The Big Short Chapter 10: Two Men in a Boat - The Final Collapse
This is the chapter where everything falls apart. Not slowly. Not gracefully. Like a building that has been rotting from the inside for years and one Tuesday morning just folds in on itself while people are still walking past it on the sidewalk.
And here is the cruel joke at the center of it all. The guys who were right, the ones who bet against the whole rotten system, now have a new problem. What good is winning a bet if the person who owes you money is dead?
Two Men in a Boat
Greg Lippmann had a metaphor for the subprime mortgage market. A tug-of-war. On one side, Wall Street making garbage loans, packaging them into bonds, repackaging the worst ones into CDOs. On the other side, his noble army of short sellers betting against it all.
But now the metaphor had changed. It was two men in a boat, tied together by a rope, fighting to the death. One man kills the other, throws the body overboard, and gets yanked over the side himself.
That is the terrifying irony of this chapter. You can be completely right about the biggest financial bet of the century, and still lose, because the people who owe you the money might not exist anymore by the time you try to collect.
The Fall of Bear Stearns
Steve Eisman, by this point, had insulted pretty much every important person on Wall Street. He told the chairman of HSBC, to his face, at a public event in Hong Kong, “You don’t actually believe that, do you? Because your whole book is fucked.” He got invited to a friendly meet-and-greet with Bear Stearns’ new CEO and interrupted the man mid-sentence to tell him this was all his fault.
By the end of 2007, FrontPoint’s bets against subprime had doubled their fund from $700 million to $1.5 billion. Danny and Vinny wanted to cash out. Vinny had an almost spiritual worry. “It was the trade of a lifetime,” he said. “If we gave up the trade of a lifetime for greed, I’d have killed myself.”
But Eisman held on. For him this was never just about money. It was a moral crusade.
On March 14, 2008, Eisman was invited to speak at a Deutsche Bank event. He was sharing a stage with Bill Miller, a famous investor who owned over $200 million in Bear Stearns stock, and then Alan Greenspan. Eisman thought Greenspan would go down as the worst Fed chairman in history.
What happened next is one of the most cinematic moments in the book.
Bear Stearns Collapses in Real Time
Miller spoke for three minutes about why owning Bear Stearns was a great idea. Then Eisman stood up. He wasn’t really supposed to give a formal speech, but he grabbed the podium and started talking: “We are going through the greatest deleveraging in the history of financial services and it’s going to go on and on and on.”
While Eisman talked, Danny Moses sat in the back row, watching Bear Stearns stock crash on his BlackBerry and texting his partners in real time.
9:49. Bear at 47.
9:55. Bear is 43 last OMG.
10:02. Bear 29 last!!!!
Bear Stearns stock was falling about a dollar a minute while Bill Miller sat there having no idea what was happening. Some kid in the back finally asked, “Mr. Miller, from the time you started talking, Bear Stearns stock has fallen more than twenty points. Would you buy more now?”
Miller looked stunned. He said yeah, sure, he’d buy more.
After that, the room emptied. People ran for the exits to sell. By the time Alan Greenspan arrived to speak, nobody was left to listen. By Monday, Bear Stearns was gone, sold to J.P. Morgan for $2 a share.
And here is the thing that should make your stomach drop. Cornwall Capital, the little garage startup, had bought insurance against Bear Stearns’s collapse for less than three-tenths of 1 percent. They put down $300,000 and made $105 million.
The Week Everything Died
Lewis fast-forwards to September 18, 2008. This is it. The week the world changed.
Monday: Lehman Brothers filed for bankruptcy. Merrill Lynch, after admitting $55.2 billion in losses, sold itself to Bank of America. The stock market fell more than it had since September 11, 2001.
Tuesday: The Fed lent $85 billion to AIG so it could pay off the credit default swaps it had sold to Wall Street banks. Goldman Sachs alone was owed over $20 billion from AIG. The U.S. taxpayer was now covering Goldman’s gambling losses.
Wednesday: A money market fund called the Reserve Primary Fund froze redemptions because it had lost too much on loans to Lehman Brothers. Money markets were supposed to be as safe as cash. Now you couldn’t even trust your own cash.
Thursday: The British financial regulator was considering banning short selling, which would basically destroy the hedge fund industry.
Danny Moses, FrontPoint’s head trader, was trying to keep track of seventy different bets across global stock markets. Five screens on his desk. 33,000 emails that month. He was built for chaos. But this was beyond chaos. Prices moved so fast he couldn’t get a fix on anything. “It felt like a black hole,” he said. “The abyss.”
