The Big Short

by

Michael Lewis

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Bonds Symbol Icon

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

The The Big Short quotes below all refer to the symbol of Bonds. For each quote, you can also see the other characters and themes related to it (each theme is indicated by its own dot and icon, like this one:
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). Note: all page numbers and citation info for the quotes below refer to the W.W. Norton edition of The Big Short published in 2010.
Chapter 1 Quotes

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.”

Related Characters: Michael Lewis (speaker), Steve Eisman (speaker), Michael Lewis, Valerie Feigen
Related Symbols: Bonds
Page Number: 20
Explanation and Analysis:

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.

Related Characters: Michael Lewis (speaker), Steve Eisman
Related Symbols: Bonds
Page Number: 25
Explanation and Analysis:
Chapter 2 Quotes

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.

Related Characters: Michael Lewis (speaker), Michael Burry
Related Symbols: Bonds
Page Number: 28
Explanation and Analysis:
Chapter 4 Quotes

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.

Related Symbols: Bonds
Page Number: 92
Explanation and Analysis:
Chapter 5 Quotes

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.

Related Characters: Michael Lewis (speaker), Steve Eisman, Greg Lippmann
Related Symbols: Bonds
Page Number: 107
Explanation and Analysis:
Chapter 6 Quotes

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.”

Related Characters: Michael Lewis (speaker), Daniel Moses (speaker), Steve Eisman, Vincent Daniel, Greg Lippmann, Wing Chau
Related Symbols: Bonds
Page Number: 139
Explanation and Analysis:
Chapter 7 Quotes

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.

Related Characters: Michael Lewis (speaker), Charlie Ledley and Jamie Mai (speaker), Ben Hockett
Related Symbols: Bonds
Page Number: 163
Explanation and Analysis:
Chapter 8 Quotes

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.

Related Characters: Michael Lewis (speaker), Michael Burry
Related Symbols: Bonds
Page Number: 180
Explanation and Analysis:
Chapter 9 Quotes

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.

Related Characters: Michael Lewis (speaker), Howie Hubler
Related Symbols: Bonds
Page Number: 209
Explanation and Analysis:
Chapter 10 Quotes

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?

Related Symbols: Bonds
Page Number: 242
Explanation and Analysis:
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Bonds Symbol Timeline in The Big Short

