The Big Short | Michael Lewis

Summary of: The Big Short: Inside the Doomsday Machine (Movie Tie-in Editions)
By: Michael Lewis


Welcome to a stark journey into a financial world turned on its head, where contradictory forces built a financial catastrophe just waiting to happen. Based on Michael Lewis’s ‘The Big Short: Inside the Doomsday Machine (Movie Tie-in Editions)’, this captivating summary takes you into the heart of the 2008 financial crisis, detailing the rise of the subprime mortgage bond industry, the complex bond market, the fallacy of never-ending rising housing prices, and the roles Wall Street bond departments and rating agencies played. Discover how several key individuals, like Steve Eisman and Michael Burry, foresaw the crisis and unraveled the intricate web of deceit and greed obscuring the impending collapse.

The Truth-Teller Who Saw it Coming

Steve Eisman, a man with no social skills and a proud cynic, was one of the few individuals who predicted the 2008 financial crisis. While working as a hedge-fund analyst, he discovered the Household Finance Company’s fraud in selling second mortgages, which involved fooling customers into paying 12.5% interest on 15-year fixed-rate loans when they were told they would pay only 7%. Eisman proceeded to spread the word to reporters, advocates, and government officials. As a result, HFC settled a $484 million class-action suit, and a year later, HSBC purchase HFC for $15.5 billion. This eye-opening experience resulted in Eisman slowly turning into a Democrat and made him realize the effects of a lack of government regulation and the looming “doomsday machine.” Eisman recognized that Wall Street bond departments made huge sums of money by exploiting customer fear and ignorance in the bond market. Overall, his curiosity, doubt, and reputation as a truth-teller allowed him to see through Wall Street’s ignorance, false optimism, and fraud that characterized the era.

The Subprime Mortgage Meltdown

In the early 2000s, the subprime mortgage bond industry boomed, with nearly half a trillion dollars in issuance per year. The bonds were built on the backs of ordinary people lured into loans they could not repay. The belief on Wall Street was that housing prices would rise indefinitely, making the lender’s risk non-existent. As the summer of 2006 approached, home prices began to fall, and the reality of the situation became clear. Boardroom strategists continued to generate as many loans as possible and fed them to investment banks to transform them into bonds. The financial crisis of 2008 became inevitable because of the relentless stupidity of bank CEOs who didn’t know what was going on in their bond departments, bond traders who didn’t understand their business or the instruments they were selling, rating agencies that manipulated data for their own benefit, and mortgage loan practices designed to enlist as many borrowers as possible, regardless of their creditworthiness.

The Soulless Machine of Wall Street

The book delves into the complex financial instruments including CDOs and credit default swaps. It exposes the greed and fear of the insiders in masking risks and maximizing returns. This “doomsday machine” was designed to bleed every drop of equity from the housing market and create synthetic CDOs. The book highlights the catastrophic nature of the unraveling of the multi-trillion-dollar US bond market caused by the complexity of these instruments. The derivatives were contracts between buyers and sellers based on mortgage-backed bonds’ prices. At peak performance, it enabled people to undermine or circumvent the financial system, see the opportunities in calamity and bet on that outcome. The doomsday machine defied regulation, understanding and humanity itself.

The Hypersensitive Investor

Dr. Michael Burry, an eccentric physician-turned-scholar, was hypersensitive to unfairness and had a knack for recognizing market weaknesses. He created the highly successful investment firm Scion Capital and saw the impending doom of the subprime mortgage market. In 2004, he capitalized on the crisis by buying credit default swaps on subprime mortgage bonds, which paid off as defaults rose. Burry also demonstrated his creativity and focus by finding undervalued stocks through web searches. Despite being characterized as odd and alienated, Burry’s unique perspective and sensitivity allowed him to succeed where others failed, making him one of the greatest investors of all time.

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