The key ideas

The Big Short: Inside the Doomsday Machine

Michael Lewis, 2010

While the most respected banks in the world were buying up mortgage bonds, a handful of oddballs bet against them and turned out to be right. Michael Lewis tells the story of the 2008 crisis through these people: a doctor with a glass eye, a hot-tempered fund manager and two beginners working out of a shed. You'll see how bad loans were turned into excellent bonds, and why almost nobody noticed.

Who it is for

For anyone who finally wants to understand what happened in 2008 and why the banks collapsed. And for anyone who takes out loans, invests money and wants to see where they could be cheated.

What are the odds that people will make smart decisions about money if they don't need to make smart decisions, if they can get rich making dumb decisions?

He thought the madness was long over

In 1989 Michael Lewis, who had recently been a bond salesman at Salomon Brothers, published the book Liar's Poker. In it he described the Wall Street of the eighties, where young people with no experience at all made millions with other people's money. Lewis was sure he was writing about the end of an era and that readers would be horrified. Instead, students began sending him letters asking how to get a job like that.

Almost twenty years went by. On 31 October 2007 a little-known analyst, Meredith Whitney, wrote that Citigroup had got so tangled up in its own affairs that it would have to cut its dividend or go bust. The bank's shares lost eight percent in a day, and the whole market sank after them. Lewis realised that the game he had thought was mad had only been growing all that time.

So he asked himself an unusual question. Not who was to blame for the disaster, but who had seen it coming. There turned out to be very few such people, and almost all of them were oddballs and outsiders: a doctor with a glass eye, a permanently irritated fund manager, two beginners working out of a shed in Berkeley. They bet against the mortgage debt market and won, while the most respected banks in the world lost tens of billions.

This book is about them. Through their stories you'll see how the machine that nearly brought down the world economy was built. There won't be any formulas here. There will be people who read the documents nobody else opened, and who didn't believe what everyone around them believed.

A strawberry picker and a 724,000-dollar house

In the Californian city of Bakersfield, a Mexican strawberry picker with an income of 14,000 dollars a year, who spoke no English, got a loan for the full price of a house worth 724,000 dollars. Lewis doesn't tell this story as a curiosity. This was how the subprime mortgage market worked, that is, loans to people who by ordinary standards could not pay them back.

How did this become possible? In the past, a bank that issued a mortgage waited for years while the borrower paid it off, and so it was careful. By the 2000s the lender sold the mortgage almost at once. Wall Street banks bought it, bundled thousands of loans together and issued bonds backed by them. The lender was paid for making the loan, and the risk moved on down the chain.

To get people to sign, they were offered a low rate for the first two years. In the language of the market this was called a teaser, a lure. Then the payment jumped sharply. The idea was that by then the house would have gone up in value and the borrower would take out a new loan against its higher price.

As long as prices kept rising, the scheme held. The people who later made money from the crash started with a simple step: they looked at who was actually getting this money.

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About the author

Michael Lewis is an American journalist and writer who worked as a bond salesman at Salomon Brothers in the 1980s. He is the author of Liar's Poker, Moneyball and other books about money and people.

All books by this author: Michael Lewis

Terms from the book

  • Stanford
  • Securities and Exchange Commission
  • Daniel
  • Greenblatt
  • Hedge fund
  • Wall Street
  • Berkeley
  • dividend
  • Moses
  • AIG
  • Cornwall Capital
  • Salomon Brothers
  • Wall Street Journal
  • Goldman Sachs
  • CDO
  • rating agencies
  • FICO
  • Citigroup
  • Whitney: Meredith Whitney, an American financial analyst. In 2007, while working at Oppenheimer, she predicted serious trouble at Citigroup.
  • Subprime mortgage: Mortgage loans to borrowers with a poor credit history or a low income.
  • Bakersfield: A city in California in the farming region of the San Joaquin Valley.
  • Teaser: A low starting interest rate on a loan for the first few years, after which the payment rises sharply. Literally, a lure.
  • Eisman: Steve Eisman, an American fund manager. He was one of the first to bet against the subprime mortgage market.
  • Oppenheimer: An American investment firm where Eisman worked as an analyst, and where Meredith Whitney later analysed banks.
  • Aames: A California subprime mortgage lender of the 1990s, one of the first such lenders to go public.
  • Household Finance: An American consumer lending company. In 2003 it was bought by HSBC.
  • HSBC: A large British bank with business all over the world.
  • FrontPoint: The hedge fund run by Steve Eisman. In 2006 it was bought by Morgan Stanley.
  • Morgan Stanley: One of the largest investment banks in the United States.
  • Mortgage bond: A security whose payments come from the mortgage payments of thousands of borrowers.
  • Tranche: A slice of a bond with its own order of payments and losses. The top tranches get paid first, the bottom ones lose first.
  • Burry: Michael Burry, an American doctor and investor, the founder of Scion Capital. He was one of the first to bet against the subprime mortgage market.
  • Resident: A doctor who, after graduating from medical school, does hands-on training in a chosen field at a hospital.
  • Silicon Investor: An internet forum of the 1990s where private investors discussed stocks.
  • Gotham: Joel Greenblatt's investment fund in New York.
  • Scion Capital: Michael Burry's hedge fund, which operated from 2000 to 2008.
  • Prospectus: A detailed description of a security for investors. For a mortgage bond it states which loans are inside.
  • Credit default swap: A contract that works like insurance: the buyer pays a regular premium, and if the borrower doesn't pay, the buyer is compensated.
  • Deutsche Bank: Germany's largest bank, with a large investment division in New York.
  • Lippmann: Greg Lippmann, a bond trader at Deutsche Bank who urged clients to bet against mortgage bonds.
  • Xu: Eugene Xu, a Deutsche Bank analyst whose calculations underpinned Lippmann's case.
  • Refinancing: A new loan used to pay off an old one, usually on different terms.
  • Moody's: One of the three largest rating agencies in the world, American.
  • Standard & Poor's: One of the three largest rating agencies in the world, American.
  • Chau: Wing Chau, the head of Harding Advisory, a company that managed CDOs.
  • Harding Advisory: An American company that managed CDOs in the mid-2000s. It was run by Wing Chau.
  • Ledley: Charlie Ledley, a co-founder of Cornwall Capital.
  • Jamie Mai: A co-founder of Cornwall Capital together with Charlie Ledley.
  • ISDA: The International Swaps and Derivatives Association. A fund needs its standard agreement to trade swaps with big banks.
  • Hockett: Ben Hockett, a former Deutsche Bank trader who helped Cornwall Capital.
  • Gene Park: An employee of the AIG FP division who noticed that the company was insuring almost nothing but subprime mortgages.
  • Cassano: Joseph Cassano, the head of the AIG FP division.
  • Hubler: Howie Hubler, a Morgan Stanley trader whose bet on the mortgage market cost the bank about nine billion dollars.
  • Asperger's syndrome: A form of autism spectrum disorder in which a person may find social contact hard, while speech and intelligence are unaffected.
  • Gutfreund: John Gutfreund, the head of Salomon Brothers in the 1980s.
  • Partnership: A form of firm in which the owner-partners invest their own money and are answerable with it for the firm's affairs.

All terms

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