The Big Short

by

Michael Lewis

Teachers and parents! Struggling with distance learning? Our Teacher Edition on The Big Short can help.

The Big Short: Chapter 1 Summary & Analysis

Summary
Analysis
Steve Eisman got into finance in the early 90s, shortly after Lewis got out. He gets his first job through his parents, who work at Oppenheimer securities, one of the last remaining small firms to survive on Wall Street. He starts as an equity analyst, looking at the value of public companies. Eisman finds that many people in equity analysis are hesitant to go against the consensus, but that he has a talent for it.
Eisman is an important figure, so Lewis establishes his background. Clearly, Eisman comes from privilege, since his parents helped him get a job. But his first financial job as an analyst demonstrates that he’s not like the others at his parents’ financial firm; while his coworkers are uncomfortable with contradicting the conventional wisdom, Eisman isn’t. This will be a source of his great success.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Early in his career, Eisman has to analyze Aames Financial, a company that extends loans to low-income Americans through a process called subprime mortgage lending. Eisman doesn’t understand the documents about the company at all.
While many people—especially early in their careers—might assume that their inability to understand something is a weakness in themselves, Eisman pays attention to his confusion, seeing it as a sign that something might not be right. He is not willing to trust information that he can’t verify himself.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
The second company Eisman analyzes is the Lomas Financial Corporation, which has just come out of bankruptcy. Despite pressure to be upbeat, Eisman puts a “sell” rating on the company because it is “a piece of shit.” Shortly after his report, the company goes bankrupt again, and Eisman establishes himself as an analyst whose opinion can move the markets.
Eisman grows to be more confident in contradicting the conventional wisdom and bucking the industry pressure to be optimistic about the future of various firms. Here, this confidence seems earned, since Eisman’s unpopular decision turned out to be correct. Already, Eisman is very powerful—his analysis can move markets, affecting broad swaths of the economy.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Eisman becomes a polarizing figure on Wall Street, beloved by those who “get” him but hated by others, particularly important men who are surprised by Eisman’s seeming lack of deference. At one point, Eisman insults the head of a large brokerage at a lunch meeting, then leaves to use the bathroom and never comes back, bewildering the other meeting attendees. Even Eisman’s wife, Valerie Feigen, admits he has no manners, though she claims he’s “sincerely rude” rather than “tactically rude.” “He knows everyone thinks of him as a character, but he doesn’t think of himself that way,” she says. “Steven lives inside his head.”
Eisman’s unconventional attitude extends beyond his contrarian analysis at work; his social demeanor is unusual and even off-putting, as well. Clearly his uniqueness is a core part of his personality that extends across his life. When Eisman’s wife says he’s “sincerely” rude rather than “tactically” rude, she’s implying that his poor manners are just who he is—he’s not being rude as a tactic, or as a way to gain power or put people on edge. This all paints him as a true eccentric, someone incapable of being anything but himself.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Get the entire The Big Short LitChart as a printable PDF.
The Big Short PDF
Lewis concludes that Eisman was a “curious character” entering Wall Street at the start of a “curious phase.” Much of this strangeness was due to the mortgage bond market. Unlike other bonds, which are based on fixed terms, mortgage bonds introduce uncertainty, since individual borrowers can repay their loans early if they want, or refinance when interest rates are low. This leaves banks less able to predict their revenue from mortgages. To combat this uncertainty, firms like Salomon Brothers devised a system to pool home loans together into groups called “tranches.” Buyers of bonds in the first tranche received the highest interest rate in exchange for the most risk, with subsequent tranches having less risk but lower interest rates.
Lewis situates Eisman’s story in a larger historical context, explaining the somewhat complicated topic of bond markets and the ways that various firms innovated to deal with uncertainty, inadvertently leading to the financial collapse. Though Lewis uses some pieces of jargon like “tranches,” he is always careful to explain what these words mean so that he doesn’t alienate people in his audience who aren’t finance experts. This is important, since he thinks that one of the major factors in Wall Street’s collapse was that everything became so needlessly complex that nobody could understand it, not even the experts.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
In the 1980s, the main fear of mortgage bond investors was that home loans would be repaid too fast, not that the loans wouldn’t be repaid at all. This was because the government would guarantee many home loans, promising to pay them if the borrower defaulted (which means failed to pay back a debt). Starting in the 1990s, however, Wall Street began speculating with bonds on loans that didn’t qualify for government guarantees, since the borrowers were less creditworthy.
