The Big Short: Inside the Doomsday Machine

by Michael Lewis

How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.

They had the essential feature of a Ponzi scheme: To maintain the fiction that they were profitable enterprises, they needed more and more capital to create more and more subprime loans.

“That’s when I decided the system was really, ‘Fuck the poor.’ ”

“I now realized there was an entire industry, called consumer finance, that basically existed to rip people off.”

The CDO was, in effect, a credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold.

Now, somehow, the same innovative spirit was being put to the opposite purpose: to hide the risk by complicating it.

But of course Mike Burry didn’t own any triple-B-rated subprime mortgage bonds, or anything like them. He had no property to “insure”; it was as if he had bought fire insurance on some slum with a history of burning down. To him, as to Steve Eisman, a credit default swap wasn’t insurance at all but an outright speculative bet against the market—and this was the second way to think about it.

In retrospect, their ignorance seems incredible—but, then, an entire financial system was premised on their not knowing, and paying them for this talent.

“I cannot fucking believe this is allowed,” said Eisman. “I must have said that one thousand times.”

A smaller number of people—more than ten, fewer than twenty—made a straightforward bet against the entire multi-trillion-dollar subprime mortgage market and, by extension, the global financial system. In and of itself it was a remarkable fact: The catastrophe was foreseeable, yet only a handful noticed.

Let me see if I can get it right—it always sounds better when the therapist says it. Well, if you start with a person who has tremendous difficulty integrating himself into the social workings of society, and often feels misunderstood, slighted, and lonely as a result, you will see where an intense interest can be something that builds up the ego in the classical sense. Asperger’s kids can apply tremendous focus and ramp up knowledge of a subject in which they have an interest very quickly, often well beyond the level of any peers. That ego-reinforcement is very soothing, providing something that Asperger’s kids just do not experience often, if at all. As long as the interest provides that reinforcement, there is little danger of a change. But when the interest encounters a rocky patch, or the person experiences failure in the interest, the negativity can be felt very intensely, especially when it comes from other people. The interest in such a case can simply start to mimic all that the Asperger’s person was trying to escape—the apparent persecution, the misunderstanding, the exclusion by others. And the person with Asperger’s would have to find another interest to build up and maintain the ego.

Greg Lippmann had imagined the subprime mortgage market as a great financial tug-of-war: On one side pulled the Wall Street machine making the loans, packaging the bonds, and repackaging the worst of the bonds into CDOs and then, when they ran out of loans, creating fake ones out of thin air; on the other side, his noble army of short sellers betting against the loans. The optimists versus the pessimists. The fantasists versus the realists. The sellers of credit default swaps versus the buyers. The wrong versus the right. The metaphor was apt, up to a point: this point. Now the metaphor was two men in a boat, tied together by a rope, fighting to the death.

“It was more than an argument,” Eisman said. “It was a moral crusade. The world was upside down.”

“I think there is something fundamentally scary about our democracy,” said Charlie. “Because I think people have a sense that the system is rigged, and it’s hard to argue that it isn’t.”

The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side—the entire financial system, essentially—had gambled with the odds against them.

At the top of Charlie Ledley’s list of concerns, after Cornwall Capital had laid its bets against subprime loans, was that the powers that be might step in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers.

“It’s laissez-faire until you get in deep shit,”