Summary
Ledley and Hockett left Las Vegas in January 2007 fearing that the whole financial system was doomed. As Ledley put it to his mother, “I think we might be facing something like the end of democratic capitalism.” Ledley and Mai recognized that they ran the risk of having made a bet on a total economic collapse—something the government would never allow to happen. They worried that if the meltdown was too severe, it might be “too big to fail.” This would become a prescient and valid concern, as the crash did indeed exceed all expectations in its dimensions.
Soon after the Las Vegas conference, which had been partly organized to restore faith in the market, the market began to show cracks. It had been falling in very small increments for the past several months. In January 2007, however, a publicly traded index of triple-B-rated subprime mortgage bonds fell more than a point, which was an enormous new shift. Ledley and Mai became more worried that perhaps they had made their bet too late to capitalize on it, and the other party would pull out instead of honoring their agreement. At first, Morgan Stanley did go ahead with selling them credit default swaps. But, when Ledley called to finalize which ones they wanted to buy, the broker had a change of heart and tried to raise the price on him very suddenly; Ledley protested against the unfairness of this, and they brought the price back down just a bit. Later, when Ledley tried to buy more insurance from Morgan Stanley, they had changed their minds on selling any more at all. This change of heart had happened overnight, from being extremely eager to sell insurance on the subprime mortgage market to not wanting to sell any.
Ledley and Mai did manage to find new purchasers even at this late point in the process. Wachovia, a small company that was trying to boost its reputation and size, agreed to sell cheap insurance on subprime mortgage bonds. Ledley and Mai continued to try to find more that they could buy, remaining unsatisfied with the $205 million they already owned. But they began to notice that after they would put in their bids at the offering price, the companies would start to pull back and raise the initial offer further and further. They couldn’t understand why exactly this was happening; the subprime CDO market was continuing on as it had before, but the Wall Street firms suddenly seemed to have no use for investors who had previously been supplying them with raw material by buying credit default swaps.
Based on these changes, Ledley guessed that some of the traders on the inside must have realized that disaster was impending, and were beginning to try to get out of the market before its collapse. Around this time, Ledley and Mai began to realize how obvious and purely positive their trade had been—like “buying cheap fire insurance on a house engulfed in flames.” For Ledley and Mai, who had gotten involved in subprime mortgage bonds so relatively late, the gains became obvious very quickly. But, at the same time, the impact on CDOs was not felt immediately. Strangely, although the triple-B-rated subprime bonds on which the CDOs were built had begun to default, the CDOs themselves were holding up. Everyone went on as though nothing had changed. They realized that the Wall Street banks were propping up the price of the CDOs so they could dump losses on customers or make a last chunk of money from their corrupt market before it crashed. Ledley, Hockett and Mai even tried to contact some reporters they knew from the New York Times and the Wall Street Journal to expose the fraud at hand, but the papers had no interest in the story. When Bear Stearns declared that it had lost money on bets on subprime mortgage securities and had to dump billions of dollars’ worth of them before closing the CDO fund, Cornwall Capital realized they might not get paid back. Because Bear Stearns was such a major and important firm, and Cornwall Capital was only a small hedge fund, Bear Stearns had not had to post collateral. Now, Cornwall might not end up getting the payment they had expected from Bear Stearns in the event of disaster.
This related to the general pattern on Wall Street at the time: although the collapse of the bond market was a catastrophe for US society, it was a great opportunity for hedge funds. People like Eisman had pushed to buy as many credit default swaps as they could. Eisman, too, realized that subprime bonds were not yet crashing, even though so many of the loans they were based on were going bad, because rating agencies like Moody’s and S&P still hadn’t changed their favorable ratings of them. This made no sense; they should have recognized just how corrupt those bonds really were, but instead they blindly assumed that home prices were bound to keep going up, and that disaster would never strike. For a while, Eisman and Daniel assumed that the rating agencies might have more data than they did, and thus a good reason not to be changing their ratings. But they didn’t. After a meeting with the CEO of Moody’s, the most influential rating agency, Daniel said to the CEO: “With all due respect, sir, you’re delusional.” Around the same time, Eisman realized that even the CEO of a major bank, like Bank of America, could totally in the dark.
