The Big Short
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The Big Short
byMichael Lewis
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The confusingly named credit default swap is not so much a swap as an insurance policy. The person who buys the swap is essentially betting against a financial product (often a bond) in the hopes that it will fail. The buyer pays a certain amount of money each year (similar to an insurance premium). If the bond doesn’t default, the buyer loses whatever amount of money was paid in premiums, but if the bond does default, the buyer of the default swap will make substantial returns on their investment. Credit default swaps were the main tool used by the Big Short traders in order to short the subprime mortgage market—they are how traders like Steve Eisman, Michael Burry, and Greg Lippman made their fortunes.
Credit default swap Quotes in The Big Short
The The Big Short quotes below are all either spoken by Credit default swap or refer to Credit default swap. For each quote, you can also see the other terms and themes related to it (each theme is indicated by its own dot and icon, like this one:
).
Chapter 2Quotes
A lot of hedge fund managers spend time chitchatting with their investors and treated their quarterly letters to them as a formality. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. In his quarterly letters he coined a phrase to describe what he thought was happening: “the extension of credit by instrument.” That is, a lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new instruments to justify handing them new money.
Related Characters:Michael Lewis (speaker), Michael Burry
Related Symbols:Bonds
Related Themes:
Page Number and Citation:28
Explanation and Analysis:
Chapter 3Quotes
The least controversial thing to be said about Lippmann was that he was controversial. He wasn’t just a good bond trader, he was a great bond trader. He wasn’t cruel. He wasn’t even rude, at least not intentionally He simply evoked extreme feelings in others. A trader who worked near him for years referred to him as “the asshole known as Greg Lippmann.” When asked why, he said, “He took everything too far.”
Related Characters:Michael Lewis (speaker), Steve Eisman, Vincent Daniel, Daniel Moses , Greg Lippmann
Related Themes:
Page Number and Citation:64
The argument stopper was Lippmann’s one-man quantitative support team. His name was Eugene Xu, but to those who’d heard Lippmann’s pitch, he was generally spoken of as “Lippmann’s Chinese quant.” Xu was an analyst employed by Deutsche Bank, but Lippmann gave everyone the idea he kept him tied up to his Bloomberg terminal like a pet. A real Chinese guy—not even Chinese American—who apparently spoke no English, just numbers’ China had this national math competition, Lippmann told people, in which Eugene had finished second. In all of China. Eugene Xu was responsible for every piece of hard data in Lippmann’s presentation. Once Eugene was introduced into the equation, no one bothered Lippmann about his math or his data. As Lippmann put it, “How can a guy who can’t speak English lie?”
Related Characters:Michael Lewis (speaker), Greg Lippmann (speaker), Steve Eisman, Vincent Daniel, Daniel Moses , Eugene Xu
Related Themes:
Page Number and Citation:66
Chapter 6Quotes
The trouble, as ever, was finding Wall Street firms willing to deal with them. Their one source of supply, Bear Stearns, suddenly seemed more interested in shooting than in trading with them. Every other firm treated them as a joke. Cornhole Capital. But here, in Las Vegas, luck found them.
Related Characters:Michael Lewis (speaker), Steve Eisman, Ben Hockett , Charlie Ledley and Jamie Mai , Greg Lippmann, Wing Chau
Related Themes:
Page Number and Citation:149
Chapter 7Quotes
It made no sense: The subprime CDO market was ticking along as it had before, and yet the big Wall Street firms suddenly had no use for the investors who had been supplying the machine with raw material—the investors who wanted to buy credit default swaps. “Ostensibly other people were going long, but we were not allowed to go short,” said Charlie.
Related Characters:Michael Lewis (speaker), Charlie Ledley and Jamie Mai (speaker), Ben Hockett
Related Symbols:Bonds
Related Themes:
Page Number and Citation:163
Chapter 8Quotes
Now, in February 2007, subprime loans were defaulting in record numbers, financial institutions were less steady every day, and no one but him seemed to recall what he’d said and done. He had told his investors that they might need to be patient—that the bet might not pay off until the mortgages issued in 2005 reached the end of their teaser rate period. They had not been patient. Many of his investors mistrusted him, and he in turn felt betrayed by them.
Related Characters:Michael Lewis (speaker), Michael Burry
Related Symbols:Bonds
Related Themes:
Page Number and Citation:180
After a few pages, Michael Burry realized that he was no longer reading about his son but about himself. “How many people can pick up a book and find an instruction manual for their life?” he said. “I hated reading a book telling me who I was. I thought I was different, but this was saying I was the same as other people. My wife and I were a typical Asperger’s couple, and we had an Asperger’s son.”
Related Characters:Michael Lewis (speaker), Michael Burry (speaker)
Related Themes:
Page Number and Citation:182
Chapter 9Quotes
Howie Hubler had grown up in New Jersey and played football at Montclair State College. Everyone who met him noticed his thick football neck and his great huge head and his overbearing manner, which was interpreted as both admirably direct and a mask. He was loud and headstrong and bullying.
Related Characters:Michael Lewis (speaker), Michael Burry, Howie Hubler
Related Themes:
Page Number and Citation:200
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Credit default swap Term Timeline in The Big Short
The timeline below shows where the term Credit default swap appears in The Big Short. The colored dots and icons indicate which themes are associated with that appearance.
