Lewis uses a metaphor to describe the unraveling of the financial system: “Two men in a boat, tied together by a rope, fighting to the death. One man kills the other, hurls his inert body over the side—only to discover himself being yanked over the side.”
Metaphors like the one Lewis uses can make complex topics easier to understand. Here, he is implying that the big banks are fighting with each other to survive, but they’re so intertwined that even the “victorious” banks get pulled down. Even the Big Short traders realize they will have to live in a broken financial system.
By the end of 2007, FrontPoint has doubled the size of their fund, from $700 million to $1.5 billion. Both Danny and Vinny want to realize their profits and get out—partly because they still don’t trust Lippmann, even though he helped make them richer.
The Big Short traders are smart enough to cash out, knowing that the market is so volatile that they could very quickly lose it all.
Eisman, however, still sees his short position as part of a moral crusade against big Wall Street firms. By March 14, 2008, FrontPoint has a short position on basically every financial firm connected to subprime mortgage bonds. Eisman is invited to give a speech that day at Deutsche Bank’s headquarters, alongside a famous investor named Bill Miller (who owns a lot of stock in Bear Stearns) and former Federal Reserve chairman Alan Greenspan.
As always, Eisman’s strategy is directed in part by his emotions. Though his presentation with Bill Miller isn’t a debate, it will pit two radically different perspectives on the market up against each other.
On the day Eisman is set to speak, there are rumors that Bear Stearns is in trouble. Bill Miller nevertheless goes on stage before Eisman and speaks briefly about why Bear Stearns is still a good investment. Eisman takes the stage after him and gives a characteristically blunt speech about why the current financial markets are historically bad.
Miller either isn’t following the markets as closely as Eisman or has an incentive to spin things more positively than they are. Eisman, however, doesn’t hold back and gives a harsh assessment.
At the very moment Eisman is speaking, Bear Stearns stock begins falling rapidly. Eisman doesn’t realize what’s happening, but his speech is proven correct in real-time by the movement of the markets. Eisman credits Bear Stearns’ surprising collapse to “leverage”: the firm kept making riskier and riskier bets with its capital. Importantly, the risks of these speculative bets were hidden, since a large proportion of the bonds were triple-A rated (which are considered riskless for accounting purposes). At first it isn’t even clear who besides Bear Stearns will have to eat the subprime losses and how big these losses will be.
Like many people and firms in the book, Bear Stearns is undone by greed and a poor understanding of risk. Lewis brings this fall to life by picking a particularly dramatic moment—when Eisman was right in the middle of a speech about the problems with firms like Bear Stearns.
In a Q&A after the Eisman’s speech, Miller says Bear Stearns probably won’t fail, since banks usually only fail when caught in criminal activities. Someone in the back of the audience points out that Bear Stearns has actually dropped 20 points since the speeches began. Miller is stunned but hesitantly says he’d buy more. Everyone rushes out, perhaps to sell shares of Bear Stearns, and Alan Greenspan speaks to a near-empty room.
The fact that Miller predicts Bear Stearns won’t fail at the very moment it’s failing suggests how far some on Wall Street will go to avoid seeing the truth. Even when presented with direct evidence, he refuses to admit that he might be wrong.
Lewis describes a typical morning at 6:40 a.m. on Wall Street, with the big bank employees headed in to work. The morning of September 18, 2008, is very different. For one, the streets are emptier, since Lehman Brothers filed for bankruptcy earlier in the week, and Merrill Lynch sold itself to Bank of America. The stock market is in freefall, and the Federal Reserve loaned $85 million to AIG to pay off its subprime losses. Along with the Treasury, the Fed is trying to calm investors, with little success.
At last, the problems in the markets are impossible to ignore—the Federal Reserve’s positive messaging does nothing to calm the markets, since everyone finally understands that this is a bloodbath. The big firms on Wall Street are forced to reckon with their risky business practices and the markets drop sharply as a result.
FrontPoint is well-positioned to make massive profits. They have already unloaded all their credit default swaps for huge gains and they transition back to being regular stock market investors. They still have lots of traditional shorts on financial institutions, which are all falling in value, earning FrontPoint even more money. Danny knows he should be excited, but he's anxious instead. The fundamentals of investing suddenly don’t seem to apply, as the markets are moving based on emotion now. Danny knows FrontPoint is in trouble if Morgan Stanley goes down, since Morgan Stanley technically owns them, and Morgan Stanley is in trouble. The stress causes Danny to think he’s having a heart attack, but it turns out it’s only an anxiety attack.
Rather than putting all the money into one strategy, FrontPoint diversifies. Even though he has succeeded by making some once-in-a-lifetime trades, Danny can’t enjoy his success and in fact even has anxiety attacks as a result. Reality sets in: even though a few people have won big, the subprime mortgage meltdown will have long-lasting, widespread effects.
Cornwall is also successful, increasing its capital fourfold, but they too have trouble enjoying the victory. Ben and the others wonder where they should put all the money they’ve made in order to preserve it. Charlie starts getting migraines.
Though being an underdog can be stressful, being on top creates its own pressures. Here, Ben and Charlie learn this and first begin to grapple with it.
On September 18, 2008, even the pessimistic Charlie Ledley is surprised. The losses that major Wall Street firms are reporting are way beyond even what he expected.
Lewis emphasizes the severity of the crash by showing that even pessimists didn’t expect how bad it was going to get.
After his successful bet against the financial industry, Michael Burry wonders what people in the future will think about him. He looks for ways to get out of money management so that he no longer has to deal with Scion Capital’s investors. On November 12, he sends a final letter to investors indicating that he’s closing down the fund. He has some trouble quitting because the fund has a 35-year-contract (even though he made enough money to pay everyone in full), but lawyers are able to sort it out.
After finally proving himself to his investors, Burry isn’t eager to continue doing the same thing. The fact that someone with so much aptitude would willingly leave the industry suggests the mental (and perhaps physical) toll it can take on a person. It might also reflect Burry’s own restlessness and desire for new challenges.
At the steps of St. Patrick’s Cathedral with his partners Vinny and Danny, Eisman considers how he wants to be, now that he is no longer an underdog (something he used to take pride in). He gets a reputation as a genius—even the doctors at his colonoscopy have heard this about him. Vinny has some doubts about what they did, since he feels like he may still have been part of the corrupt financial system. But Eisman is more self-assured and sees the fall of Wall Street as justice.
Even someone as self-assured as Eisman gets disoriented by sudden fame. Vinny’s concern that he helped further a corrupt system may be valid—in many ways the Big Short traders did operate similarly to traditional Wall Street traders, and they profited off the misery of others. But Lewis also shows the many ways in which the Big Short traders were outsiders and how they worked in a way that was backed up by better data and clearer thinking.
On the ground on Wall Street, it isn’t clear that anything major has happened. People go about their business in Manhattan. Lewis asks, “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?”
Lewis’s ending leaves room for ambiguity. Clearly, something massive has happened in the finance world, and it will ripple out into other industries. But at the same time, The Big Short deals with abstract and complicated deals that don’t necessarily have an immediate effect on the average person on the street of Manhattan. Though on Wall Street, it seems inevitable that a reckoning will come at some point, at the moment Lewis is writing about, it’s ambiguous what form this reckoning will take. Lewis’s book itself will play a role in educating people about what really went down in the financial industry and how it affects them.