The Big Short

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.

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.”

To Lewis, the line between gambling and investing is “artificial and thin.” He suggests maybe investing is “gambling with the odds in your favor.”

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.

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.

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.”

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.

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.

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.