The Big Short

by

Michael Lewis

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Collateralized debt obligation (CDO) Term Analysis

A collateralized debt obligation (CDO) is a type of finance product that became very popular around 2003 and which played a major role in the vast amounts of money lost during the 2007 subprime mortgage meltdown. CDOs are “towers” of bonds that are built by packaging together several subprime mortgage bonds (which are themselves “towers” that are built from a package of thousands of mortgage loans). This process allowed big banks to hide the risk of their investments (even from themselves), since CDOs were almost automatically rated as safe investments by ratings agencies because they were considered to be diversified, even if the loans underneath them were ultimately very risky.

Collateralized debt obligation (CDO) Quotes in The Big Short

The The Big Short quotes below are all either spoken by Collateralized debt obligation (CDO) or refer to Collateralized debt obligation (CDO). For each quote, you can also see the other terms and themes related to it (each theme is indicated by its own dot and icon, like this one:
Outsiders vs. Conformists  Theme Icon
). 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 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:
Epilogue Quotes

Until that moment I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous, frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated, and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm.

Related Characters: Michael Lewis (speaker), John Gutfreund
Page Number: 264
Explanation and Analysis:
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Collateralized debt obligation (CDO) Term Timeline in The Big Short

The timeline below shows where the term Collateralized debt obligation (CDO) appears in The Big Short. The colored dots and icons indicate which themes are associated with that appearance.
Chapter 3
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
...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 bonds are so bad... (full context)
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
...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 it over to a ratings agency... (full context)
Chapter 4
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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
...investors who might take them off his hands. This means he has to create a credit default swap market . (full context)
Chapter 5
Outsiders vs. Conformists  Theme Icon
The Problems with Capitalism  Theme Icon
Needless Complexity Theme Icon
The more Ben, Charlie, and Jamie look into collateralized debt obligations (CDOs), the more they think the whole system is crazy. As Lewis puts it, “it was... (full context)
Chapter 6
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman ends up at a table with an investor named Wing Chau, who is a CDO manager (meaning he is long on bonds). Chau is “newly, obviously rich” and keeps smirking... (full context)
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
Eisman keeps asking Wing Chau to repeat statements, as he learns more about how a CDO works. Since AIG left the market, most CDOs are now bought by managers like Chau.... (full context)
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
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...Eisman finally gets it. As Lewis 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... (full context)
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
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...Eisman isn’t joking, and he ends up buying credit default swaps specifically on Wing Chau’s CDOs. (full context)
Chapter 7
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
...Charlie, Ben, and Jamie suspect that Wall Street is artificially propping up the prices of CDOs so that they can dump losses onto clueless customers or make a little more money... (full context)
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The Problems with Capitalism  Theme Icon
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...among Wall Street insiders, Grant’s Interest Rate Observer (edited by Jim Grant), decides to investigate CDOs. Even with the help of his well-educated assistant, he can’t figure out what’s in them.... (full context)
Chapter 9
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
Pessimism vs. Optimism Theme Icon
Needless Complexity Theme Icon
...a profit, however, he sells off some of his credit default swaps on triple-A-rated subprime CDOs (which are supposedly less risky than lower ratings). Basically, Hubler is betting that some triple-B-rated... (full context)
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Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
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...is taking a huge risk, perhaps without realizing it, by essentially betting on the same CDO tranches that Cornwall Capital are betting against and the same bonds that FrontPoint Partners and... (full context)
Outsiders vs. Conformists  Theme Icon
Wall Street’s Culture of Overconfidence Theme Icon
The Problems with Capitalism  Theme Icon
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Needless Complexity Theme Icon
...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. Hubler loses billions... (full context)