Lewis again looks at how the Wall Street of the 1980s set the stage for more recent events. He reveals that things didn’t change overnight—there was a gradual escalation in the 90s where bonds became riskier. This passage also makes clear how Wall Street speculation is tied to the daily lives of everyday people—financiers were betting on people's homes.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
In the 1990s, Steve Eisman is one of the few people looking into the consequences of these risky loans; one of the others is Sy Jacobs, who went through the same training program at Salomon Brothers as Lewis and who went on to work at a small investment bank. Jacobs recounts to Lewis how the subprime mortgage bond market began with allegedly altruistic intentions: by mass-marketing the bonds, banks would reduce the cost to low-income people who needed to borrow money, since they would be able to replace high-interest credit card debt with lower-interest mortgage debt.
Since the subprime mortgage meltdown didn’t happen until 2007, Eisman is a pioneer for taking notice of how risky the loans were way back in the 1990s. Ironically enough, however, Eisman starts off by believing that the bonds could be good for lower-class Americans who might be able to buy a home now. This was true in some cases, but for a lot of people, the lenders were preying on them by offering them loans they wouldn’t ever be able to pay back. Here, Eisman is uncharacteristically optimistic, and it doesn’t pay off.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
By the mid-1990s, Jacobs and Eisman both believe in the potential of subprime mortgage bonds to help alleviate income inequality, but Jacobs admits that it was a “fast-buck business” that brought in sleazy speculators. Eisman helps take many subprime companies public, partly due to pressure from his employer and partly because he believes the story that these bonds are helping consumers.
Eisman’s interest in income inequality is one of many things that makes him an unusual figure on Wall Street. On the surface, Eisman might look like a hypocrite for helping to bring subprime companies public then later railing against them, but Lewis frames the story to suggest that Eisman’s motivations are consistent and that he simply changed his opinions after he had more information.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Meanwhile, Vincent Daniel grew up in Queens without the same advantages that Eisman had. After learning that the real money is in Manhattan, he gets a job at a junior accountant and is assigned to audit Salomon Brothers. There, he is shocked to find how opaque the company’s books are, and how no one can answer any of his questions.
Vinny’s lower-class background sets him up as a foil for the upper-class Eisman, showing how two men from very different backgrounds ended up having similar interests. Like Esiman, Vinny is attuned to his own confusion and curiosity. When he finds the books at Salomon Brothers to be difficult to understand, he assumes that the problem is with them, not with him. This proves perceptive.
Themes
Outsiders vs. Conformists  Theme Icon
Needless Complexity Theme Icon
Vinny concludes that Wall Street firms are “black boxes,” and that it’s not even possible for an accountant to tell if they’re making money or not. Frustrated with his job, Vinny applies for a job at Eisman’s company, Oppenheimer. The initial interviews go well, but when Vinny gets a call from Eisman that he assumes is the job offer, Eisman leaves for an emergency call and doesn’t come back on the line. Two months later, Eisman calls back and offers Vinny the job.
Eisman once again proves to be an odd character, even toward people who understand his worldview. Vinny’s tolerance for this unusual interview process suggests that he must really be interested in what Eisman is doing.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Vinny later finds out that Eisman never called back because he’d just learned that his firstborn infant son, Max, had died. His wife, Valerie, was calling because the night nurse fell asleep next to the baby, rolled on top of him, and smothered him. This was the moment when Eisman stopped believing he was safe and started believing bad things could happen to anyone at any time.
The death of Eisman’s son humanizes him and makes his erratic behavior seem more sympathetic. It also explains why he has such a dark worldview. As a very privileged person, he had assumed that he was immune from various kinds of tragedy and hardship. Realizing that he isn’t immune helps him see the world more clearly, especially its darkness and risks.
Themes
Outsiders vs. Conformists  Theme Icon
Pessimism vs. Optimism Theme Icon
Vinny doesn’t know Eisman’s whole story when he starts work—he just knows that Eisman seems different from their previous meetings. Eisman begins to become increasingly negative at work. He wants to write a report that basically condemns the practices of the whole industry. Still, he has to be cautious, because there are consequences in the industry for people who make predictions that are both negative and wrong. Eisman asks Vinny to go into a room and look at a database of mortgage loans until he finds out what’s going on.
