Summary
Michael Lewis’ telling of this story draws on his personal experience on Wall Street. When he was only 24, he landed a job with Salomon Brothers, though he felt very unprepared for the position. He worked there for three years before leaving, partly out of a sense that his situation must be unsustainable because he was so unqualified. His first book, Liar’s Poker, tells the story of his experience on Wall Street. When he wrote this, he believed he was penning a kind of warning for future employees or investors; he didn’t think anyone would believe that such crazy and risky things could happen on Wall Street, if someone who had first-hand knowledge did not record them. This was also the first time someone had written about the bond market, as opposed to the stock market. Lewis expected that readers of his book would be appalled by his stories and see them as a reflection of a particularly crazy and unstable time in the 1980s. Instead, his readers seemed to approach the book as a “how-to manual.” New generations joining Wall Street continued its tradition of huge bonuses, rogue traders, and scandals. Lewis came to believe that nothing could bring down Wall Street. In 2007, however, an analyst named Meredith Whitney correctly predicted that Citigroup had badly mismanaged its affairs, and caused a crash in the stock market. People began to listen to her warnings about how risky and unbalanced Wall Street had been.
Lewis felt personally invested in Whitney’s takedown of Wall Street because he knew that he could have raised similar alarm bells; he had worked with many of the same people that she warned against. In March 2008, he reached out to her in order to find out more about how she had been able to make these predictions. It turned out that she had a background in literature, and ended up working at Oppenheimer and Co. thanks to a kind mentor named Steve Eisman who helped her to rise through the ranks. Eisman had expressed great pride in her after she had called out Citigroup. Lewis then heard of a hedge fund manager named John Paulson who had made billions of dollars by betting against the subprime mortgage bonds that had gotten Citigroup in trouble. Lewis realized that a number of people within the Wall Street system had realized ahead of time that it was headed toward a crash because of these bad subprime mortgage bonds. He asked Whitney to give him a list of investors who had predicted the crash ahead of time. One of the most prominent was Steve Eisman.
Lewis goes on to tell Eisman’s story, beginning in 1991 when he was a thirty-year-old corporate lawyer who wanted to change professions. Eisman’s parents worked at Oppenheimer securities as brokers, and managed to find him a new job at their company, instead. This company was one of the last of old-fashioned Wall Street firms, and felt more like a small family business than a large corporation. This made it a good learning environment for Eisman, who quickly rose through the ranks of the company thanks to his contrarian personality. Oppenheimer valued people who dared to be different and bold, and Eisman was good at this. He was also known to be brash and rude; he said whatever he was thinking, even if it may have seemed inappropriate to other people. For example, when evaluating the group Lomas Financial, he wrote that it “loses money in every conceivable interest rate environment,” even though the company claimed to investors that it was perfectly stable. He gained a reputation as someone who fought for the underdog and stood up to powerful people when others didn’t dare to. He also became known for how good he was at predicting when a given company would fail.
Eisman became particularly interested in the mortgage bond market, which became an important sector on Wall Street a decade before he arrived. Mortgage bonds are different from normal corporate and government bonds; they are not one giant loan for an explicit fixed term, as these other two types tend to be. Instead, a mortgage bond is based on cash that comes from a pool of thousands of individual home mortgages. Investors don’t know how long their investment in home loans would last, but do know that they will get their money back only when interest rates fall and mortgage borrowers can refinance more cheaply. This is the worst time for investors to get their investment back, since they end up with cash that they can invest only at lower interest rates. Salomon Brothers originally came up with the mortgage bond market, and they also came up with a solution to this problem: they took big pools of home loans and divided the payments made by homeowners into different pieces called “tranches.” The buyer of the first tranche would get hit with the first wave of mortgage prepayments, but would also get a higher interest rate in exchange. The owner of the second tranche took the next wave and the next highest interest rate, and so on. The investor in the last tranche had a low interest rate but also a very high assurance that his investment wouldn’t end before he was ready. Standards for these mortgage bonds would be set by government agencies like Freddie Mac and Fannie Mae, which guaranteed that if homeowners defaulted—in other words, failed to pay back their loans at all—the government would pay off their debts.
When Eisman started researching the mortgage bond market, it was in the middle of an expansion. Mortgage bonds were extended to loans that did not qualify for government guarantees. This made an incentive for lenders to give credit to homeowners who were less likely to pay back their loans. Sometimes, homeowners were being given credit not to buy a house, but to cash out the equity they had in a house they already owned. (This was called a home equity loan.) Within this system, investors in the first tranche were exposed to actual losses. But those who had invented the system believed that it could benefit lower-middle-class Americans by allowing them to pay lower interest rates on their debts. The consumer could take out a low-interest home equity loan and use it to pay off high-interest credit card debt. Sy Jacobs, another analyst who understood the risk of this system, noted, however, that, “Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people.” He and Steve Eisman discovered the potential dangers of this system early on, in the 1990s.
