I just finished reading “The Big Short: Inside the Doomsday Machine” by Michael Lewis. Michael Lewis is also the author of “Liar’s Poker,” which described his 3 years working on Wall Street, advising investors on major investments when he said he had no idea what was going on. In fact, not many people he worked with knew what was going on. Mr. Lewis is also the author of the recent Hollywood hit, “The Blind Side.” In all, he has written 10 books.

In “The Big Short,” Mr. Lewis follows a handful of investors who saw the financial crisis coming, placed bets that the market driven by bad mortgages would fail, and reaped millions of dollars when they proved to be right. It was a very entertaining book. Most of the time, I was absolutely astonished that CEO’s, top financial government officials, and rating agencies failed to see disaster ahead. The rest of the time, I was just plain fearful that we are only beginning to see the first part of what will be a major economic crisis (one investor who saw this coming told his mother “I think we might be facing something like the end of democratic capitalism.”)

In fact, the most incredible part of this story is that there were only a handful of people in the United States who understood the real implications of you and me getting loans for our houses with no money down. That means that CEO’s down to new hires on Wall Street completely overlooked the risks involved in the credit market for mortgages. But not only them. People around the United States started buying houses they could never afford (one strawberry picker obtained a loan to purchase a $750k house while only making $14k a year). The media (watch the media laugh at Peter Schiff in 2006-07), the government, and investors worldwide completely missed the signs.

One of the scariest quotes of the book comes on page 214:

“They weren’t lying; they genuinely failed to understand the nature of the subprime CDO.”

In this quote, Mr. Lewis is specifically talking about bond traders at Morgan Stanley who failed to understand what they were selling, but also about the market in general. In other words, this wasn’t some big scheme to screw the American middle class, it was complete ineptitude & idiocy by some of the highest paid, most educated, most esteemed people in the United States. That scares me more than this being a big fraud. We can go after a Bernie Madoff because he knew he was screwing people. We can’t go after the CEO’s of the major Wall Street firms because they were inept. In fact, we have rewarded them with bailout money.

Overall, I highly recommend this book for those interested in our country’s recent financial disaster. I’ve noticed that it has already helped me better understand what I am reading in the newspaper about the continuing financial crisis.

For entrepreneurs, this book is an important read. It was the corporate people (Wall St) who couldn’t think straight and inevitably lost all their money. The handful who saw it coming were mostly outside of the industry. Those who were outside the culture and could look at information without Wall St. groupthink were the ones who profited. The book starts out with this quote by Leo Tolstoy:

“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him.”