3.22.2010

Distressed Debt Book Review - The Big Short

On Friday, I picked up Michael Lewis' new book "The Big Short: Inside the Doomsday Machine" which chronicles the sub-prime short through the eyes of four different characters: Cornwall Capital, Steve Eisman, Michael Burry, and Greg Lippmann. To give you a sense of how much I enjoyed it, and how quick a read it was, I successfully finished the book last night. Despite the somewhat lukewarm review on Amazon and in the press, I really enjoyed this book and recommend it to readers.


For a little background, in early 2007, the fund with which I was working at the time was shorting both vintages of the 2006 ABX as well as a number of single name tranches of sub-prime. I learned how to analyze loan tranches using Bloomberg and Intex, stayed up on all the remittance data, and was greeted daily by email blasts from Greg Lippmann and co. A number of other distressed funds we were friendly with were also buying protection on the ABX and single named sub prime tranches. The fund had great returns but nothing like the likes of Harbinger, Paulson, or Scion.

Reading Lewis' account of the events of 2006-late 2008 for me was absolutely fascinating. I had seen Greg Lippmann present (along with Karen Weaver) but had no idea about the inner workings of Deutsche Bank and his relationship at the time. The story of Cornwall Capital was particularly interesting in that these guys started out with a little over 100k (yes: one-hundred thousand dollars), and somehow turned that into many and many of millions of dollars by betting with the fat tails (i.e. Black Scholes is wrong in assuming a normal distribution of stock prices...the better assumption may be that the tails are a lot fatter) or when the market was laying them a 100x payout for a chance they perceived at 1 out of 10.

The story of Steve Eisman is also spectacular. It is comical at times of how aggressive this guy and his analysts/traders were. On speaking about a meeting with Ray McDaniel, the CEO of Moody's:
..."But we're sitting there," recalls Vinny, "and he says to us, like he actually means it, 'I truly believe that our ratings will prove accurate.'" And Steve shoots up in his chair and asks, 'What did you just say?' - as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him. "With all due respect, sir," said Vinny deferentially, as they left, "you're delusional."
I love it.

The book chronicles from the very beginning: When Mike Burry was one of the first people to short sub prime (according to the book, Morgan Stanley was doing it before Burry but on a bespoke basis", through AIGFP being the counterparty to the short, through the CDO machine and the creation of AAA out of BBB- mezz tranches, through Lippmann pitching the trade to anyone who would listen, and through the inevitable decline in the prices of everything sub prime or CDO or bank which in my mind first began with the filing of New Century.

My favorite quote in the book came from Dr. Michael Burry when it seemed like the whole world was against him (including - which I did not know - Joel Greenblatt):
I have always believed that a single talented analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.
This quote resonated with me and it makes perfect sense. The example of Monish Pabrai or a young Warren Buffett come to mind. I know of two or three young managers pursuing the same strategy with mind boggling successes.

Nonetheless, you will not be disappointed purchasing this book. I definitely would say its the most enjoyable book I have read on financial markets in some time. Hope you enjoy.

7 comments:

Anonymous,  3/23/2010  

Hi Hunter, where can I know more about the bunch at Cornwall Capital? I once came across a Vanity Fair article about aides to Clinton's campaign. It happens that Charles Ledley, one of the founders of Cornwall, was the one responsible for running the hotel management for Clinton during his 1992 campaign at the age of 18. What a colourful character.

Jeff
Hong Kong

Penny Stock Investing Picks 3/28/2010  

I read that book as well and it was absolutely great. There were many things I saw from their points of view which I did not even consider. I reccomend it to all who are interested.

Anonymous,  3/29/2010  

Hi

Joel Greenblatt came out of the book badly. His treatment of dr Burry speaks volumes of his real attitude.
Initally he loves the returns, but when burry moves into being short credit - he wants to pull his money out and sues Burry.
when Burry is proved right, he doesnt have the grace to say he was wrong. Not cool!

Anonymous,  3/29/2010  

Great Review.
In all due respect, Monish Pabrai should not even be mentioned in the same breathe with Bury. He was way, way long Delta Funding (a small sub prime lender) at the time Bury was doing his work.
He actually presented this company at a Value Conference and tried to make the case that it had a "moat" becuase it did fixed rate sub prime loans

Sid 3/29/2010  

I feel bad for Gregory Zuckerman. His book, The Greatest Trade Ever covered Burry extensively. It covered Lippmann in detail as well. The Big Short was a good book, but having read Zuckerman's book first, I personally found it redundant. If Cornwall's story wasnt a part of it, I would have been quite upset with it.

Suzanne 9/09/2010  

Who are the two to three young managers who are pursuing this strategy today?

Anonymous,  3/15/2011  

@Sid, I read Greg Zuckerman's book as well, after I read the Big Short. I felt Lewis captured both the financial nuance (I am a finance guy) and more importantly, captured the emotions and related it to the reader.

However, just curious, what was the name of the character who made ~ 10 Mil in CA? (Andy Lauda? ) can you spell that for me?

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.