About the Book
The Big Short starts by telling us about how Meredith Whitney, a financial analyst, predicted the crash of Citigroup. She also predicts that something similar may happen to the subprime mortgage market. When this prediction becomes reality, Michael Lewis decides to visit her and discuss who else may have known that this would happen. At the top of her list of individuals was her former boss, Steve Eisman.
Steve Eisman, a businessman and investor who profited from the housing bubble by shorting collateralized debt obligations (CDOs), was one of the first people to become involved in the mortgage bond industry. He helped many subprime mortgage companies join the stock market. Eisman was optimistic about the mortgage bond industry at first, but then realizes that the quality of the bonds is bad and that many people default on their mortgages. Many financial firms that sell these bonds are lying about the risk. He then starts FrontPoint Partners, a hedge fund, because he thinks there is money to be made off of his knowledge.
Michael Burry
Next introduced is Michael Burry. He was a medical student, but is now the owner of Scion Capital, an investment fund. Burry starts buying credit default swaps (CDSs), which is insurance on bonds. Many financial institutions, like Goldman Sachs, started packaging subprime mortgage bonds with the highest risk as CDOs. Ratings agencies had no idea and continued to give them high ratings.
To bet against a bond is called shorting, which Burry earned lots of money doing. It wasn’t long until others started to realize what he was doing. Greg Lippmann, a bond salesman at Deutsche Bank, decided to buy CDSs for himself to sell to others. At first, he wasn’t having any luck selling them. He then met Eisman who purchases the CDSs. Eisman knew that they were likely to make him some money.
Cornwall Management
Two individuals, Charles Ledley and Jamie Mai, start Cornwall Management, a capital management company. They made millions from buying Capital One options. They end up meeting Lippmann through Ben Hockett, an employee at Deutsche Bank, and bought CDSs from him. Ledley purchased more CDSs while at a subprime mortgage bond conference in Las Vegas from Bear Stearns.
Lippmann and Eisman met a CDO manager named Wing Chau, who sells CDSs. Chau informs them that companies are creating and selling synthetic CDOs to bet against the CDSs they sell. Synthetic CDOs are bonds that must be paid out when a CDS pays out. Chau has no idea about the collapse of the housing market, so Eisman decides to buy credit default swaps from him.
Wall Street finally realizes that a housing crash is highly possible. Companies were raising the prices of their mortgage bonds to try to sell them before crash happened. The bondholders were unable to sell them and wound up in debt. Wall Street firms were also in debt because of their investment in collateralized debt obligations and the credit default swaps that they had sold. At this point, Morgan Stanley owed billions of dollars to Deutsche Bank and Bear Stearns collapsed and was sold to JP Morgan. Because they knew the secret and predicted the stock market crash, Greg Lippmann, Steve Eisman, Charles Ledley, and Jamie Mai came out the crisis with tons of money. These individuals felt somewhat bad because they knew they got rich off of the misfortne of others.
