Big profits for subprime prophets

Image courtesy of Norton.

Book Review
Title: "The Big Short: Inside the Doomsday Machine"
Author: Michael Lewis
Publisher: Norton, 2010; 266 pages; $27.95

The saying "hindsight is 20/20" has never been truer than when applied to explanations of the recent real estate bubble and burst and the subprime mortgage market debacle.

Every other person you talk to decries the "obvious" destiny-for-failure of every element of the crisis, from Fannie and Freddie to interest-only adjustable-rate mortgages, to ever-escalating home values.

The unanimity of backward-looking "I coulda told you so's" is so overwhelming it belies the reality that hundreds of banks, tens of thousands of professionals, and millions of homeowners participated in and had their own role to play in creating the problem. Otherwise, there would be no problem, right?

In light of all this Monday morning quarterbacking, brilliant writer Michael Lewis -- who also wrote "Moneyball" and book-turned-Oscar-winning-film "The Blind Side" -- took a dramatically different approach in writing his housing crisis retrospective, "The Big Short: Inside the Doomsday Machine."

Instead of pitching himself as a mortgage market savant, or even doing an intelligent but backward-looking deconstruction of how in the heck we all ended up in this collectively problematic situation, Lewis asked a single question of big-finance truth-teller Meredith Whitney.

She became the doomsday oracle of Wall Street when she vociferously predicted the October 2007 crash in financial stocks set off when Citigroup was forced to slash its dividend due to what Lewis unflinchingly deems its "mismanagement" of assets.

Lewis' question: Who got it right? And with foresight, not hindsight?

And, Lewis asked Whitney, who got it so right that they put their money -- at the time -- right where their mouth was? Who are the modern-day finance "Nostradamii" who felt so strongly about their then-unpopular prognostications of the subprime mortgage market meltdown that they made millions by creatively "shorting" the market?

"The Big Short" is a series of character studies -- the characters being the handful of names Whitney listed in her reply to Lewis' query. "The Big Short" weaves together the tales of exactly how, when, where and why these folks called Wall Street out -- more or less loudly, but always very profitably -- on the setup for a big-time fail that was the then-flourishing subprime mortgage business. ...CONTINUED

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