The Big Short

by

Michael Lewis

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The Big Short: Epilogue Summary & Analysis

Summary
Analysis
At about the same time that Eisman, Danny, and Vinny are at St. Patrick’s, Lewis goes to lunch with his old boss, John Gutfreund. He hasn’t seen Gutfreund since quitting Wall Street, and in the time between then, Gutfreund has taken heavy flak for his role as the CEO of Salomon. Lewis talks about how, in the time since the 1980s, Wall Street had tried to clean up its act, looking outwardly less like a rowdy boys club—but that this was all “camouflage” to disguise the risky business practices they were undertaking.
Lewis once again inserts himself into the story. His meeting with Gutfreund offers an opportunity to look back on the Wall Street of the 1980s and how it’s changed (and how it hasn’t) since then. 
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Gutfreund used to lie about not knowing Lewis, since his book Liar’s Poker caused Gutfreund public relations problems. At lunch, however, he is polite to Lewis. They talk about the financial crisis, with him claiming it was simple greed, while Lewis claims it’s more complicated: “a system of incentives that channeled the greed.”
Lewis shows that Gutfreund is complicated: despite his many reasons to dislike Lewis, they share some things in common, and Gutfreund talks with him politely. Nonetheless, Gutfreund seems to have a simplistic understanding of what’s wrong with Wall Street. He frames it in moral terms—a matter of greed—while Lewis recognizes that it’s greed combined with a system of perverse incentives that have created systemic issues in the finance world.
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To Lewis, the line between gambling and investing is “artificial and thin.” He suggests maybe investing is “gambling with the odds in your favor.”
Lewis both romanticizes the finance industry (by comparing it to gambling, which can be glamorous) while also puncturing some of the myths that traders tell about themselves (since if everything’s a gamble, no one is really smart enough to predict the markets correctly every time).
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Gutfreund asks Lewis why he invited him to lunch. Lewis doesn’t want to tell the truth: that, though he doesn’t think Gutfreund is evil, he does think that a decision Gutfreund made is what ultimately led to the recent collapse of Wall Street. This decision was to take Salomon Brothers from a private partnership to a public corporation, transferring the risk from the partners to the shareholders. The effect, writes Lewis, was to make firms into a “black box” where no one really knows what’s going on inside.
Lewis draws a clear line of historical cause and effect to show how decisions in the past led to the subprime mortgage meltdown of 2007. Once again, he puts forward the idea that the complexity of Wall Street firms became a way to hide the risk.
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The U.S. government didn’t bail out individual subprime borrowers but did bail out the big Wall Street firms that made bad bets. The people in government attempting to “resolve” the crisis were “the very same people who had failed to foresee it.” The Troubled Asset Relief Program (TARP) set aside $700 billion to buy subprime assets from banks, allowing some firms to be compensated for their terrible bets.
The government bailout is an important epilogue to the main events of The Big Short. Though the tenth chapter ends with a major change seemingly coming to Wall Street, in fact the Troubled Asset Relief Program meant that the changes weren’t nearly as drastic as someone like Eisman would’ve predicted, with many of the banks being deemed “too big to fail” while individual borrowers—who lost the homes they’d purchased—got nothing.
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Even the $700 billion from TARP wasn’t enough to stabilize the financial industry. Some leaders on Wall Street and in the government tried to frame the disaster as a simple panic, suggesting that the problems were not as severe as they seemed. Lewis disagrees, stating that “every major firm on Wall Street was either bankrupt or fatally intertwined with a bankrupt system.” He describes the government’s response as “free money for capitalists, free markets for everyone else.”
Though Lewis’s main focus is usually on explaining, he also editorializes on occasion. In this case, he makes clear his disapproval of how the government handled the bailout. His logic is that the big banks were rewarded for engaging in risky behavior while other victims (like people who defaulted on subprime loans) got nothing.
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Eisman also looks at the problems that occurred after the bailout. He thinks the problem is that the banks were so central to the U.S. economy and that “there’s no limit to the risk in the market.” Banks are too big to fail not just because of size or relevance, but because of all the side bets that are made on them.
The system of side bets recalls the story Lewis told earlier about the two men tied together in a boat. The bets make it so that no bank goes down alone: everything is so intertwined that one failure could take down the full system.
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Lewis asks Gutfreund how he feels in hindsight about his decision to turn Salomon Brothers from a partnership to a corporation. Gutfreund agrees that the effect was to transfer the risk to shareholders and ultimately to the government itself. “It’s laissez-faire until you get in deep shit,” he tells Lewis. He asks Lewis what the whole conversation is for.
Though Gutfreund did things Lewis disapproves of, Gutfreund shows that he is capable of looking back on his past actions with some objectivity. He ends up agreeing with Lewis on some important issues.
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Lewis tells Gutfreund that he’s thinking of doing an anniversary edition of Liar’s Poker, now that the world it described is mostly gone. Lewis still finds Gutfreund interesting, even as he disapproves of his influence on Wall Street. Gutfreund has reason to dislike Lewis, at one point joking that Liar’s Poker destroyed Gutfreund’s career in order to make Lewis’s, though he remains outwardly courteous. Gutfreund offers Lewis a deviled egg, which Lewis accepts. Lewis realizes it’s the best thing on the menu, a simple egg turned into something complicated and appealing.
The deviled egg is an ambiguous image to end the book on. In some ways, it resembles synthetic CDOs, which take something relatively simple (mortgages) and spin them into something extremely complex and risky. Though Lewis has just finished a book all about the dangers of these types of deals, perhaps he is acknowledging that he can see the appeal, just as he sees the appeal of the deviled egg that Gutfreund has ordered.
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Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
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