In The Big Short, bonds represent a broken promise between the financial elite and average Americans. A bond is, on the most basic level, a promise. In financial terms, a bond is a type of investment where the issuer of the bond owes a debt to the holder of the bond, to be paid back at a specified later date with interest. Traditionally, bonds are considered to be less risky than stocks (with the trade-off being that they also have less potential for growth). In The Big Short, however, bonds don’t work as intended and end up being one of the main factors that leads to the market crash of 2007. The problem is that, in an effort to increase profits, big banks started issuing bonds that packaged together risky loans from subprime mortgages—and these bonds became worthless when a certain percentage of the risky loans inside them defaulted. Through a combination of trickery and ignorance, big banks managed to hide this risk, laying the groundwork for the crash.
Subprime mortgages were supposed to offer a path to homeownership for lower-class Americans, but in the end, they became a tool for greedy speculators, who kept trying to squeeze out profits until they crashed the economy. Despite the spectacular meltdown in 2007, many bankers who invested in subprime bonds were spared from facing the consequences of their actions due to the government bailout of 2008. The Big Short traders were not just making an abstract bet against some financial products; they were essentially betting that America’s financial industry would break its promise to act in the interest of ordinary Americans. The fact that their short positions paid off so spectacularly is an indictment of the whole financial industry—the “too big to fail” banks had already failed clients by taking advantage of their trust in the system.
Bonds Quotes in The Big Short
By the time Household’s CEO, Bill Aldinger, collected his $100 million, Eisman was on his way to becoming the financial market’s first socialist. “When you’re a conservative Republican, you never think people are making money by ripping other people off,” he said. His mind was now fully open to the possibility. “I now realized there was an entire industry, called consumer finance, that basically existed to rip people off.”
Most people didn’t understand how what amounted to a two-decade boom in the bond market had overwhelmed everything else. Eisman certainly hadn’t. Now he did. He needed to learn everything he could about the fixed income world. He had plans for the bond market. What he didn’t know was that the bond market also had plans for him. It was about to create an Eisman-shaped hole.
A lot of hedge fund managers spend time chitchatting with their investors and treated their quarterly letters to them as a formality. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. In his quarterly letters he coined a phrase to describe what he thought was happening: “the extension of credit by instrument.” That is, a lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new instruments to justify handing them new money.
In his search for stock market investors he might terrify with his Doomsday scenario, Lippmann had made a lucky strike: He had stumbled onto a stock market investor who held an even darker view of the subprime mortgage market than he did. Eisman knew more about that market, its characters, and its depravities than anyone Lippmann had ever spoken with. If anyone would make a dramatic bet against subprime, he thought, it was Eisman—and so he was puzzled when Eisman didn’t do it. He was even more puzzled when, several months later, Eisman’s new head trader, Danny Moses, and his research guy, Vinny Daniels, asked him to come back in to explain it all over again.
Even as late as the summer of 2006, as home prices began to fall, it took a certain kind of person to see the ugly facts and react to them—to discern, in the profile of the beautiful young lady, the face of an old witch.
He’d graduated from the University of Rhode Island, earned a business degree at Babson College, and spent most of his career working sleepy jobs at sleepy life insurance companies—but all that was in the past. He was newly, obviously rich. “He had this smirk, like, I know better,” said Danny. Danny didn’t know Wing Chau, but when he heard that he was the end buyer of subprime CDOs, he knew exactly who he was: the sucker. “The truth is that I didn’t really want to talk to him,” said Danny, “because I didn’t want to scare him.”
It made no sense: The subprime CDO market was ticking along as it had before, and yet the big Wall Street firms suddenly had no use for the investors who had been supplying the machine with raw material—the investors who wanted to buy credit default swaps. “Ostensibly other people were going long, but we were not allowed to go short,” said Charlie.
Now, in February 2007, subprime loans were defaulting in record numbers, financial institutions were less steady every day, and no one but him seemed to recall what he’d said and done. He had told his investors that they might need to be patient—that the bet might not pay off until the mortgages issued in 2005 reached the end of their teaser rate period. They had not been patient. Many of his investors mistrusted him, and he in turn felt betrayed by them.
In the murky and curious period from early February to June 2007, the subprime mortgage market resembled a giant helium balloon, bound to earth by a dozen or so big Wall Street firms. Each firm held its rope; one by one, they realized that no matter how strongly they pulled, the balloon would eventually lift them off their feet.
But the biggest lag of all was right here, on the streets. 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?
Bonds Symbol Timeline in The Big Short