Danny’s Panic Attack
Just before eleven in the morning, Danny saw wavy black lines between his eyes and his screen. A shooting pain in his head. He looked down and could see his heart banging against his chest.
The last time this happened was September 11, 2001. He had been on the top floor of the World Financial Center when the first plane hit. He watched people jump from the towers. He walked two pregnant women to safety through lower Manhattan. Now it was happening again.
He turned to Porter Collins and said, “Porter, I think I’m having a heart attack.”
Porter, a former Olympic rower who assumed everyone was dramatic about pain, laughed and said, “No, you’re not.”
Danny stopped talking. Porter reconsidered.
Cornwall Capital’s Quiet Crisis
Charlie Ledley and Jamie Mai at Cornwall Capital had turned $30 million into $135 million. They never had a champagne moment. Instead they spent their time wondering how to preserve the doubt and uncertainty that had made them right in the first place. Once you’re sure you’re a genius, you stop looking for the places where you might be wrong.
Charlie got migraines. Jamie stared at Bloomberg screens all day. They tried to sue the rating agencies, Moody’s and S&P, for the damage their bogus ratings had caused. They drove all the way to Portland, Maine, to find lawyers who would listen. The lawyers told them that suing the rating agencies for inaccurate ratings was like suing Motor Trend magazine for recommending a car that crashed.
Charlie called a professor he knew, a historian of financial crises. These calls came late at night and went on for a long time. What struck the professor was that Charlie Ledley, of all people, this kid who wasn’t even a money person, had anticipated the greatest financial crisis since the Depression.
What shook Charlie and Jamie most was the discovery that nobody was in charge. They had always assumed some grown-up was overseeing the financial system. Now they saw there wasn’t one. The headline that stuck in Jamie’s mind: “Senate Majority Leader on Crisis: No One Knows What to Do.”
Michael Burry: Right About Everything, Thanked for Nothing
And then there is Michael Burry. The most right person in the entire story and possibly the most punished for it.
By June 2008, anyone who had stayed with Scion Capital from the beginning had a gain, after fees, of 489 percent. The S&P 500 over the same period returned about 2 percent. In 2007 alone, Burry made his investors $750 million.
And yet he had only $600 million under management. Investors were pulling their money out as fast as they could. Not a single new investor called. Nobody asked for his views on the future. Nobody even seemed curious about how he did what he did. A trade magazine published the top 75 hedge funds of 2007, and Scion wasn’t on the list, even though its returns would have put it at the very top.
“It was as if they took one swimmer in the Olympics and made him swim in a separate pool,” Burry said. “His time won the gold. But he got no medal.”
Burry stopped eating. Stopped sleeping. Stopped talking to his wife and kids. He went to the emergency room with chest pains. On November 12, 2008, he sent his final letter to investors and shut the fund down. He vanished.
I find this part devastating. A man who was right when everyone else was wrong. Who proved it with real money. Who made his investors rich. And the world punished him for it because he didn’t play the social game. He just did the work, saw the truth, and expected that to be enough.
It wasn’t.
Sitting on the Steps of St. Patrick’s
The chapter ends with one of the most beautiful and melancholy scenes in the book. Danny, after his panic attack, calls Eisman and tells him to come to St. Patrick’s Cathedral. Eisman walks there slowly. “Steve’s such a fucking slow walker,” Danny said. “He walks like an elephant would walk if an elephant could only take human-size steps.”
The four of them sit on the cathedral steps on a gorgeous September day. Blue sky reaching down through the tall buildings. They watch people walk by and wonder: How many of these people are about to lose their jobs?
They had won. They had been right about everything. And yet the feeling wasn’t triumph. It was something closer to grief.
“It was like the flood’s about to happen and you’re Noah,” Eisman had said earlier. “You’re on the ark. Yeah, you’re okay. But you are not happy looking out at the flood. That’s not a happy moment for Noah.”
Lewis closes the chapter with a thought that haunts me. The problem with money is that consequences are so far removed from the original action that the mind never connects the two. The teaser-rate loan made in 2005 goes bad in 2007. The bond made from those loans goes bad months later. The CDO made from those bonds goes bad after that. And somewhere, someone gets a little note: “Dear Sir, We regret to inform you that your bond no longer exists.”
The biggest lag of all was right there on the street. How long before the people walking past St. Patrick’s Cathedral figured out what had just happened to them?
Some of them are still figuring it out.
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