Summary
The head of Morgan Stanley’s subprime mortgages, Howie Hubler, made a notoriously bad trade. He had played football in college, and was known for his overbearing manner, loudness, and stubornness. His career was much like Greg Lippmann’s, until the subprime mortgage bond market boomed. Until then, he was essentially playing a low-stakes poker game rigged in his favor, since nothing had ever gone seriously wrong in the market. By 2004, Hubler was cynical about subprime mortgage bonds to some extent, and wanted to find some way to bet against them. He didn’t understand subprime mortgage bonds very well—they were particularly opaque and confusing, and Hubler did not know much about his own job. But when he ended up getting greedy about how much he had to pay out in order to bet against some subprime mortgage bonds, Hubler sold a number of them off. He ended up betting on the A-rated CDOs; he was cynical to some extent, but not cynical enough to realize he needed to bet against all subprime mortgage bonds. At first, Hubler made the company money by betting for some subprime mortgage bonds, and was promised a bonus. He ended up taking the bonus and leaving the company. When the bet ended up costing Morgan Stanley an enormous amount of money, Hubler was long gone.
Hubler was not unusual in his choice to make this ill-fated bet in favor of A-rated subprime mortgage bonds. Many other traders believed that the bonds were entirely safe, and most banks and firms on Wall Street tied themselves to the subprime mortgage market in a variety of ways. However, when it began to go wrong, they began to “release their grip” from this disastrous market, one by one, allowing it to take off and do harm to the American public as a whole. Hubler’s case is also illustrative of bad communication on Wall Street, however. His bet had been “stress tested” for scenarios in which subprime pools experienced some losses, but nothing higher than 6 percent, which was the highest loss faced in recent history. They failed to stress test these bets for anything worse than that. When he was asked, at one point, what would happen if a worse scenario did come about, his only response was that “that state of the world can’t happen.” Hubler’s traders did eventually look into what would happen if losses were ten percent or higher, and found that Morgan Stanley would lose at least $2.7 billion. But nobody followed up on this. Hubler and his traders insisted everything would be fine.
In early July of 2007, Morgan Stanley was contacted by Greg Lippmann, who told Hubler that the credit default swaps he had sold Deutsche Bank six months earlier had gone bad, and Morgan Stanley now owed Deutsche Bank $1.2 billion. The triple-A-rated CDOs that everyone had assumed to be riskless were now worth only 70 cents to the dollar. At first, Hubler and Morgan Stanley refused to believe that this could be the case. The loss seemed so enormous that it was beyond belief. Greg Lippmann tested this disbelief by asking whether Morgan Stanley would be willing to sell them back at seventy, and buy more at seventy-seven. Otherwise, they could pay the $1.2 billion. Of course, Morgan Stanley didn’t buy any more of these bonds that were clearly no longer good. Hubler did continue to insist on not taking a loss, believing that his triple-A CDOs should still be worth 95 cents on the dollar. His superiors eventually agreed to give Deutsche bank $600 million as a compromise. Otherwise, Deutsche Bank would have had to take the matter to a panel of Wall Street banks that would evaluate how much the triple-A rated CDOs were worth. The fact that they were unwilling to do this testifies to how much confusion and misunderstandings prevailed on Wall Street; Deutsche Bank did not trust that these banks would accurately see just how bad the CDOs had gotten.
In the months that followed, the triple-A rated CDOs continued to fall in value. Deutsche Bank repeatedly offered Morgan Stanley chances to exit the trade. For example, when Greg Lippmann first called Howie Hubler, he offered him the chance to exit the $4 billion trade at a loss of only $1.2 billion, but by the second time, the price had risen to $1.5 billion. It only continued to rise from there. Hubler continued to argue about the price and refused to exit. Consequently, in the end, Morgan Stanley ended up owing Deutsche Bank $3.7 billion. At that point, Hubler had been fired. In fact, the bond traders at Morgan Stanley seemed to have misunderstood their own trade. They didn’t realize just how bad the triple-A rated CDOs were, and just how much they would end up owing because of them. Morgan Stanley ended up suffering the single largest trading loss in the history of Wall Street, all because of Howie Hubler.
