Basically, they managed to get risky bonds re-rated as triple-A, the most secure rating, dishonestly lowering their perceived risk. A CDO gathered a hundred different mortgage bonds, usually the riskiest ones, and used them to erect a new “tower” of bonds that helped to make them look more attractive to potential investors. Lewis talks specifically about CDOs, or collateralized debt obligations. He explains that the subprime lending industry was first invented to make the system more efficient, but that it gradually became a way of hiding risks and taking advantage of poor Americans, giving them loans that realistically they would never be able to repay. Toward the middle of the book, Lewis shifts his focus from these two characters, toward explaining the intricacies of Wall Street and its different industries. At the same time, he went through personal trials, such as finding out that his son had been diagnosed with Asperger’s, and that he most likely had the syndrome, as well. Burry would go on to face an enormous backlash from his investors as he stuck with his plan. This seemed like a doomed plan, as everyone believed that the subprime mortgage bond market could never fail.
But when Burry chose to bet against the subprime mortgage bond market, his investors balked. He had always explored finance in his spare time and had a rare talent for making predictions and dispensing good advice when he opened his hedge fund, he had immediate success. When he was approached by Greg Lippmann, a bond salesman from Deutsche Bank who had figured out how lucrative it could be to buy credit default swaps on subprime mortgage bonds, Eisman jumped on the chance to be against Wall Street.Īt the same time, Michael Burry had opened his own hedge fund, Scion Capital, after quitting a promising career as a neurologist. After the death of his infant son, he became even more cynical about the industry, which he believed, was driven by a single creed: “fuck the poor.” He began to investigate the subprime lending industry, with the help of his new hiree Vincent Daniel, to see if there was any corruption he could unearth or some aspect he could bet against. Eisman was known for his brashness and his willingness to challenge Wall Street norms, and the industry as a whole. In the first few chapters, Lewis profiles Steve Eisman and Michael Burry, two particularly quirky characters. He went on to write The Big Short in 2011 to focus on the financial crisis of 2007-2008, which he believes has roots in the 1980s. Instead, the industry only seemed to begin hiding its practices better. Lewis explains that he originally wrote his first book, Liar’s Poker, believing that people would change their ways if he shed light on the corruption of the 1980s. He worked for Salomon Brothers as a bond salesman in the 1980s, which exposed him to the corrupt practices that eventually led to a crash in the 1990s. Lewis begins the book with a Prologue in which he explains his personal history on Wall Street. He concludes by tying this crisis back to its roots in the 1980s, and by noting that not much has changed on Wall Street in the years since the crash. Along the way, Lewis also delves into the personalities and actions of people on Wall Street who contributed to the deepening of the crisis.
The narrative revolves around these characters: Steve Eisman of FrontPoint partners, who bet against the subprime lending industry thanks to the advice of Greg Lippmann, a bond trader from Deutsche Bank who recognized the benefit of shorting the industry Michael Burry, a quirky and isolated hedge fund manager who used his investors’ money to bet against subprime mortgage bonds and Cornwall Capital, a company that bet against the bonds on the later side and chose to short the most highly rated of them. It focuses in particular on a few exceptional people who were able to predict the crisis in advance and thus profit from it. The Big Short tells the story of the lead-up to the 2007-2008 financial crisis.