In The Big Short, former Wall Street trader Michael Lewis profiles several real people who correctly predicted the 2007 global financial collapse and were able to profit from it. All of these people were outsiders to the mainstream financial system in some way. Before the crash, many of the characters struggled to get people to understand and support their ambitions. For example, even as a boy, hedge-fund manager Michael Burry had trouble connecting with other kids because of his autism and his glass eye. This weakness turned into a strength, however, when Burry’s sense of independence allowed him to ignore complaints from his investors and trust his own judgment about what was happening in the financial markets. The other major characters have different backgrounds than Burry, and some do have traditional finance experience, but they all share Burry’s sense of confidence and independence. On the other hand, the antagonists of the story are blind rule-followers—they trust the system without knowing why. Lewis’s book explores how outsiders can shake up an industry with their unconventional wisdom, and also how success can bring mixed feelings when a former underdog—like investor and former analyst Steve Eisman—suddenly becomes a top dog.
All of the Big Short traders were outsiders, which enabled them to more clearly see what was happening in the markets. Steve Eisman of FrontPoint Partners, for instance, was always at odds with the culture and attitude of other analysts, particularly their expectation that he should be optimistic and upbeat, even when his instincts told him otherwise. Michael Burry of Scion Capital was literally an outsider to finance, as he was originally a neuroscientist who wrote a contrarian finance blog that happened to catch on with some influential financiers. Charlie Ledley and Jamie Mai were also total outsiders, starting their company, Cornwall Capital, out of a shed with money they scraped together themselves. Even as they began to succeed, they were considered such outsiders to the world of finance that they struggled to get meetings with the major players. But for each of these companies, being staffed by outsiders turned out to be an advantage, as the outsiders’ inability to fit in with Wall Street culture and their willingness to hold contrarian opinions enabled them to see something that everyone else was blind to: a catastrophic issue in the subprime mortgage bond market.
By contrast, those in finance who shared the industry’s dominant, conformist ideas took actions that directly led to the 2007 subprime mortgage meltdown and then lost money in its wake. Lewis calls out several overconfident Wall Street traders who failed to see the risks of subprime mortgages and therefore lost tons of money for their firms. Wing Chau is perhaps the best example of this, as he is described as believing that he is always the smartest person in the room, even when he’s meeting with traders who know more about the topic at hand than he does. Wing Chau doesn’t seem to do much research or think for himself, and it’s catastrophic for him. Likewise, Howie Hubler—a consummate Wall Street insider—makes what might be the worst trade in the history of Wall Street when he keeps his faith in the bond market even as many other traders around him are beginning to see the signs of trouble. Joe Cassano, an arrogant manager who doesn’t listen to an employee’s impassioned and well-researched warning, is another example. Though these men resemble the protagonists in some ways—they’re all finance guys, after all—their lack of imagination stops them from seeing the impending catastrophe, since they are too close to the inside to see what’s wrong.
At the end of the book, in the wake of the market collapse, all the outsider traders are suddenly on top—but none adapt easily to being suddenly in the mainstream. For instance, after Eisman’s unpopular views are vindicated with the collapse of Bearn Stearns, he doesn’t gloat or try to leverage his success—instead, he watches the unfolding financial crisis with fury, especially when the government bails out the same big banks whose risky investing decisions directly led to the crisis. His partner Vinny goes further, wondering if it is even moral to profit off of such a tragedy, while his other partner Danny begins to have panic attacks. By contrast, Burry does gloat a little—he gets to send his investors an I-told-you-so message—but he finds that even his spectacular success isn’t enough to appease some of them. Despite his amazing aptitude for finance, he begins to tire of it, and so he quits his firm and decides to pick up the guitar instead. Meanwhile, Charlie and Jamie experience their own anxiety about the financial crisis, with Charlie in particular getting migraines. In spite of his newfound wealth, their advisor Ben Hockett remains paranoid about when the next big disaster will strike. As none of the characters who make big money shorting the bond market actually feel satisfied with what they’ve done, they end up basically returning to being outsiders, as the culture of Wall Street certainly isn’t to look a gift horse in the mouth.
Related Themes from Other Texts
Outsiders vs. Conformists ThemeTracker
Outsiders vs. Conformists Quotes in The Big Short
The willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grown-ups remains a mystery to me to this day.
When I sat down to write my first book, I had no great agenda, apart from telling what I took to be a remarkable tale. If you’d gotten a few drinks in me and then asked what effect the book would have on the world, I might have said something like, “I hope that college students trying to decide what to do with their lives might read it and decide that it’s silly to phony it up, and abandon their passions or even their faint interests, to become financiers.” I hoped that some bright kid at Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Goldman Sachs, and set out to sea.
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.
He sensed that he was different from other people before he understood why.
The least controversial thing to be said about Lippmann was that he was controversial. He wasn’t just a good bond trader, he was a great bond trader. He wasn’t cruel. He wasn’t even rude, at least not intentionally He simply evoked extreme feelings in others. A trader who worked near him for years referred to him as “the asshole known as Greg Lippmann.” When asked why, he said, “He took everything too far.”
The argument stopper was Lippmann’s one-man quantitative support team. His name was Eugene Xu, but to those who’d heard Lippmann’s pitch, he was generally spoken of as “Lippmann’s Chinese quant.” Xu was an analyst employed by Deutsche Bank, but Lippmann gave everyone the idea he kept him tied up to his Bloomberg terminal like a pet. A real Chinese guy—not even Chinese American—who apparently spoke no English, just numbers’ China had this national math competition, Lippmann told people, in which Eugene had finished second. In all of China. Eugene Xu was responsible for every piece of hard data in Lippmann’s presentation. Once Eugene was introduced into the equation, no one bothered Lippmann about his math or his data. As Lippmann put it, “How can a guy who can’t speak English lie?”
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.
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.
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.”
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.
Charlie Ledley and Ben Hockett returned from Las Vegas on January 30, 2007, convinced that the entire financial system had lost its mind. “I said to my mother, ‘I think we might be facing something like the end of democratic capitalism,’ She just said, ‘Oh, Charlie,’ and seriously suggested I go on lithium.”
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.
After a few pages, Michael Burry realized that he was no longer reading about his son but about himself. “How many people can pick up a book and find an instruction manual for their life?” he said. “I hated reading a book telling me who I was. I thought I was different, but this was saying I was the same as other people. My wife and I were a typical Asperger’s couple, and we had an Asperger’s son.”
Howie Hubler had grown up in New Jersey and played football at Montclair State College. Everyone who met him noticed his thick football neck and his great huge head and his overbearing manner, which was interpreted as both admirably direct and a mask. He was loud and headstrong and bullying.
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.”
It wasn’t Eisman who upset the tone in the room, but some kid in the back. He looked to be in his early twenties, and he was, like everyone else, punching on his BlackBerry the whole time Miller and Eisman spoke. “Mr. Miller,” he said. “From the time you started talking, Bear Stearns stock has fallen more than twenty points. Would you buy more now?”
Miller looked stunned. “He clearly had no idea what had happened,” said Vinny. “He just said, ‘Yeah, sure, I’d buy more here.’”
After that, the men in the room rushed for the exits, apparently to sell their shares in Bear Stearns. By the time Alan Greenspan arrived to speak, there was hardly anyone who cared to hear what he had to say. The audience was gone. By Monday, Bear Stearns was of course gone, too, sold to J.P. Morgan for $2 a share.”
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?
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.
