The Big Short tells the story of the lead-up to the 2007-2008 financial crisis. It focuses in particular on a few exceptional people who were able to predict the crisis in advance and thus profit from it. 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. Along the way, Lewis also delves into the personalities and actions of people on Wall Street who contributed to the deepening of the crisis. 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.
Lewis begins the book with a Prologue in which he explains his personal history on Wall Street. 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 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. Instead, the industry only seemed to begin hiding its practices better. 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.
In the first few chapters, Lewis profiles Steve Eisman and Michael Burry, two particularly quirky characters. Eisman was known for his brashness and his willingness to challenge Wall Street norms, and the industry as a whole. 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. 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.
At the same time, Michael Burry had opened his own hedge fund, Scion Capital, after quitting a promising career as a neurologist. 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. But when Burry chose to bet against the subprime mortgage bond market, his investors balked. This seemed like a doomed plan, as everyone believed that the subprime mortgage bond market could never fail. Burry would go on to face an enormous backlash from his investors as he stuck with his plan. 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. Nevertheless, he stuck with his bet.
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. 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. Lewis talks specifically about CDOs, or collateralized debt obligations. 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. Basically, they managed to get risky bonds re-rated as triple-A, the most secure rating, dishonestly lowering their perceived risk. They claimed that the 100 ground floors gathered from 100 different subprime mortgage buildings of 100 different triple-B-rated bonds were all a diversified portfolio of assets, and should be rated triple-A for this reason when, in fact, they were all the same quality: triple-B (a very low score). Lewis compares the CDO to a “credit-laundering service for the residents of Lower Middle Class America,” and explains that it was the backbone of a system that was doomed to fail when loans inevitably could not be repaid.
In the latter third of the book, Lewis also introduces the founders of Cornwall Capital, Charlie Ledley and Jamie Mai. They both had very little previous experience on Wall Street, but started Cornwall Capital with a conviction that thinking more “big picture” would pay off. Their guiding principles were that thinking globally was important, but neglected by Wall Street, which paid a lot of people well for their narrow expertise and few people badly for seeing the big picture. They also believed that people tended to be too certain about inherently uncertain things, and thus had difficulty attaching appropriate probabilities to improbable events. These principles led them to look for long-term options that they could buy cheaply, when they had a good sense that they would become more valuable in the future. They went on to bet against A-rated bonds, which had not previously been done, because they believed that this long-term bet against the most secure of the bonds would also eventually pay off. They had stumbled upon this bet late in the game, which also gave them the advantage of having more information and knowing with more certainty that a crash was coming.
At the end of the text, Lewis explains how the 2007-2008 crash eventually occured. Although it was unexpected by the majority of Wall Street and caught most of the country unpleasantly by surprise, it had been long awaited by his central characters. Eisman, Lippmann, Burry, and Cornwall Capital all made a huge profit off of the crash. But, at the same time, these characters were dismayed that their pessimistic view of Wall Street had been right after all. None of them felt completely vindicated by the disaster, but rather felt that it was something of a hollow victory. To this day, Lewis points out that Wall Street has not seen the error of its ways. Instead, it has simply changed its strategies and its terminology, once again.
