The Big Short

by

Michael Lewis

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The Big Short: Chapter 8 Summary & Analysis

Summary
Analysis
The same day that Eisman reads Grant’s article, Mike Burry is also forwarded a copy of the article from Scion Capital’s chief financial officer. Though he still has bets against subprime mortgage bonds, he had to make sacrifices to keep them, including firing half his staff.
Burry faces perhaps the most pushback of any of the Big Short traders, partly because of how his company is set up and partly because he struggles to communicate with his investors. But the cost of Burry’s bet is clear here—he was so confident in his position that he was willing to let half his staff go in order to keep his short position on subprime mortgage bonds
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Early in 2007, a child psychologist calls Burry and his wife in for a conversation about his son. The psychologist suggests that Burry’s son is exhibiting unusual behavior and should be tested. Reluctantly, Burry allows him to be tested and finds that his son has Asperger’s syndrome. While researching the symptoms of Asperger’s, Burry is surprised to realize he might himself have Asperger’s. He finds a psychiatrist for himself to help improve how he interacts with his family, but he doesn’t attempt to change how he works.
As it turns out, Burry’s difficulty communicating may have a medical cause—autism. Interestingly, Burry sees his autism as a detriment to how he interacts with his family but an aid to how he works in finance. Though Wall Street values interpersonal communication, Burry’s real skill is his aptitude for research and numbers—which he thinks his autism may help with.
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Back in April 2006, Burry is one of the few people in the credit default swap market, and he is often at the mercy of big banks and the valuations they give him. He feels his bets should be paying off, but they aren’t yet. By the middle of the year, he starts hearing from other money managers who want to make bets similar to his. This upsets him, since Scion will no longer be on the cutting edge, and adding to his misery is the fact that his investors are getting restless from poor short-term quarterly returns.
Burry thinks longer term than his investors, looking to maximize eventual gains rather than just chasing short-term profits. This is risky, however, because if the investors get restless and pull their money before the crash, Burry might suffer a big loss.
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Burry is in trouble because if Scion’s assets fall enough, big Wall Street firms can cancel the bets he made with them. Furthermore, some of his investors will soon be eligible to take their money out. Burry discovers, however, that there is a loophole that allows him to “side-pocket” certain investments if he thinks a market is temporarily functioning the wrong way—and he uses this to protect his credit default swaps. He writes a quarterly report to defend himself, but it comes off as antagonistic. Even Joel Greenblatt, an early supporter of Burry, is pressuring him to abandon his bets, but Burry doesn’t budge.
When Burry “side-pockets” the credit default swaps, that basically means that he temporarily prevents his clients from withdrawing money. Normally, investors can pull money out of a fund, but they can’t touch money Burry has side-pocketed. Obviously, this is a controversial move (and is intended to only be used for emergencies), which is why even an early supporter like Joel Greenblatt begins to question Burry’s choice. (Later, Greenblatt claims that he only asked for money from Burry because he was facing similar pressure from his own clients that were trying to withdraw money.)
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In January 2007, right around the time of the Las Vegas convention, Burry has to explain to his investors why Scion is down 18.4 percent when the S&P is up over 10 percent. He becomes a villain, with his letters to investors being leaked to the press. Strange rumors about him going into hiding pop up. As 2007 goes on, Burry becomes increasingly sure that the subprime mortgage market is “a fraud perpetrated by a handful of subprime bond trading desks.” He keeps his bets in the side pocket.
For someone only looking at short-term numbers, it is easy to see why Burry’s investors would be angry at him. The long-term numbers are very different, however—over the short lifespan of his fund, Burry has made his investors a lot of money. Lewis portrays Wall Street’s obsession with the short term as something negative and even misleading, as short-term gains in this case obscure the broader dysfunction of the markets.
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On June 14, two important subprime mortgage bond hedge funds owned by Bear Sterns crash, and a publicly traded index of triple-B bonds goes down. Burry contacts major banks and finds they all have “systems problems” or “power outages.” By the end of June, Burry’s bets start to be marked as more valuable for the first time—because firms like Morgan Stanley and Goldman Sachs are also getting in on the trades.
The simultaneous “systems problems” and “power outages” seem suspicious and could once again be an indication of Wall Street attempting to rig the system. Wall Street can’t stop the crash, but it may be able to temporarily hold back the consequences.
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Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
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Burry finds his credit default swaps are suddenly in high demand; by July, they are rapidly increasing in value. An article in Bloomberg News covers some of the people who saw the catastrophe coming and made a profit: it includes Greg Lippmann, but it leaves out Eisman, Danny, Charlie, Jamie, Ben, and Vinny, as well as Burry. Burry is frustrated that his investors don’t acknowledge his good work and grudgingly respects Lippmann for taking the same idea as Burry and running with it.
The fact that Lippmann is in the article while the other Big Short traders aren’t suggests that Lippmann’s self-promoting has allowed him to attract more attention. Burry also cares about acknowledgement but doesn’t chase it as eagerly as Lippmann does.
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