Eisman’s attitude has perceptibly changed since the death of his infant son. While he was always willing to buck the conventional wisdom of his field, he now seems to be spoiling for a fight, wanting to reveal to the other privileged people around him that their field is deeply flawed. Perhaps he's scandalized that all these financiers seem to feel—as he once did himself—that they are invincible from the professional risks they’re taking. Regardless of his motives, Eisman’s new negativity is productive; it’s what leads him to start investigating what’s really going on in mortgage loans.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Vinny teaches himself about mortgage-backed securities and finds that Eisman’s intuition is right: there’s something rotten in the subprime mortgage industry. Companies are disclosing massive earnings but not being honest about the massive risks they’re incurring.
Vinny proves himself to be a competent self-starter. He gets deeper into the nitty gritty than Eisman, but Eisman’s intuition often turns out to be correct, and Eisman relies on Vinny’s research before moving forward.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Vinny first notices that lots of people in the “manufactured housing” (mobile home) sector are prepaying their loans surprisingly quickly. Eventually, Vinny realizes that many of these prepayments are in fact “involuntary” (a euphemism for defaulting on the loan). Money lenders are losing money on these defaulting loans, because the interest rates aren’t nearly high enough to justify the massive risk.
Lewis slowly unravels the mystery of the housing market by showing step-by-step how Vinny and Eisman discovered what was really going on. The fact that people who purchased mobile homes are defaulting on their loans is the first sign that maybe the current mortgage market isn’t so great for lower-class Americans after all. While these mortgages did allow them to become homeowners when they otherwise couldn’t have been, they’re losing their houses because they can’t actually afford their mortgage payments. In other words, these loans are making things worse for them because they’re left with debt, bad credit, and no home.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Ultimately, Vinny takes six months to sort through all the data about subprime mortgage loans. He reports to Eisman that the whole thing is basically a Ponzi scheme, with companies making more and more loans to cover the losses of their previous loans. Eisman uses this as evidence in a report that harshly criticizes all the subprime mortgage companies.
Lewis doesn’t bother retelling everything that Vinny and Eisman did in their six months of research, but the fact that they took so long suggests they were thorough. Despite Eisman’s reputation for being contentious, he does take his time to do the research before spouting off contrarian opinions. In other words, he’s not just going against the grain for its own sake—he’s rigorous because he wants to ensure that he’s right.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman’s report creates a “shitstorm,” according to Vinny, and this is exactly what Eisman wants. His report comes in 1997, during an economic boom—but less than a year later, many subprime lenders are forced into bankruptcy.
Again, the fact that this all happened in 1997 shows that Eisman and Vinny were way ahead of the curve and that they didn’t just get lucky when they later shorted the subprime mortgage market.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman emerges as a leading skeptic on Wall Street. He leaves his job for a new one at the hedge fund Chilton Investment, where he continues to analyze companies. By 2002, there are no public subprime lending companies left in the U.S. There is, however, a large consumer lender called the Household Finance Corporation, which is perpetrating a related type of loan fraud. The company is telling borrowers that interest rates will be 7 percent, when in fact they end up being closer to 12.5 percent.
Lewis shows how Wall Street is like a many-headed hydra—as soon as one problem is solved, another one pops up to replace it. So even though Eisman’s report helped bankrupt some firms that had shady practices, it doesn’t reform the industry overall. Once again, borrowers (i.e., those most in need of money) are the ones who end up being hurt by dishonest business practices.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman finds hundreds of complaints from borrowers who discover that they have been lied to by the Household Finance Corporation about their interest rates. He begins a crusade against the company, alerting reporters and regulators to the fraud. The federal government fails to respond. At the end of 2002, Household settles a class action lawsuit for a $484 million fine, but just a year later, the company is sold to the British finance company HSBC Group for $15.5 billion.