As the crash approached, Eisman stumbled across an article in Grant’s Interest Rate Observer, written by Jim Grant, which confirmed his theory that the whole industry was ignorant and corrupt. Grant had been prophesying disaster since the mid-1980s, and had begun looking into CDOs in late 2006. After having his assistant try to understand them, he concluded that even investors did not know what was in CDOs, and too many people were taking too many things on blind faith. For Eisman, reading this article was a welcome confirmation of his worldview. For Burry, however, it was a frustrating example of how he was right, but remained overlooked and mistreated. Burry had gotten involved in credit default swaps very early, before their payoff had become as clear as it was to Ledley and Mai, and his investors had begun to get upset with him as they waited for this payoff to come. Burry’s investors mistrusted him, and he, in turn, felt betrayed by them. He was going through a rough patch in relation to the hedge fund when he had to face the fact that his toddler son might be dealing with issues of his own, as well. Teachers had noted that Burry’s son was different from other kids, and tended to be disliked, and brought it up with Burry and his wife. At first, Burry had dismissed this, knowing that he had been similar as a kid and believing that he had turned out fine. But after his son was diagnosed with Aspergers, which Burry previously knew little about, he realized that he himself might also have this condition. For the first time, his oddities were packaged into a diagnosis, and a recognizable medical condition; this changed Burry’s entire perspective on his unique personality, and was difficult to come to terms with. Over time, however, he realized that the singular focus on hobbies that characterizes Asperger’s is what allowed him to read through subprime mortgage bond prospectuses and realize he should bet against them, in the first place.
For a while, Wall Street refused to acknowledge that Burry’s bet was paying off. They were on the other side of this bet, and there was no one else buying and selling exactly what Mike Burry was buying and selling. Thus, there was no hard evidence of what these things were worth, so they could then be worth whatever Goldman Sachs and Morgan Stanley decided they were worth. This made it difficult for Burry to collect on his bets at first. Over time, however, firms were forced to admit to just how big their losses were. Meanwhile, though, Burry was made completely miserable by the aggression and mistrust of his investors. When their demands that he explain his odd choice to bet against subprime mortgage reached a peak, Burry realized that Wall Street firms could cancel their bets with him if his assets fell beneath a certain level, due to investors pulling out. In desperation, facing the potential ruin of his fund, he side-pocketed his credit default swaps, meaning that he was locking up a large percentage of investors’ money with the excuse that there was no public market for these securities, which was highly debatable. Many investors became even angrier with him, and his partners at Gotham Capital even threatened to sue him. He, in response, became aggressive and blunt in his communications by letter, where he insisted that his judgment was sound. But he suffered personal consequences, developing even worse rage, new contempt for investors, and having to continuously explain himself to them even when they were not listening to him. He seemed primed to become a “Wall Street villain,” and what had previously seemed like endearing quirks—wearing the same shorts and t-shirts to work for days, blaring heavy metal music, etc.—became annoyances.
On June 14, 2007, however, everything changed. Bear Stearns’ subprime mortgage bond hedge funds went belly-up, and Goldman Sachs seemed to be experiencing a breakdown. People at these big firms began mysteriously calling out sick, and claimed there had been a “systems failure.” Burry knew this meant that they were simply trying to buy time to sort out the mess that was going on behind the scenes. They all began to cave. The market finally began to accept that it was failing, and come to terms with it. By June 25, the bonds Burry had bet against had failed. Burry knew that, because the panic on Wall Street began before this date, the firms must be working with inside information that they had kept from investors and the public. On the other hand, he figured that if they really had not come to this realization before June, then: “‘well, it makes me wonder what a ‘Wall Street analyst’ really does all day.’” When Burry’s bets began to pay off, his investors were unapologetic.
Analysis
Chapter 7 and 8 primarily revisit the book’s main characters, Eisman and Burry. No new characters are introduced. Instead, the chapters focus on describing the peak moments of the market crash, and the ignorance and stubbornness by Wall Street firms that led up to the crash. This corresponds to the fact that, in many ways, the book has reached its climax in these chapters: the crash that was long anticipated by the book’s major characters finally occurs in chapter 7 and 8. Lewis’ choice not to introduce new major characters here, and instead to revisit some of his original characters, also demonstrates that Eisman and Burry are the two most important characters, from the narrator’s perspective. It is these two who get the most attention during the book’s climax, and take part in the heart of the action. Both Eisman and Burry are the quirkiest, most misunderstood, and least social of the characters; the fact that they stand out as the biggest players in Lewis’ version of the climax shows the importance of these qualities. It is outsiders who come across as the heroes of the text, in many ways, and it is their unusual perspective that allows them to see through things that most “normal” Wall Street employees overlook or ignore.
