You’ve got be really weird to think that everyone else is wrong and be willing to bet heavily on your thoughts. Lewis’s book follows several people who bet against the subprime mortgage bubble. Lots of people said they saw the apocalypse that was coming, but these people actually bet on it.
One of the guys that ran Cornwall, "had bought a small farm in the country, north of San Francisco, in a remote place without road access, planted with fruit and vegetables sufficient to feed his family, on the off chance of the end of the world as we know it." Here’s another talking to his before the crisis:
"I said to my mother, ‘I think we might be facing something like the end of democratic capitalism,’" said Charlie. "She just said, ‘Oh, Charlie,’ and seriously suggested I go on lithium."
Here’s some on Eisman:
He’d go to meetings with Wall Street CEOs and ask them the most basic questions about their balance sheets. "They didn’t know," he said. "They didn’t know their own balance sheets." Once, he got himself invited to a meeting with the CEO of Bank of America, Ken Lewis. "I was sitting there listening to him. I had an epiphany. I said to myself, ‘Oh my God, he’s dumb!’ A lightbulb went off. The guy running one of the biggest banks in the world is dumb!" They shorted Bank of America, along with UBS, Citigroup, Lehman Brothers, and a few others. They weren’t allowed to short Morgan Stanley because they were owned by Morgan Stanley, but if they could have, they would have.
Burry is "a one-eyed money manager with Asperger’s syndrome."
In addition to chronicling the stories of these very interesting people, the book is probably the best complete explanation of what went wrong that I’ve read. It includes a (very short) bit on making loans to poor people, blaming the rating agencies, and all the other explanations you can think of. However, most of the blame is put on the fact that investment banking is conducted in a certain way, and once the investment banks turned into public companies, there was basically no restraint on their willingness to take risk. Here’s how Lewis sees the crisis:
The subprime mortgage market had experienced at least two distinct phases. The first, in which AIG had taken most of the risk of a market collapse, lasted until the end of 2005. When AIG abruptly changed its mind . . . The people who ran the CDO machine at the various firms had acquired too much authority. From the end of 2005 until the middle of 2007, Wall Street firms created somewhere between $200 and $400 billion in subprime-backed CDOs [and AIG was not on one side at this point]: No one was exactly sure how many there were. Call it $300 billion, of which roughly $240 billion would have been triple-A-rated and thus treated, for accounting purposes, as riskless, and therefore unnecessary to disclose. Much, if not all, of it was held off balance sheets.
This sort of thing would not have happened if the investment banks were betting their own money, but they weren’t and they still aren’t. As Lewis says, "[w]hat’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. . . . What are the odds that people will make smart decisions about money if they don’t need to make smart decisions–if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they’re still all wrong."
Nevertheless, the personalities were more interesting to me than the story. Burry found that, "he had been right, the world had been wrong, and the world hated him for it."