Vincent Daniel joined Eisman’s firm after being too contradictory for his old job in accounting. Eisman took him on to analyze numbers that he was confused by. In fact, Eisman originally put off hiring him for two months while dealing with the death of his infant son, accidentally killed by the night nurse who rolled on top of him in her sleep. This incident changed Eisman’s outlook, making him more cynical and willing to believe the worst of people and situations. He wanted to write a report that would take down the entire subprime lending industry, which he believed to be corrupt, and had hired Daniel to find detailed evidence of its faults for him. Though he didn’t know anything about mortgage-backed securities to begin with, Daniel taught himself enough to recognize that these companies did not disclose the delinquency rate of home loans they were making, because they did not want to admit to how high the risk of their business really was. Daniel noticed that there were high prepayments coming in from “manufactured housing,” another term for mobile homes. The interest rate on these loans wasn’t high enough to justify the risk of lending to mobile home-owners, but the subprime loan industry was giving out cheap loans that made these poor people feel wealthy—even though the industry did not actually have any real earnings.
In many ways, the subprime lending industry was like a Ponzi scheme: they borrowed more and more capital to create more and more subprime loans that were not actually going to be profitable for their lenders. Daniel passed on his findings to Eisman, who immediately used the information to criticize the industry. He published a report in September 1997, when the US economy seemed to be booming, in which he described this dangerous phenomenon. Then, he went to work at a hedge fund called Chilton Investment, where he was relegated to analyzing companies. This role showed him what was going on inside the market for consumer loans, which would allow him to develop insights that few other people on Wall Street had. In 2002, he investigated the consumer lending company Household Finance, and realized that it had lied to borrowers by claiming their interest rate was only 7 percent, when it was in fact closer to 12.5 percent. Eisman went on a crusade against the Household Finance Corporation to expose this fraud, but the federal government ultimately failed to punish the corporation. After observing this injustice firsthand, Eisman decided that our economic system boiled down to one brutal principle: “really, ‘Fuck the poor.’” From then on, he became determined to expose the ways in which the housing industry exploited poor and middle class Americans. This determination was crystallized by the fact that subprime financiers did not learn from the crash that occurred in the 1990s, after the poor quality of their loans had been revealed; instead, they learned not to keep any information on the books, and continued to give loans to people who could not repay them. In fact, the industry only grew, and the terms of the loans changed in ways that increased their likelihood of going bad: they sold off loans to fixed income departments of big Wall Street investment banks, which in turn packaged them into bonds that were sold to investors.
In 2004, the stock market investor Michael Burry first got involved in the bond market. He taught himself how subprime mortgage bonds worked in order to learn how to “short” them, meaning bet against their success. He was the eccentric owner of the hedge fund Scion Capital, which attracted an amazing amount of investment in a short amount of time after Burry spent years building online resources for dispensing financial advice, and proved himself to be gifted at understanding finance. Burry had originally been a doctor, but spent much of his time learning about the stock market. He finally quit the medical field to open Scion Capital, and only got drawn further into finance thanks to his immediate, incredible success. He was especially interested in credit default swaps: insurance policies that had fixed terms for paying them off, meaning that you could only lose as much as you put in, but could make many times more if the company you invested in defaulted on its debt within that fixed term. In particular, Burry wanted to bet against the real estate market, which he sensed was so corrupt that it was bound to go bad within two years, after the artificially-low interest rates were reset and rose. When Burry first got involved in this, there were no credit default swaps available on subprime mortgage bonds. But he convinced big Wall Street firms to create them, and sell them to him at low prices. This was possible because no one else but him believed that these loans would go bad. Burry was also careful only to buy credit default swaps from banks less exposed to the mortgage bond market, with a lower chance of going completely bankrupt and being unable to pay him when these bonds went bad.