In these chapters, Lewis uses colorful metaphors to illustrate and explain the complicated financial issues he is describing. This tactic reflects one of the main arguments of the text: part of the reason for the 2008 market crash was how obscure financial jargon had become, and how little even industry insiders understood about the situation. Because of this, Lewis makes sure to be absolutely clear in all of his own descriptions, and provides readers with the kinds of illustrations of the situation that the most experienced of Wall Street investors may not have been able to grasp at the time. For example, when explaining how Ledley and Hockett were able to buy some credit default swaps from Wachovia even after other companies had stopped selling them, he quotes Hockett relating the situation by saying, “‘It was like we were in a plane at thirty thousand feet, which had stalled, and Wachovia still had a few parachutes for sale. No one else was still selling parachutes, but no one really wanted to believe they were needed, either...After that, the market completely shut down.’” Hockett’s description lets readers visualize the importance of the sale by Wachovia, and to understand its stakes and consequences in a more visceral sense. The fact that Hockett is able to provide such an illustrative and clear description of the situation also corresponds to the fact that he is one of few people on Wall Street who foresaw the disaster; his ability to describe things clearly is tied to his ability to see things more clearly, as well. Overall, the importance of clarity and the dangers of obfuscation are emphasized in these chapters.
Lewis also emphasizes the boldness of his main characters, and all of the many factors working against them, to strengthen his narrative of brave underdogs facing the corruption and evil of big Wall Street firms. For example, he describes Vincent Daniel’s meeting with the CEO of Moody’s: “‘With all due respect, sir,’ said Vinny deferentially, as they left, ‘you’re delusional.’ This wasn’t Fitch or even S&P. This was Moody’s. The aristocrats of rating business, 20 percent owned by Warren Buffet. And its CEO was being told he was either a fool or a crook, by Vincent Daniel, from Queens.” In this incident, the narrator emphasizes the origins of each character, and builds a sharp contrast between them. He reminds readers of just how important and influential Moody’s is, and then also reminds them of Daniel’s very humble origins in Queens. Through this comparison, he emphasizes how bold Daniel was to speak so candidly to the CEO of Moody’s. This boldness makes Daniel a more sympathetic character, and contributes to the general narrative Lewis builds throughout the text: only a very few, exceptional, people dared to look into and stand up to the big Wall Street firms perpetuating this corruption.
At the beginning of chapter 8, Lewis builds a clear connection between Eisman and Burry, as he had in the first few chapters of the book. He has returned to focusing on these two characters, and makes clear that he sees parallels between them by tying their two narratives together: “The day that Steve Eisman became the first man ever to take almost sexual pleasure in an essay in Grant’s Interest Rate Observer, Dr. Michael Burry received from his CFO a copy of the same story, along with a jokey note: ‘Mike—you haven’t taken a side job writing for Grant’s, have you?’” By building this connection between them, Lewis makes both characters more sympathetic. They are both portrayed as underdogs who face bad odds and persist against negative public opinion. Earlier, Lewis established that Eisman views himself as Spider-Man, and supports this perspective by emphasizing the ways in which Eisman did crusade against the “dark forces” of Wall Street. He connects Eisman to Burry just before describing how Burry was almost made into a “Wall Street villain” before his heroic foresight was revealed just in time, when subprime mortgage bonds really did fail. This allows readers to see Burry, too, as a Spider-Man-like figure. In turn, it makes clear that these two, despite their many oddities, are the real heroes of the story.
In his chapter on Burry, the narrator is careful to humanize him further with a personal story about his son’s diagnosis with Asperger’s. The fact that he delves into Burry’s personal life while in the midst of describing the most climactic moments of the market crash shows how important Burry is to this story. Also, the character traits Lewis chooses to emphasize are those that make Burry different from other people on Wall Street: his likely Asperger’s syndrome. He provides a number of the points describing Asperger’s that are included on the diagnosis sheet of Burry’s son. For example: “Many people have a hobby…The difference between the normal range and the eccentricity observed in Asperger’s Syndrome is that these pursuits are often solitary, idiosyncratic and dominate the person’s time and conversation.” Examples like this give a concrete reason for Burry’s difference from other people on Wall Street; he is singularly devoted to reading the information on subprime mortgage bonds, for example, thanks to the particular oddities that can be attributed to Asperger’s, like an idiosyncratic and solitary pursuit of a chosen hobby. In fact, the narrator draws a direct line between Burry’s Asperger’s and the way in which he was spectacularly successful and prescient when it came to subprime mortgage bonds, noting that “complex modern financial markets were as good as designed to reward a person with Asperger’s who took an interest in them. ‘Only a person with Asperger’s would read a subprime mortgage bond prospectus,’ he said.” In passages like these, Lewis brings out one of the main arguments of the book: only very few, very unique people were able to foresee disaster as early as Burry and Eisman did.
