Study Guide

The Big Short: Inside the Doomsday Machine Greed

By Michael Lewis


The "consumer loan" piles that Wall Street firms, led by Goldman Sachs, asked AIG FP to insure went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. (3.25)

The rise of the subprime mortgage market is a case study in the power of greed. Subprime mortgages are not good long-term investments—the word "subprime" should tip you off on that one. But here's the thing: they're somehow hugely profitable. This contradiction sparks the expansion of subprime mortgages and sets the stage for the stock market crash of 2008.

The market was paying Goldman Sachs bond traders to make the market less efficient. (3.32)

But why would you want to do that? It's simple: it pays. Greed is so powerful on Wall Street that most peeps would rather make quick cash than do something of value. Hey, you don't become a Wall Street banker because you want to make the world a better place…

The market for "synthetics" removed any constraint [...] To make a billion-dollar bet, you no longer needed to accumulate a billion dollars' worth of actual mortgage loans. (3.39)

If the rise of the subprime mortgage market is an example of how greed can be corrupting, then the rise of the synthetic market shows how greed can make you act like a straight-up fool. Everyone involved in this market knows that they're just dealing in fake money, but they're too focused on commission checks to think about long-term consequences.

The big Wall Street firms [...] pay as little as possible for raw materials (home loans) and charge as much as possible for the product (mortgage bonds). (4.43)

The Big Short basically frames Wall Street as a manufacturing business, with subprime loans representing the "materials" and subprime bonds representing the "product." There's just one problem: that's not how the financial market actually works. As usual, short-term profit gets in the way of long-term stability.

All by himself, Chau generated vast demand for the riskiest slices of subprime mortgage bonds, for which there had previously been essentially no demand. (6.7)

As more people enter the subprime bond market, the situation spirals further out of control. The financial world's greed has gone so unchecked that they've fully detached from reality, buying and selling worthless products for sky-high prices. You know what they say, though—what comes up must come down.

In one year as a CDO manager, [Wing Chau] had taken home $26 million, the haul from half a dozen lifetimes of working at New York Life. (6.12)

This really puts things into perspective, huh? As easy as it is to criticize Wing Chau for his clearly fraudulent business, we know it'd be really hard to turn down $26 million a year for doing basically nothing. We can see why it would be so tempting.

His job was to be a CDO "expert," but he actually didn't spend a lot of time worrying about what was in CDOs. His goal, he explained, was to maximize the dollars in his care. (6.13)

A typical financial services company is less concerned with the amount of money in their care than the actual return produced on that investment. After all, what's the value of a $5 billion fund if it's losing money constantly? Unfortunately, the system is currently organized in a way that actually encourages bond traders to be greedy.

The subprime mortgage industry [...] had somehow become the most powerful engine of profits and employment on Wall Street—and it made no economic sense (6.33)

Just a few years ago, the subprime mortgage industry was mere peanuts—now, it's a monster. At this point, Eisman knows that the monster is going to explode sooner or later, but he also knows that the banks will eke out as much profit as possible before it's too late. You know what kind of behavior that is? The. Worst.

One of the reasons Wall Street had cooked up this new industry called structured finance was that its old-fashioned business was every day less profitable. (7.23)

This is the ugly truth at the core of The Big Short: Wall Street exploits the subprime market simply because it's a cash cow. It's as straightforward as that. They don't enter the market to make their investors money or to give the working class the opportunity to own homes—they do it rake it in the dough.

"I have a job to do. Make money for my clients. Period. But boy it gets morbid when you start making investments that work out extra great if a tragedy occurs." (8.2)

To give you a break from all of that greed, we'll change things up by looking at the good guys in our story. They still operate in the financial world, so they're still looking to make money at the end of the day, but they are always aware of the potential consequences of their actions. That's a big distinction.