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Book Review - The Big Short: Inside the Doomsday Machine

Monday 24 May 2010 - by Georgie Rawkins

The Big Short: Inside the Doomsday Machine by Michael Lewis

Published by W. W. Norton & Company in March 2010

Michael Lewis’s first book, Liar’s Poker, published in 1989 was intended as a cautionary, moralistic tale about the extraordinary arrogance and greed of the Wall Street traders in the 1980s. Ironically, despite this, it became almost a recruiting manual for young graduates who were seduced by the tales of excess and hedonism, and raced to join an industry which Lewis had been condemning.

Twenty one years later, Lewis is back with a different premise. The Big Short is a fascinating description of the market that Wall Street created in sub-prime mortgage bonds and various derivative securities, which defaulted to spectacular effect in 2007, destroying several financial institutions and requiring many billions of dollars of government bail-outs to the institutions which managed not to collapse entirely.

The Big Short is the diametric opposite to Liar’s Poker in tone; the sky has fallen since then, and the days of excess and exuberance are over. However, it maintains the engaging style of its predecessor in the cast of characters Lewis introduces; the story is told through the eyes of three managers of small hedge funds, and a Deutsche Bank bond salesman who were among the few to spot early-on the fraud and extreme incompetence perpetuating the myth of the sub-prime mortgage market, and to find ways to bet against it.


Lewis’s strengths lie in navigating us through the quagmire of financial jargon and complex products and explaining how the system really works; he manages to give the truest picture of what went wrong on Wall Street and why.

It makes for depressing reading; we discover that even the traders within the institutions didn’t understand the instruments that they had created; that when investor demand for sub-prime mortgages outstripped the supply, the investment bankers filled the gap by creating “synthetic” mortgage-backed securities whose performance would mirror that of the real thing; and that the banks conspired to inflate the prices of mortgage-backed securities even when they knew that the value was falling until they had managed to ensure that their own hedging systems were in place.

It has been said that there are no heroes in The Big Short; Lewis portrays the majority of the bankers on Wall Street as not purely greedy, just hugely incompetent and unaware of the enormous risks they were taking and he exposes this in merciless and fascinating detail.


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