The timeline below shows where the symbol Bonds appears in The Big Short. The colored dots and icons indicate which themes are associated with that appearance.
Prologue
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Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
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Lewis’s first book was about the bond market. At the time he was writing, Wall Street traders were making tons of money... (full context)
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The Problems with Capitalism  Theme Icon
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...man named John Paulson, who made phenomenal amounts of money by betting against subprime mortgage bonds. These same bonds were responsible for the crash of Citigroup and other Wall Street banks.... (full context)
Chapter 1
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...the start of a “curious phase.” Much of this strangeness was due to the mortgage bond market. Unlike other bonds, which are based on fixed terms, mortgage bonds introduce uncertainty, since... (full context)
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In the 1980s, the main fear of mortgage bond investors was that home loans would be repaid too fast, not that the loans wouldn’t... (full context)
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...to work at a small investment bank. Jacobs recounts to Lewis how the subprime mortgage bond market began with allegedly altruistic intentions: by mass-marketing the bonds, banks would reduce the cost... (full context)
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By the mid-1990s, Jacobs and Eisman both believe in the potential of subprime mortgage bonds to help alleviate income inequality, but Jacobs admits that it was a “fast-buck business” that... (full context)
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...he realizes that instead of focusing on stock picks, he needs to do something with bonds. (full context)
Chapter 2
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In early 2004, Michael Burry is another stock market investor looking into bonds for the first time. He performs a lot of research with one goal: to find... (full context)
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Burry combs through the fine print on dozens of mortgage bonds. He notices that lending standards have fallen—to the very bottom, in his view. Even people... (full context)
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...in corporate credit default swaps, but he realizes that credit default swaps on subprime mortgage bonds could be an even more direct way to profit off an upcoming market downturn. This... (full context)
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...event of a total market collapse. He sets out to find the very worse mortgage bonds and is surprised when Goldman Sachs offers him the information to do just that. He... (full context)
Chapter 3
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...sell Eisman on an idea he claims he came up with: betting against the subprime bond market. (full context)
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The crux of Lippmann’s pitch is that, in order for his bet against the subprime bond market to be successful, home prices don’t have to fall—they just have to stop rising... (full context)
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...Though it was initially profitable, eventually AIG FP starts taking on the worst subprime mortgage bonds (triple-B rated) and becomes the world’s biggest owner of them. (full context)
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...dollars each year, they transfer all risk to AIG in the event that the worst bonds failed. (full context)
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...complex that most investors and ratings agencies don’t understand it. It involves “synthetic subprime mortgage bond-backed collateralized debt obligation (CDO).” Basically, the process allows them to hide the fact that triple-B... (full context)
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...Sachs begin to want pessimists like Mike Burry to buy credit default swaps against triple-B bonds. They then create a “synthetic CDO” made of nothing but credit default swaps and take... (full context)
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...other industry players on shorts like his, but they largely refuse him. When subprime mortgage bonds rise, decreasing the value of Lippmann’s credit default swaps, his bosses begin to wonder if... (full context)
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...to implode the market—because if AIG stops taking credit default swaps, the whole subprime mortgage bond market might collapse, making Lippmann’s credit default swaps much more valuable. He visits AIG FP... (full context)
Chapter 4
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...in May 2006, Standard & Poor’s announces it’s changing its model for rating subprime mortgage bonds. This stirs up fear, suggesting that, on some level, even the big Wall Street firms... (full context)
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...They find “empty neighborhoods built with subprime loans.” The best targets for shorts (i.e., “the bonds ultimately backed by the mortgages most likely to default”) are primarily in states like California,... (full context)
Chapter 5
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Ben, Charlie, and Jamie research the bond market and conclude that it uses so much confusing terminology because it’s designed to be... (full context)
Chapter 6
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...suggested to them by Lippmann. Lippmann has arranged it so that investors who are shorting bonds will be seated at tables with investors who are long on bonds. (full context)
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...an investor named Wing Chau, who is a CDO manager (meaning he is long on bonds). Chau is “newly, obviously rich” and keeps smirking the whole time. Vinny and Danny think... (full context)
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...CDOs—he passes the risk on to investors who have, theoretically, hired him to vet the bonds, and he takes money off the top and bottom of all deals. (full context)
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...puts it: “The credit default swaps, filtered through the CDOs, were being used to replicate bonds backed by actual home loans.” In short, people like Chau need people like Eisman to... (full context)
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...where the event is being held. They try to get information from the subprime mortgage bond buyers and sellers in attendance, without revealing much about themselves. None of the people they... (full context)
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...but in order to do so, they have to pretend they are interested in buying bonds instead of shorting them. Deutsche Bank, who arranged the meetings, is keeping an eye on... (full context)
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...who don’t have the connections to make it on Wall Street. His opinions toward the bond market begin to solidify. Vinny describes this as the moment where the group realizes the... (full context)
Chapter 7
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...the fact that the Las Vegas conference was created to boost confidence in subprime mortgage bonds, the price of a leading index of these bonds drops by over a point. Charlie... (full context)
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...than $30 million, but they have $205 million in credit default swaps on subprime mortgage bonds. They are unsuccessful in buying more—even though the big banks are theoretically going long on... (full context)
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Major stock indexes of the subprime bonds begin to fall rapidly by early June, but surprisingly, it doesn’t lead to a collapse... (full context)
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...throughout early 2007, the ratings agencies have yet to change their official positions on subprime bonds, even though lots of loans are going bad. Eisman confronts the CEO of the rating... (full context)
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By early June, the subprime mortgage bond market is finally in decline and will stay that way. Eisman and his team are... (full context)
Chapter 8
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...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. (full context)
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...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. (full context)
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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... (full context)
Chapter 9
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Howie Hubler is an ex–college football player who, in 2004, runs Morgan Stanley’s asset-backed bonds trading, effectively putting him in charge of subprime mortgage bets. During this period, quants at... (full context)
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...(which are supposedly less risky than lower ratings). Basically, Hubler is betting that some triple-B-rated bonds will go bad but not all of them. As Lewis puts it: “He was smart... (full context)
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...betting on the same CDO tranches that Cornwall Capital are betting against and the same bonds that FrontPoint Partners and Scion Capital are betting against. Hubler trusts the bond ratings and... (full context)
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...make deals and ultimately lose money for Morgan Stanley. He doesn’t understand that the triple-B bonds in a CDO are 100 percent correlated, meaning if one goes bad, they’re all bad.... (full context)
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By August 1, 2007, the last buyer of subprime mortgage bonds finally stops purchasing more. Shareholders bring a lawsuit against Bear Stearns, which frightens Cornwall Capital,... (full context)
Chapter 10
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...2008, FrontPoint has a short position on basically every financial firm connected to subprime mortgage bonds. Eisman is invited to give a speech that day at Deutsche Bank’s headquarters, alongside a... (full context)
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...Importantly, the risks of these speculative bets were hidden, since a large proportion of the bonds were triple-A rated (which are considered riskless for accounting purposes). At first it isn’t even... (full context)