Chapter 2
...that there’s no direct way to do so. Earlier, however, he discovered something called a credit default swap, which is an insurance policy where you lay down annual premium payments on a...(full context)
Burry is already involved in corporate credit default swaps , but he realizes that credit default swaps on subprime mortgage bonds could be an...(full context)
In early 2005, Burry runs into a problem with this credit default swap plan: the big Wall Street investment banks aren’t treating the matter as urgently as...(full context)
...him the information to do just that. He begins pestering investment banks to sell him credit default swaps —and eventually some do. He plays dumb but secretly believes that he’s right and the...(full context)
In August, Burry writes a proposal for a fund called Milton’s Opus, which involves credit default swaps . None of his investors understand it, however, and it dies quickly. Later he confesses...(full context)
...at Deutsche Bank called Greg Lippmann who is offering to buy a billion dollars in credit default swaps . Burry declines. He looks into it and finds out other major banks are suddenly...(full context)
Chapter 3
...stop rising so rapidly. His plan is basically the same as Mike Burry’s and involves credit default swaps .(full context)
Meanwhile, Burry is able to buy $100 million in credit default swaps from Goldman Sachs. He guesses that Goldman isn’t the company taking on the risk if...(full context)
Wall Street firms like Goldman Sachs begin to want pessimists like Mike Burry to buy credit default swaps against triple-B bonds. They then create a “synthetic CDO” made of nothing but credit default...(full context)
Lippmann’s bosses ask him to do what Mike Burry is doing, creating as many credit default swaps as possible before AIG realizes how much risk they’re taking on. Though Lippmann is in...(full context)
...but they largely refuse him. When subprime mortgage bonds rise, decreasing the value of Lippmann’s credit default swaps , his bosses begin to wonder if he’s doing the right thing.(full context)
...to stop pressure from his bosses is to implode the market—because if AIG stops taking credit default swaps , the whole subprime mortgage bond market might collapse, making Lippmann’s credit default swaps much...(full context)
Chapter 4
...investors who might take them off his hands. This means he has to create a credit default swap market.(full context)
Lippmann’s initial attempts to sell credit default s are unsuccessful, but ultimately, he meets Steve Eisman. At first, Eisman doesn’t take the...(full context)
Ultimately, Lippmann sells credit default swaps to a different investor, and two pieces of breaking news change the whole situation. First,...(full context)
Chapter 5
Eisman is not alone in investing in investing in credit default swaps . Lippmann pitched them around and got about a hundred interested buyers, although many use...(full context)
...Deutsche Bank’s favor, but Ben, Charlie, and Jamie are excited about being able to buy credit default swaps from Greg Lippmann—even as they remain suspicious that his deal is too good to be...(full context)
Chapter 6
...I don’t have anything to buy.” Eisman finally gets it. As Lewis puts it: “The credit default swaps , filtered through the CDOs, were being used to replicate bonds backed by actual home...(full context)
...is buying, I want to short it.” Eisman isn’t joking, and he ends up buying credit default swaps specifically on Wing Chau’s CDOs.(full context)
...him and says if he believes in the market so much, why not sell some credit default swaps ?(full context)
Chapter 7
...worries that the crash will come too soon and that they haven’t bet enough on credit default swaps yet.(full context)
Fortunately for Cornwall Capital, Wachovia is still willing to sell them credit default swaps . Cornwall now has a portfolio of less than $30 million, but they have $205...(full context)
Cornwall’s biggest problem is that Bear Stearns, which sold them 70 percent of their credit default swaps , is in danger of going under. To help offset this, Cornwall bought credit default...(full context)
Chapter 8
Back in April 2006, Burry is one of the few people in the credit default swap market, and he is often at the mercy of big banks and the valuations...(full context)
...thinks a market is temporarily functioning the wrong way—and he uses this to protect his credit default swaps . He writes a quarterly report to defend himself, but it comes off as antagonistic....(full context)
Burry finds his credit default swaps are suddenly in high demand; by July, they are rapidly increasing in value. An article...(full context)
Chapter 9
...in charge of subprime mortgage bets. During this period, quants at Morgan Stanley invent the credit default swap specifically to protect Hubler from risk—but Hubler and his traders steal the idea as...(full context)
Hubler’s credit default swap is so tilted in Morgan Stanley’s favor that they essentially predict that it would...(full context)
...percent of the firm’s profits by April 2006. He expects that his $2 billion in credit default swaps will soon yield $2 billion in profits. Because of pressure to make a profit, however,...(full context)
By May 2007, Hubler is in conflict with Morgan Stanley management, but not over credit default swaps . He threatens to quit but is offered more money, which he takes.(full context)
...Greg Lippmann at Deutsche Bank: Hubler and his team owe them $1.2 billion, since the credit default swaps have moved in Lippmann’s favor. Morgan Stanley and Deutsche Bank dispute the value of the...(full context)
...Shareholders bring a lawsuit against Bear Stearns, which frightens Cornwall Capital, since many of their credit default swaps are through Bear Stearns. They also stand to lose money if the U.S. government steps...(full context)
Later, on August 31, 2007, Mike Burry takes his own credit default swaps out of the side pocket and begins to unload them. By the end of the...(full context)
Chapter 10
FrontPoint is well-positioned to make massive profits. They have already unloaded all their credit default swaps for huge gains and they transition back to being regular stock market investors. They still...(full context)
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