Weighing In: The Big Short

I just finished Michael Lewis' wonderful book The Big Short. In it, Lewis recasts the financial crisis as a tale of heroism, where three rogue investors peer through the fog of moral recklessness and embarrassing incompetence that was the financial service sector circa 2008, and decide to short the market. They were right, of course, and they make away with a killing.

One of the most unnerving scenes in the book was a dialogue between one of the short selling "heroes" and an under-qualified "CDO manager" (a truly bizarre job!) named Wing Chau, whose portfolio was extremely long on the subprime bond market. Over dinner, Wing Chau precedes to argue that he actually likes it when people short his CDOs, and that, in fact, his worst nightmare is that they'll stop. He gets paid on volume, he explains, and he needs the short sellers to create the liquidity to keep his bets going. He actually wants the facts on the ground (like housing prices) to turn against him, so his trade volume increases. He can't get enough short sellers!

It's pretty crazy stuff. Yet there he is, Wing Chau, positioned with the rest of the sector to lose tens of billions of dollars and destroy the entire financial system...hoping for more risk and fatter returns.

Carrie Summer argues in her last post that short sellers are in a morally ambiguous position because their payout depends on the suffering of others. She's not wrong. They bet on disaster. But the thing is: sometimes they're right. Indeed, sometimes the morally responsible position is to bet against the greed and stupidity of those propping up a world that really is too good to be true, with the belief that it'll all come crashing down -- which it was and which it did. The short sellers were realists in a world gone mad.

Meanwhile, it was the "investors [who] want things to go well," investors like Wing Chau, who poured trillions of dollars into a socially valueless asset (subprime mortgages), inflated the asset bubble, and, ultimately, created the conditions that made the short sellers position so attractive, and the losses for everyone so very great.

So you'll have to excuse me if I can't muster too much anger against the short sellers, who were the only people to get this thing right, in a long line of dunces, from the bankers, to the investors, to the mortgage providers, to the rating agencies, to the Fed -- at least this time. Next time it'll be different, perhaps. But you know, I wouldn't bet on it.