The Big Short

Most accounts of 2008 start with Lehman Brothers. Lewis starts years earlier, in the subprime mortgage bond market, and follows the investors who looked at what was inside those bonds and concluded the whole structure would fail. Their trade, buying credit default swaps on mortgage securities and the CDOs built from them, gives the book its plot. Their struggle to find anyone who understood what they were seeing gives it its argument: the people running Wall Street's biggest firms did not understand the risks on their own balance sheets.

The cast is memorable, from Steve Eisman, a blunt, combative money manager, and Michael Burry, a doctor who read mortgage prospectuses that almost nobody else read, to the losers on the other side, such as Morgan Stanley's Howie Hubler and AIG Financial Products.

Lewis, a former Salomon Brothers bond salesman and author of Liar's Poker, has a gift for making securitization clear without dumbing it down. The book spent 28 weeks on the New York Times bestseller list, was shortlisted for the FT and Goldman Sachs Business Book of the Year, and became Adam McKay's Oscar-winning 2015 film. Because it is told through the short sellers, it says less about regulators, the rating-agency business model or the government's rescue than books such as Andrew Ross Sorkin's Too Big to Fail.

Anyone starting in credit, structured finance or risk should read it first.

1. Read the collateral. Burry's edge came from studying the actual loans inside mortgage bonds while others relied on ratings and summary statistics.
2. Ratings are opinions with incentives. The agencies were paid by issuers and their models assumed housing prices would not fall nationally, which turned junk into AAA paper.
3. Correlation is the hidden risk. CDOs built from many similar subprime tranches were sold as diversified when they would all fail together.
4. Being right early feels like being wrong. The shorts paid premiums and faced angry investors for months before the trade worked, so position sizing and investor communication matter as much as the thesis.
5. Check who holds the risk. Firms such as Morgan Stanley and AIG were blindsided by exposures their own traders had created, a warning for anyone who assumes management understands the balance sheet.

The book moves from the early warnings of the mid-2000s to the collapse of 2007 and 2008, cutting between three groups of short sellers and the bankers on the other side of their trades.

1. The setup. Lewis traces how subprime lending came back after the 1990s blowups, how mortgage bonds were sliced into tranches and how Wall Street created credit default swaps on them and CDOs out of their riskiest pieces.
2. Burry finds the trade. Working alone, Michael Burry concludes from loan-level data that teaser-rate mortgages will default when rates reset, and persuades Goldman Sachs and others to sell him protection on specific bonds.
3. Eisman and Lippmann. Deutsche Bank trader Greg Lippmann pitches the short to investors, Steve Eisman's team at FrontPoint takes it, and their research trips, including a securitization conference in Las Vegas, convince them the market is worse than they feared.
4. The outsiders. Cornwall Capital's founders, small enough to be dismissed by the big banks, find a way into the trade and bet against the highest-rated CDO tranches.
5. The long wait and the crash. Prices refuse to move for months even as delinquencies rise, testing the shorts' nerve and their investors' patience, until the market breaks in 2007, Wall Street firms record enormous losses and AIG and the system have to be rescued.

The #1 New York Times bestseller: It is the work of our greatest financial journalist, at the top of his game. And it's essential reading.—Graydon Carter, Vanity Fair The real story of the crash began in bizarre feeder markets where the sun doesn't shine and the SEC doesn't dare, or bother, to tread: the bond and real estate derivative markets where geeks invent impenetrable securities to profit from the misery of lower- and middle-class Americans who can't pay their debts. The smart people who understood what was or might be happening were paralyzed by hope and fear; in any case, they weren't talking. Michael Lewis creates a fresh, character-driven narrative brimming with indignation and dark humor, a fitting sequel to his #1 bestseller Liar's Poker. Out of a handful of unlikely-really unlikely-heroes, Lewis fashions a story as compelling and unusual as any of his earlier bestsellers, proving yet again that he is the finest and funniest chronicler of our time.