Hubler ended up retiring with his large bonus, safe from the blowback that resulted because of his bad trade decisions. But he was not the most foolish person on Wall Street at the time. Some people hung on even longer than he did. Hubler had in fact managed to find buyers for his triple-A CDOs even after Greg Lippmann had told him he owed him $1.2 billion because of them. The Mizuho Financial group in Japan and UBS, from the US, took a large chunk of Hubler’s triple-A CDOs when it should have been clear that these were not wise to trade in anymore. The trade at UBS was kept very secretive, and some in the company may have protested if they had known it was happening. By December of 2007, Morgan Stanley was forced to explain to investors how they had suffered a trading loss of $9.2 billion. The CEO, John Mack, had to field tough questions about what had gone wrong. He had a difficult time explaining himself, precisely because Mack had never fully understood what was happening even when it was happening. He had not known what his traders were up to, and could not fully explain what they had done even after they had done it, and lost him $9 billion.
At the same time, the people who had bet against subprime mortgage bonds stood to gain a large amount of money, but still felt discouraged. They recognized just how big of a disaster was possible: when banking stops, credit stops, and when credit stops, trade stops, and when trade stops...important goods like medications, core food staples, water supplies, etc. were endangered. People like Ben Hockett and Charlie Ledley had been able to predict this disaster and bet against it precisely because they were hyper-aware of the risks. But now, their hyper-awareness of risk only made them more deeply anxious about what would end up happening, whereas other people may have been simply happy that they had personally made so much money. Michael Burry, as well, was disillusioned by his success. As he said, “Making money was nothing like I thought it would be.” He received no thanks from his investors, who had benefited greatly from his successful trade and had previously unfairly criticized him. Out of anger, Burry kicked out his funding investor, Gotham Capital, which had threatened to sue him back when the trade did not seem like it was working out. When they asked him how much they should sell their stake back for, he replied, “How about you keep the tens of millions you nearly prevented me from earning for you last year and we call it even?” Soon after that, Burry found that he lost interest in studying finance as intensely as he had in the past. Instead, he switched over to the guitar.
Steve Eisman was also winning big thanks to his bets against the subprime mortgage market. For him, these bets were like personal revenge against Wall Street. When they paid out, he was thrilled, and felt that he had proven his point: Wall Street was greedy and inefficient and bad for America. At the end of 2007, Bear Stearns invited Eisman to come give a speech at a conference, opposite someone who was pro-Bear Stearns. As he spoke, insulting Bear Stearns and predicting disaster, their stock started to fall dramatically. This coincidence perfectly illustrated how right Eisman had been all along. When Bear Stearns eventually collapsed completely, it had to be bought out by J.P Morgan and supported by the government. Cornwall Capital, which had bought insurance against its collapse, made $105 million from their original bet of $300,000.
It was only in March 2007 that the stock market finally began to grasp that at least $240 billion had been lost, but no one was sure exactly who had lost it, yet. This was part of the reason that even people like Eisman, Hockett, Ledley, Daniel and Burry were dismayed rather than overjoyed that they had succeeded. Danny, the head trader at FrontPoint and the man responsible for being the eyes and ears on the market, was particularly alert to the details of the disaster. He felt that his trading life had become less “man versus man” and more “man versus nature.” As he realized what was happening with the stock market, he suffered a heart attack. The last time this had happened to him had been when he was in the twin towers during the attack on 9/11. At the same time, Ledley and his colleagues were realizing just how little they had known about the market; they hadn’t realized just how corrupt and how disastrous Wall Street was, even when they had bet against it. Eisman, meanwhile, changed his attitude. Once he is proven right and is no longer the underdog in the situation, he begins to feel bad about being in a position of power and superiority. He recognizes how bad the crash is, and tries to act accordingly. He begins to behave more pleasantly and politely, trying to become a better and more accommodating person overall.
The last chapter ends by emphasizing that this crash had consequences beyond Wall Street. As some traders sit watching people pass by in New York, Eisman notes that, “the biggest lag of all was right here, on the streets. How long would it take before the people walking back and forth in front of St. Patrick’s Cathedral figured out what had just happened to them?” In the epilogue, Lewis shifts to reflect on his experience writing the book. After publishing his first book on the financial sector in the 1980s, in which he criticized many people on Wall Street, he expected that Wall Street would change dramatically. Instead, it changed only in ways that helped distract outsiders from the corruption growing inside Wall Street. Lewis believes that the corruption of the 1980s can help to explain the crash in 2008, as well; it was then that many practices began which would continue into 2008 and end up causing such an enormous disaster. For example, the obscurity of Wall Street and its insulation from the public were both factors that allowed the 2008 crash to happen.
