The Big Short

by

Michael Lewis

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Subprime mortgage Term Analysis

A mortgage is a loan taken out to buy a home, and a subprime mortgage is a specific type of mortgage aimed at people who have low credit scores (and who are therefore at high risk of defaulting on their loan and not being able to pay it back). During the years leading up to the housing bubble burst in 2007, subprime mortgages were frequently bundled together to create bonds. These bonds (and the CDOs that were created from them) were extremely risky investments, since they were based on loans from people who might never be able to pay them back; however, this risk was hidden, partly because the process of creating the bonds was so complex and partly because ratings agencies like Moody’s and Standard and Poor’s did not accurately assess the risk. Ultimately, this was a major contributing factor to the financial crisis.

Subprime mortgage Quotes in The Big Short

The The Big Short quotes below are all either spoken by Subprime mortgage or refer to Subprime mortgage. 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:
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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

Oddly, Cassano was as likely to direct his anger at profitable traders as at unprofitable ones, for the anger was triggered not by financial loss but by the faintest whiff of insurrection. Even more oddly, his anger had no obvious effect on the recipient’s paycheck; a trader might find himself routinely abused by his boss and yet delighted by his year-end bonus, determined by that same boss.

Related Characters: Michael Lewis (speaker), Joe Cassano , Gene Park
Page Number: 87
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:

Every new business is inherently implausible, but Jamie Mai and Charlie Ledley’s idea, in early 2003, for a money management firm bordered on the absurd: a pair of thirty-year-old men with a Schwab account containing $110,000 occupy a shed in the back of a friend’s house in Berkeley, California, and dub themselves Cornwall Capital Management. Neither of them had any reason to believe he had any talent for investing. Both had worked briefly for the New York private equity firm Golub Associates as grunts chained to their desks, but neither had made actual investment decisions.

Page Number: 108
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:

The trouble, as ever, was finding Wall Street firms willing to deal with them. Their one source of supply, Bear Stearns, suddenly seemed more interested in shooting than in trading with them. Every other firm treated them as a joke. Cornhole Capital. But here, in Las Vegas, luck found them.

Page Number: 149
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

Now the metaphor was two men in a boat, tied together by a rope, fighting to the death. One man kills the other, hurls his inert body over the side-only to discover himself being yanked over the side. “Being short in 2007 and making money from it was fun, because we were short bad guys,” said Steve Eisman. “In 2008 it was the entire financial system that was at risk. We were still short. But you don’t want the system to crash. It’s sort of like the flood’s about to happen and you’re Noah. You’re on the ark. Yeah, you’re okay. But you are not happy looking out at the flood. That’s not a happy moment for Noah.”

Related Characters: Michael Lewis (speaker), Steve Eisman (speaker)
Page Number: 227
Explanation and Analysis:

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:
Epilogue Quotes

The changes were camouflage. They helped to distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed.

Related Characters: Michael Lewis (speaker), John Gutfreund
Page Number: 254
Explanation and Analysis:
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Subprime mortgage Term Timeline in The Big Short

