Big Short

Finished reading Michael Lewis' The Big Short. I've read many of his books, and really enjoy his writing style. This book is no different. Lewis focuses on a few smart, dedicated and especially odd investors who grappled with one of the greatest trades of all-time - short the subprime bubble. It is an in-depth look at the underpinnings of the financial crisis without getting too technical, and I would recommend it to all kinds of readers.

The underlying theme that impressed me most about the characters in the book was the dedication and commitment these people had to the trade, and the uphill battle most of them endured to keep it on. These people started shorting the subprime market as far back as 2005. It took 2-years to begin paying off - and pay off big it did. However, during that 2-year period each of these characters faced significant adversity from their investors - who all wanted them to unwind the trade!

John Paulson, the most famous winner in this trade, isn't covered in this book other than a few references. He probably didn't grant Lewis access. However, Lewis in more than one instance, insinuates that Paulson didn't come up with this trade alone. Rather, one of the characters in the book supplied him with the idea.

My boss during this period knew Paulson. They had worked together at Bear Stearns. When word came out in 2007 that Paulson had made a killing betting against subprime mortgages, my Boss berated himself (and tangentially us) for "not seeing it." We had long discussions about it when I was lucky enough to occasionally ride along during his daily car service. Without even a full understanding of how the trade worked, I would argue that it wasn't that easy, but he couldn't let it go. With more information now, it is even more apparent that we couldn't have pulled it off. As seen from this book, 1. you basically had to be introduced to this trade to even know it existed. Many of the securities that allowed you to go short were very esoteric; 2. you had to understand the nature of the trade, and dedicate significant analytical resources to know what you were shorting; 3. you had to be in the trade well prior to 2007 and stay in it!

The last point is the most salient. My boss was insistent after-the-fact that we should have been involved. However, to be "involved" meant putting this trade on in size in 2005 (or at least in early 2006) - and lose small amounts of money for the next 14-26 months straight. During that time, you had to endure investor complaints and threats that, "this isn't your area of expertise, you are wrong about this! Get out or give us our money back!" Even before reading this book, I knew from articles that Paulson's investors thought he was nuts! My boss (and particularly his partner) didn't have the stomach for that. They would have caved at the first investor letter. This trade would have been shuttered in the first six months, for sure.

20/20 hindsight is great for figuring out what you should have done. Having the fortitude and stamina to do it in real-time - and finish it out is something different altogether. The characters in The Big Short proved it, and it makes compelling reading.