largest financial institutes. At the same time, almost no one among the responsible for
the crisis was punished for pumping up the financial bubble, although Lewis assigns responsibility
for the crisis to the U.S. Federal Reserve Board Chairmen, Alan Greenspan and Ben Bernanke,
Treasury Secretary, Henry Paulson, and investment banks directors (Lewis, 2010, p. 271).
Summing up, Michael Lewis, an American talented journalist, wrote an exciting book in
which he explained the collapse of the financial system through the real stories of real people:
investors, who managed to recognize the real state of affairs. On the first sight, Lewis’s heroes were
negative because they made a fortune when the global economy was crashing. However, if the rest
of financiers were as insightful as Lewis’ characters, the crisis would not have happened.
Lewis’s key conclusion stated that the crisis of 2008 became possible due to the absence of
necessary regulation of financial sphere from the American government, which provided the U.S.
financial institutes with too much freedom. Besides, The Big Short Inside the Doomsday Machine
by Michael Lewis provides much food for thought on how justifiable is the principle of nonintervention in an economy from the authorities' side.
The role of Lewis’ book is difficult to underestimate. It serves as an initial financial literacy
for those who have no idea how all financial institutions work. Perhaps, individuals will become
more alert and thoughtful regarding credit responsibilities, capable of thinking critically before
following the financial consultants' recommendations, and recognizing any assessment of rating
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agencies as credible. The crisis of 2008 will always remind human beings that long-term benefits
are better than short-term perspectives.
THE BIG SHORT INSIDE THE DOOMSDAY MACHINE
References
Lewis, M. (2010). The Big Short - files.haiguinet.com. Retrieved 2016, from
http://files.haiguinet.com/newupload/1331691030_158The_Big_Short.pdf
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