Reformed Christians are, of course, familiar with the civil use of the law to restrain evil. But as Augustine put it, “[C]ertain laws are established which are called civil laws, not because they bring men to make a good use of their wealth, but because those who made a bad use of it become thereby less injurious.”

The Big Short: Inside the Doomsday Machine by Michael Lewis
W. W. Norton & Company, 2010, 266 pages (hardcover), $27.95
Reviewed by Nathan Barczi for Modern Reformation (November/December 2010) Vol. 19, No. 6. Pages 54-55.

No one saw it coming. In April 2005, former Federal Reserve Board Chairman Alan Greenspan spoke glowingly of the burgeoning subprime mortgage industry. At his Senate confirmation hearings a few months later, current Chairman Ben Bernanke similarly disavowed any danger of a housing bubble. Policymakers, financiers, and captains of industry have spoken in near-unanimous chorus: no one saw it coming.

Michael Lewis’s The Big Short is the story of some of those who not only anticipated the collapse but made a fortune betting on it. Clearer and more comprehensive accounts of the tumult have been written, but none delivers with such force its human particulars.

The central figure in Lewis’s character-dominated account is Steve Eisman. As an analyst at Oppenheimer, Eisman earned a reputation for being brash and excessively honest about the dim prospects of the companies he evaluated. “Even on Wall Street, people think he’s rude and obnoxious and aggressive,” his wife tells Lewis. He left to run a hedge fund in 2001, and by spring 2005 his pessimism focused chiefly on the same subprime mortgage industry lauded by Greenspan.

Lenders seemingly couldn’t issue mortgages quickly enough, often with little or no proof of the borrower’s capacity to make good on the payments. Eisman began looking for ways to bet against bonds backed by subprime mortgage debt. What he found was the now-infamous credit default swap (CDS).

The buyer of a CDS effectively owns insurance against the default of a bond.

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