“The Big Short” is taken from a phrase used in the financial world to refer to the practice, not entirely illogical, of selling investments in the expectation that the value of the investments will decrease in the near future. When conducted on a mass scale, however, such as was the case with the sub-prime mortgage market, and with financial instruments of dubious validity, the transfer of such investments can catch financial markets off-guard and precipitate a crisis. Marketing financial instruments, like stock or bond derivatives, that are known to rest on highly questionable assumptions and accounting practices and unloading those instruments right before they inevitably collapse is “the big short.” In his 2010 study of the financial crisis that destroyed major U.S. investment firms and left behind thousands of victims among the lower and middle classes, Michael Lewis lets one of his book’s subjects describe the mentality that dominated Wall Street:
“[Money manager Steve] Eisman was predisposed to suspect the worst of whatever Goldman Sachs might be doing with the debts of lower-middle-class Americans. "You have to understand," he says. "I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a s**t what it sold." . . . The very first day, we said, 'There's going to come a time when we're going to make a fortune shorting this stuff. It's going to blow up. We just don't know how or when.'" By "this stuff," Eisman meant the stocks of companies involved in subprime lending. Stock prices could do all sorts of crazy things: He didn't want to short them until the loans started going bad.”
Lewis titles his book The Big Short because that is precisely what occurred with the sub-prime mortgage market. The bundling of billions of dollars in dubious mortgages and placing them on the market was a recipe for disaster, and Lewis’ study of the 2008 crisis captured the dynamics very well. “Buy low, sell high” is the founding motto of the stock market. Unloading investments that are expected to sour is only common sense – assuming the selling-off of those assets is not the product of illicit information (i.e., insider trading) indicating that the value of the investment will likely fall under specific circumstances – and the nature of investing is, as Lewis points out, not dissimilar to gambling. When the investment involves fraudulent or highly suspect instruments, though, the playing field is no longer level. The gambling metaphor, in the context of “short” selling, was described by Lewis as follows:
“The line between gambling and investing is artificial and thin. . . Maybe the best definition of "investing" is "gambling with the odds in your favor." The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side--the entire financial system, essentially--had gambled with the odds against them. Up to this point, the story of the big short could not be simpler.”
Michael Lewis is a very good student of financial practices, and does an admirable job of explaining complex financial instruments in lay-man’s terms. Even in retrospect, however, what transpired in the U.S. banking and financial services industries during the 1990s and 2000s was anything but simple.