Michael Lewis remembers what it was like to be a 24-year-old trader at the Wall Street investment bank Salomon Brothers. He thought that the culture there was ridiculous and unsustainable, so he set out to capture it in his first book, Liar’s Poker. To his surprise, Wall Street continues to evolve so that the fast times in the 80s now seem quaint. Shortly after the subprime mortgage bond bubble bursts in 2007, Lewis has a conversation with the financial analyst Meredith Whitney, who gives Lewis a list of people who successfully predicted the crash and who were able to profit off of it by taking short positions. This is where Lewis first hears of Steve Eisman.
From the beginning of his financial career, Eisman was a rebel. He starts as a financial analyst, where he resists pressure to assign optimistic ratings to companies that don’t deserve them. His style attracts admirers, who eventually join him at his new investment firm FrontPoint Partners. Two of his most important team members are Vincent Daniel (a cynical trader from Queens who becomes FrontPoint’s head research guy) and Daniel Moses (a coworker of Eisman’s at his previous job who becomes FrontPoint’s lead trader).
Meanwhile, Michael Burry is a neurosurgeon who writes a financial blog in his free time that attracts a surprising amount of attention. He eventually starts his own firm, Scion Capital, and manages to attract so much money that he has to turn investors away. After making some risky bets that pay off, he becomes interested in credit default swaps as a way to bet against the subprime mortgage market.
A Deutsche Bank trader named Gregg Lippman has a similar idea to Burry, and he goes around trying to sell the idea to various traders, including Eisman’s team at FrontPoint. After a lot of initial skepticism, Eisman agrees to deal with Lippman.
While this is happening, Jamie Mai and Charlie Ledley are building their own “garage band” hedge fund by taking a relatively small initial investment of $110,000 and growing it into a substantial fortune. They use a process called event-driven investing, which often involves betting on unlikely events where analysts have overlooked the risk. In order to give their small firm more legitimacy, they partner with former Deutsche Bank trader Ben Hockett, who brings his experience, as well as his apocalyptic worldview to their team.
Through research, the future Big Short traders all learn that something is wrong in the subprime mortgage bond market. Banks are using complex practices that obscure (even from themselves) the fact that these bonds are based on mortgages that have a very high chance of defaulting (which, after enough people default, will make the bonds worthless). Even supposedly safe bonds are built on shaky foundations, largely because the ratings agencies are not accurately assessing the make-up of the bonds.
Eventually, Eisman, Vinny, Danny, Lippman, Ben, and Charlie all end up in Las Vegas for a major convention of subprime mortgage buyers and sellers. They all come away with the impression that the traders going long on subprime mortgage bonds are deluding themselves and that they need to increase their own short positions.
Initially, the Big Short traders lose money on their short positions. Burry in particular faces resistance from his investors. After his son is diagnosed with autism, he realizes that his own struggle to communicate with investors may be linked to autism. Major banks like Goldman Sachs refuse to mark positions in favor of short traders, at least at first.
As more time passes, however, a crash is inevitable. Eisman is literally on stage giving a talk about problems in the market when the news breaks that the stock for Bear Stearns (a major Wall Street firm) is plummeting rapidly. This is the first sign of a wider problem. All the Big Short traders scramble to make sure they aren’t financially exposed to the crisis. When the dust settles, they have all made enormous amounts of money and been vindicated for their predictions. While some traders like Eisman make dire predictions about the end of Wall Street, eventually the U.S. government steps in to bail out many major banks and prevent them from going under.
The Big Short traders contemplate what to do next now that they’re no longer outsiders and underdogs, with many of them experiencing intense anxiety about the state of the world. Some, like the Cornwall Capital traders, look into transferring their money into less risky investments to preserve it, while others, like Burry, take the opportunity to get out of finance entirely.
Around the same time, Lewis invites his old boss at Salomon Brothers, John Gutfreund, out to lunch with him. Gutfreund was once dubbed “The King of Wall Street,” and he paved the way for many of the risky practices that directly led to the financial crisis. Still, despite all the reasons they have to be enemies, Gutfreund is polite to Lewis and Lewis can’t help but be fascinated by his tough-talking former boss.