Eisman makes the transition from a renegade within his industry to someone who crusades on larger social issues. Yet again, the problem seems to be solved, only for a new twist to reveal that things are still as bad as ever. Establishing how hard Eisman tried to clean up the industry will give him a little moral credibility later on, once he makes tons of money shorting the market. This all shows that he didn’t simply profit off of the crisis; he tried for more than a decade to keep it from happening.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman is shocked by the scale of Household’s fraud. He starts becoming more political and notices how the regulatory system seems designed to protect people at the top. A lover of comic books, particularly fractured fairy tales, Eisman sees the subprime mortgage loan as its own sort of fairy tale. Borrowers are told they’ll be able to pay off all their other loans with one new loan at a low rate, but the rate isn’t real—it’s just a teaser to get new people to sign up. As Eisman learns more, he realizes that big financial institutions are out there to make a profit at any cost, even if it means taking advantage of the poor.
After trying and failing to clean up the industry’s shady mortgage practices by revealing the malfeasance of specific firms, Eisman sets his sights on another part of the industry: its regulators. Supposedly, regulators exist in order to make sure the industry is running well, both logistically (in terms of its business practices) and morally (by not destroying society), but Eisman realizes that this isn’t what’s happening; the regulators basically exist to help rich people make even more money. The regulators seem to have no problem with widespread practices that ruin the lives of the poor, even when poor people are essentially the victims of fraud.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman started as a Republican, but his experiences in finance, such as watching the CEO of the fraudulent Household collect $100 million, lead him to become a socialist. Frustrated that his current job doesn’t let him manage money, he sets up his own hedge fund at FrontPoint Partners, which is owned by Morgan Stanley (although Morgan Stanley doesn’t provide investment money). Eisman tries to raise money, but at first, he can’t.
Lewis brings up Eisman’s Republican past to show that, while politics may not always play an obvious role in the story, they are often part of the subtext, particularly for Eisman. His experiences on Wall Street completely change his worldview, and this is what leads him to crusade against what he sees as terrible practices in the industry. He didn’t start as an ideologue; instead, seeing what was really going on radicalized him. His socialist politics and his difficulty raising money help establish that, despite his privilege and experience, he’s still something of an outsider to the industry.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Related Quotes
In spring of 2004, Eisman begins to despair that he’ll never raise any money. He takes an unconventional type of therapy, but he causes problems in the meetings—so much so that the therapist eventually begins calling Eisman’s wife, Valerie. Valerie gives Eisman an ultimatum: if his new project on Wall Street doesn’t work out, they’re leaving New York to start a bed and breakfast. This motivates Eisman to work hard enough to get his first investment: $50 million from an insurance company.
Despite his privilege, not everything comes easily to Eisman. The anecdote with his wife, however, shows that if Eisman is just given the right motivation, he can do just about anything that he puts his mind to.
Themes
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Eisman’s unusual style attracts a certain type of person. Vinny comes to FrontPoint Partners right away. Porter Collins, a former Olympic oarsman who previously worked with Eisman, also comes. Finally, there’s Danny Moses, who worked with Eisman at Oppenhiemer and was impressed with his style.
Even though Eisman’s rudeness alienated many people around him, his intellect and honesty were ultimately responsible for attracting a loyal and trustworthy team.
Themes
Outsiders vs. Conformists  Theme Icon
By 2005, Eisman and his employees begin to feel that Wall Street doesn’t understand what’s going on—the subprime mortgage industry is roaring back, bigger than it ever was. Instead of learning a simple lesson (not to lend money to people who can’t pay it back), Wall Street firms simply learned how to get better at hiding the risks of subprime loans in their books. Eventually, all the big Wall Street investment banks want a piece of the subprime game, including Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley.
Lewis shows how the financial products being offered on Wall Street became increasingly complex in the years before the crisis. They importantly became deliberately complex, as this complexity allowed firms to cover up the huge risks they were taking, making their companies seem more profitable. Sometimes this complexity even hides who is responsible for the risk if the investment goes bad.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman, who already has a lot of experience with subprime mortgage markets, realizes the whole market is going to blow up at some point, and that it’s possible to make a fortune on shorting it (betting that the value will go down). Eisman has an epiphany: he realizes that instead of focusing on stock picks, he needs to do something with bonds.
Here, Eisman gets the big idea that will motivate him for the rest of the book: shorting the market and focusing on bonds. Because Lewis has carefully sketched the background of Eisman and his team, it’s easy to see how Eisman’s unusual career made him the perfect person to discover the problems in the subprime mortgage market.
Themes
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Related Quotes