Book Review: Too Big to Fail

Too Big to Fail on Amazon.com

An ex-colleague recently told me to safely ignore Andrew Ross Sorkin’s Too Big To Fail – “it’s little more than propaganda”, he said.

Undeterred, I ploughed through the tome, finding it well-written and informative. While it may have defended certain individuals, it by no means came across as biased; though perhaps I’m just naive.

Where The Big Short is a fascinating yet brief look at a few key players in the crisis who bet against the market, Too Big to Fail is an exhaustive look at the events that occurred during the credit crisis in 2008. It follows an impressive cast of individuals, from the US Treasury, through the Federal Reserve, and just about every major investment bank in the US.

I confess that getting though the book took some effort. Not because there wasn’t ample drama and conflict, but chiefly because there was just so many characters to familiarise with.

Much of the book centres around the fall of Lehman Brothers and the attempts of all and sundry to save it. The book makes much of both Dick Fuld, the ex-CEO of Lehman who, by all accounts, tried dearly to save the firm, and Hank Paulson, the US Secretary of the Treasury under Bush, who struggled relentlessly to prevent an economic meltdown (perhaps that’s the said propaganda?).

Sorkin has evidentially put a lot of work into researching the events of the time, and the book reads surprisingly well; often throwing in well-placed reminders regarding character relationships touched on in the past. I particularly like the occasional inconsequential commentary by those present (eg. he looks fit for his age) or throwaway body-language queues that lead nowhere, immersing the reader in the situation.

While the book focuses primarily on Lehman, it also covers most of the other major events during the crisis. In particular, the buyout of Bear Stearns by JP Morgan for $2 a share with support of the US government (later revised to $10), AIG being propped up by the government shortly letting Lehman fall (by not providing government assistance to any of the buyers) and the eventual takeover of Merrill Lynch by Bank of America.

The question of whether or not the US government were to blame for the depth of the crisis by not saving Lehman remains to be seen. Pick up a copy and make up your own mind. At the very least you’ll see how they do things on the other side of Wall Street.

Book Review: The Big Short

The Big Short (on Amazon.com)

If you’re looking for a different perspective on the Credit Crisis of 2008, then look no further. The Big Short follows four of the main players who saw the impending doom of the mortgage bond market and betted against it.

Outside finance, the concept of buy low and sell high – or going long – is well understood. Of course, the industry is more than just about investing in growth. The converse to going long – or selling short – involves selling high and buying lower. In essence, shorting is quite simple. A trader who senses a downward shift in the market, may sell items at the current market price without actually owning them. They do this by selling borrowed securities that they obtain from a third party (paying fees for the privilege) until the market falls enough for them to buy low and replace their borrowed securities. While this may seem great in theory, the downside is that your losses are infinite – as the final market price you buy at has no ceiling.

Unlike the share market, shorting in the debt market isn’t always as straight  forward. In order to bet against the market, a new type of Credit Default Swap (essentially insurance against something or someone going bust) was invented to quench the thirst of those desperate to short the subprime bubble. By paying a regular premium, they were assured they’d receive compensation if a number of loans within the security defaulted. However, in the case of The Big Short, these weren’t traders hedging their books, this was pure speculation.

As the sub-prime mortgage market took off in the mid-2000s, few people thought it could end. Investments banks were printing their own money, selling off mortgage-backed securities chock-full of subprime (or suboptimal) loans. As the market ballooned, so did these loans, and as anyone living in the US at the time can contest, every man and his dog could get a mortgage for $500K plus with no deposit and no repayments for 2 years. It sounds ludicrous, but it really happened.

The Big Short follows the movements of four separate groups, intertwined and yet operating on their own, that shorted the sub-prime market. On the way, they had to fight off endless criticism from their peers, and eventually made truckloads of money.

The first is Mike Burry, founder of the hedge fund Scion and a brilliant recluse who first cottoned on to the intrinsic flaws within the market back in 2005 – well before his peers. Next comes Steven Eisman, the cynical money manager who, independent of Burry, saw the signs on the horizon and moved into shorting the market. Following is Greg Lippmann, a Deutsche Bank trader  who cottoned on to the situation fairly early in the piece and had to fight his employer to continue paying those CDS premiums against the movements of the entire market. Finally, there’s the Wall St success story of Cornwell Capital – originally a Californian-based outfit that had made its mark scouring for mis-priced securities in the stock market.

This book, by the author of Liar’s Poker, flows well and is, for the most part, chronological. It’s easy to follow even with a rudimentary understanding of financial markets. The characters are thorough and detailed; indeed, the sense of empathy he creates towards subjects is so compelling, the book is difficult to put down. The pace picks up around the meltdown itself and both the climax and denouement are well-handled – especially for a very small subset of a very large, and shockingly all too true, story.