Study Guide

The Big Short: Inside the Doomsday Machine Chapter 7

By Michael Lewis

Chapter 7

The Great Treasure Hunt

  • After returning home, Charles Ledley realizes that he's basically betting that "the end of democratic capitalism" will occur (7.1). Yikes.
  • Meanwhile, the market isn't doing great. Major subprime companies are failing left and right.
  • Five days later, a new subprime index called the TABX opens, which gives analysts the ability to see the actual prices of CDOs first time. Shocker: they're way lower than Wall Street estimates.
  • Prices start tumbling on the TABX immediately. After this, pretty much every bank stops selling credit default swaps except for Wachovia.
  • Nevertheless, the subprime market quickly goes back to normal, moving billions of dollars' worth of CDOs. Wall Street is artificially propping up prices.
  • Ledley and Mai are getting pretty scared at this point, so they notify reporters and the SEC. No one takes them seriously.
  • In June, the CDO division of Bear Stearns announces that it has lost a ton of money in the subprime market. Because Cornwall owns a bunch of credit default swaps from Bear Stearns, this makes them worry that the company will go bust, preventing them from realizing their profits.
  • Meanwhile, Eisman and company are getting their research game on. They learn about the "floating-rate subprime mortgages" that are at the root of the problem: these loans offer incredible rates for a fixed, two-year period, after which the interest goes up tenfold (7.17).
  • The guys also learn that the rating agencies don't have any specific information about these loans that can't be found in publicly available sources. Good grief.
  • By June 2007, the bonds are beginning to decline, and Eisman is finally getting his cash. What he still doesn't know, however, is who's losing money in these deals.
  • Eisman suspects that the banks and finance firms have been investing in CDOs themselves, a suspicion that is confirmed when HSBC announces that it too has lost a bunch of money in the subprime market. That only jacks up the consequences of a crash further.
  • As the market starts to go mad, Eisman reads an article by an economic forecaster named Jim Grant talking about the failure of rating agencies in the subprime market.
  • When Eisman finishes, he pretty much has "an orgasm" (7.35).