The timeline below shows where the term Subprime mortgage appears in The Big Short. The colored dots and icons indicate which themes are associated with that appearance.
Prologue
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...about a 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... (full context)
Chapter 1
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...analyze Aames Financial, a company that extends loans to low-income Americans through a process called subprime mortgage lending. Eisman doesn’t understand the documents about the company at all. (full context)
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...went on 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... (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... (full context)
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...about mortgage-backed securities and finds that Eisman’s intuition is right: there’s something rotten in the subprime mortgage industry. Companies are disclosing massive earnings but not being honest about the massive risks... (full context)
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Ultimately, Vinny takes six months to sort through all the data about subprime mortgage loans. He reports to Eisman that the whole thing is basically a Ponzi scheme,... (full context)
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...His report comes in 1997, during an economic boom—but less than a year later, many subprime lenders are forced into bankruptcy. (full context)
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...fund Chilton Investment, where he continues to analyze companies. By 2002, there are no public subprime lending companies left in the U.S. There is, however, a large consumer lender called the... (full context)
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...at the top. A lover of comic books, particularly fractured fairy tales, Eisman sees the subprime mortgage loan as its own sort of fairy tale. Borrowers are told they’ll be able... (full context)
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...Eisman and his employees begin to feel that Wall Street doesn’t understand what’s going on—the subprime mortgage industry is roaring back, bigger than it ever was. Instead of learning a simple... (full context)
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Eisman, who already has a lot of experience with subprime mortgage markets, realizes the whole market is going to blow up at some point, and... (full context)
Chapter 2
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...He performs a lot of research with one goal: to find out how to short subprime mortgage bonds. (full context)
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Burry wants to short the subprime market, but the problem is that there’s no direct way to do so. Earlier, however,... (full context)
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...already involved 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... (full context)
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In October 2005, a subprime trader at Goldman Sachs becomes the first of Burry’s Wall Street contemporaries to take a... (full context)
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...how he was about to make “oceans” of money off $1 billion in shorts on subprime mortgages. (full context)
Chapter 3
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...to 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... (full context)
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...surprisingly, Eisman seems very interested. He asks questions but ultimately has no problem betting against subprime mortgages. (full context)
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...to happen. 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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...is so 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... (full context)
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...to sell 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... (full context)
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...bosses is 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... (full context)
Chapter 4
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...Lippmann. It’s Gene Park in AIG FP’s Connecticut office who figures out that all the subprime mortgages AIG FP owns are dangerous, since the company doesn’t have enough to cover the... (full context)
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Meanwhile, Lippmann is confused that AIG FP keeps refusing to take his advice. Surprisingly, the subprime market keeps growing, and in April 2006, Lippmann is asked by his bosses at Deutsche... (full context)
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...situation. First, 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... (full context)
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...to Miami to investigate more about the housing market. They find “empty neighborhoods built with subprime loans.” The best targets for shorts (i.e., “the bonds ultimately backed by the mortgages most... (full context)
Chapter 5
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...full bet against the markets. Only about 10 to 20 people bet on the whole subprime mortgage market going down. (full context)
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...hear about a major conference in Las Vegas that will draw every bigshot in the subprime mortgage market. At the event, Bear Stearns is organizing an outing at a shooting range,... (full context)
Chapter 6
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...the hotel 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... (full context)
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After leaving Las Vegas, Eisman, Danny, and Vinny increase their subprime short position from $300 million to $550 million, overwhelming their portfolio of $500 million that... (full context)
Chapter 7
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...collapse. Despite 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... (full context)
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...of less 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... (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... (full context)
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...surprising announcement in February 2007, however, reveals that HSBC is also taking big losses from subprime mortgage loans. (full context)
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...Furthermore, 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... (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... (full context)
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...the chairman of the Federal Reserve, announces in July 2007 that the losses from the subprime mortgage market should be no more than $100 billion. Shortly after, Eisman hosts a conference... (full context)
Chapter 8
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...of the 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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...going into hiding pop up. As 2007 goes on, Burry becomes increasingly sure that the subprime mortgage market is “a fraud perpetrated by a handful of subprime bond trading desks.” He... (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... (full context)
Chapter 9
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...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 Morgan Stanley invent the credit default swap specifically... (full context)
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From early February to June 2007, the subprime mortgage market is being propped up by a few Wall Street firms, but starting in... (full context)
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...April 2007, Hubler second-guesses his large gamble but ultimately decides to keep some of his subprime position rather than take a loss of tens of millions of dollars. The decision ends... (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... (full context)
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Six months after Burry gives up finance, the International Monetary Fund estimates that U.S. subprime-related assets have lost a trillion dollars. Every major Wall Street firm is negatively affected in... (full context)
Chapter 10
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...March 14, 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,... (full context)
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...At first it isn’t even clear who besides Bear Stearns will have to eat the subprime losses and how big these losses will be. (full context)
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...in freefall, and the Federal Reserve loaned $85 million to AIG to pay off its subprime losses. Along with the Treasury, the Fed is trying to calm investors, with little success. (full context)