Burry was able to involve his hedge fund in betting against the subprime mortgage bond market thanks to his particular policies and the trust he had built up over time. He made sure that his investors could not remove their money on short notice, as most others could, because he was sued to disagreeing with popular sentiment and knew he needed space and time to take such risks. Nevertheless, his investors were shocked and appalled by his decision to bet against the subprime mortgage bond market, as this was unheard of. He was able to pick which mortgage bonds he wanted to bet against because no one suspected what he was doing; banks gave him their lists without realizing that he was picking the ones that had the highest chance of going bad, thanks to his unusual knowledge and ability to spot which bonds were the lowest quality. In November of 2005, Greg Lippmann, the head subprime mortgage trader at Deutsche Bank, bought back the six credit default swaps Scion had bought back in May. Soon after, other banks reached out asking to buy theirs back, as well, and Burry realized this must mean that the inevitability of a crash had become apparent.
Analysis
Lewis begins his first chapter by introducing Steve Eisman as a character. He establishes his own connection with Eisman early on, noting that “Eisman entered finance about the time I exited it.” This connection also reminds readers of Lewis’ authority as the narrator of these events; he has insider knowledge regarding Wall Street, and is thus well-positioned to paint an accurate portrait of the industry and its employees. Lewis goes on to make use of this authority by delving deeply into Eisman’s personality and biography. He describes Eisman the way the author of a novel would describe a fictional character: “He was pressured to be a bit more upbeat, but upbeat did not come naturally to Steve Eisman. He could fake upbeat, and sometimes did, but he was happier not bothering.” Lewis’ descriptions of Eisman are intimate, and provide a glimpse into the inner workings of his mind. The depth of these illustrations makes clear that Eisman will go on to be a central character in the story, whose unusual personality will be an important component of the plot.
Lewis also leans heavily on interviews when painting a picture of Eisman. He includes a number of interviews with Eisman himself, who describes his motivations in his own words. He also conducts interviews with Eisman’s wife and many of his colleagues at the Oppenheimer group. This use of interviews further establishes Lewis’ credibility as a narrator, and provides direct access to the important characters of his story. People like Eisman can speak for themselves, in addition to being described as characters by Lewis. This mix of descriptions with interviews is characteristic of the genre of the text: Lewis’ book is nonfiction, as it recounts the true events of the Wall Street housing market crash in 2008, but it also tells a compelling story. Lewis provides readers with an informed assessment of the housing market and the inner workings of Wall Street. At the same time, he shapes these events into a story, complete with interesting characters such as the quirky Steve Eisman and the aloof Michael Burry, and a plot based on these characters’ life stories.
This first chapter also includes a number of more technical descriptions of how the economy works. Lewis quickly introduces the concept of a mortgage bond, and describes how they function for readers who may not have prior knowledge of financial markets. These descriptions are interspersed throughout more plot-driven moments of the chapter; for example, Lewis explains mortgage bonds after telling the story of how Eisman hired the cautious young Daniel to investigate the housing market for him. This helps him to weave a straightforward lesson about the housing market into the more compelling story of Eisman’s personal crusade to bring this same market down. Such a mix of economic details with personal narratives is characteristic of Lewis’ work; he provides readers with a work of nonfiction, which explains in detail how the housing market crashed and how certain people knew about it ahead of time, but also builds a story that revolves around unusual, compelling characters such as Eisman and Daniel. This results in an unusual genre that mixes biography, economic analysis, and history.
A clear contrast is established between the characters of Steve Eisman and Vincent Daniel. Lewis introduces Daniel as someone who grew up “without any of the perks Steve Eisman took for granted.” This immediately makes clear that Daniel is Eisman’s opposite in many ways. While Eisman had been born in luxury but acted crassly, Daniel was born into a lower-class family but conducted himself with elegance and care. The contrast between these characters helps to highlight the strengths and weaknesses of each. Daniel goes on to help Eisman with the numbers aspect of the business, and his fastidiousness helps him find the information Eisman has been looking for to support his big-picture idea.
Lewis also builds a narrative by drawing on the dramatic elements of Eisman’s investigation into subprime mortgage and comparing them directly to typical fairy tales. As he describes Eisman’s early forays into researching subprime mortgage lending, Lewis also relates his personal interest in superhero movies and fairytales. He notes that Eisman left work early every Wednesday to receive a new shipment of stories at Midtown Comics, and that he was most interested in dark retellings of classic fairytales. “Now a fairy tale was being reinvented before his eyes in the financial markets,” Lewis narrates. This personal detail about Eisman’s interests signals what kind of story Lewis intends to tell: he sees elements of a twisted fairytale in the financial secrets that Eisman goes on to uncover. Eisman’s fondness for superhero stories and dark retellings of familiar tales helps to explain his personal motivations for exposing the corruption he finds in the subprime lending industry. It also shapes Lewis’ narration of these events; he portrays Eisman as a kind of new superhero, and the lending industry as a fairytale gone wrong.