Analysis
In the second to last chapter, Lewis introduces a new character: Howie Hubler. This signals that the narrative is shifting to include new players and new dynamics. Hubler is one of the people on Wall Street who bet in favor of the subprime mortgage market. He is, in many ways, the opposite of characters like Burry, Eisman, and Ledley, who were introduced in the first part of the book. Hubler exemplifies the incompetence that existed on Wall Street, and the descriptions of him and his actions help us see how this kind of incompetence led to the 2008 disaster. Lewis’ introduction of a new character signals that the action in the text is picking back up, as it had in the beginning, when characters were first placing their bets and being introduced to the readers. Now, the action concerns the outcome of those bets.
More specifically, Lewis’ choice to profile Hubler allows him to emphasize just how smart and rare Cornwall Capital’s founders, and Eisman and Burry, really were. “Howie Hubler trusted the ratings,” Lewis remarks. This goes to show that Hubler was not unusual in his incompetence. Like many other people on Wall Street, he simply went along with the ratings, and trusted that nothing shady could be going on. In fact, Hubler was the norm on Wall Street. This helps to illustrate that Eisman, Burry, and Cornwall Capital were very unusual. By refusing to trust the ratings, they displayed a degree of cynicism and extra analysis that was very unusual. The narrator’s profile of Hubler thus provides a new contrast for these earlier characters, showing that their quirky personalities and early prediction of disaster were remarkable on Wall Street.
The narrator also shifts his tone toward a more dramatic, metaphor-laden one in these last two chapters. For example, at the end of the second to last chapter, he writes, “It was as if bombs of differing sizes had been placed in virtually every major Western financial institution. The fuses had been lit and could not be extinguished. All that remained was to observe the speed of the spark, and the size of the explosions.” This comparison of the impending disaster to a series of bombs with lit fuses emphasizes the gravity of the situation; “bombs” are a particularly grave weapon, with special destructive potential that is triggered but not controlled by humans. As such, they are an apt metaphor for the financial crisis, which had been “lit” by people on Wall Street but then took on a life of its own and went on to cause damage that no one could control or stop. Eisman uses a number of other dramatic metaphors to illustrate the situation, signaling its gravity. His use of metaphors also comes back to the importance of clarifying an obscure situation for his readers; one of Lewis’ main arguments is that Wall Street’s lack of transparency was one of its biggest problems, and his use of metaphors to make his argument clearer helps to combat just such a lack of transparency in his narrative.
In his profile of Burry, Eisman, and Ledley’s response to the stock market crash, Lewis makes clear that they were unusual for their intensely sad reaction to the crisis. He chooses to focus on these characters because they are the ones who predicted the eventual crash early on, and were able to bet against it well enough to make huge amounts of money off the disaster. However, the narrator makes clear that they are emotionally crushed by the crash. Although they make an enormous amount of money, none of them are left as happy as they might have been expected to be. Instead, they all recognize the enormity of the problem; they know that this will screw over lower and middle class Americans, and they are dismayed at the level of corruption they observe. By profiling these particular characters and their emotional responses to the disaster, the narrator emphasizes one of the book’s key arguments: no one was truly a “winner” in this situation, even if they made money off of it, because Wall Street’s collapse was bad for the country as a whole.
The narrator further emphasizes that this is not a story of triumph by wrapping up his narrative, cleanly, where he began. Characters like Michael Burry ended “where he began—alone, and comforted by his solitude.” The neat narrative arc of Burry’s story makes clear that this is not a narrative with a struggle, a moment of climax, and an ultimate triumph. Instead, it is a narrative in which, ultimately, nothing truly changes. People like Burry remain isolated and unhappy, despite the money they make from the crash. Eisman, as well, feels that he goes back to where he was before. He had enjoyed his time as an underdog, when he was betting against Wall Street and no one believed that he could win the bet. But, once he ends up right, “I felt bad about it,” he says. “I was no longer the underdog. And I had to conduct myself in a different way.” When he loses his status as an underdog, Eisman goes back to feeling bad about his position of privilege within Wall Street. At the same time, Wall Street itself remains greedy and incorrigible, even after messing up so colossally. And normal Americans remain isolated from and incapable of truly understanding what goes on on Wall Street.
