The Big Short Chapter 6: Spider-Man at The Venetian Las Vegas Conference
There is something almost too perfect about the setting. The biggest annual conference for the subprime mortgage bond industry takes place in Las Vegas. In a fake Italian palace. Inside a casino specifically designed to make you lose track of time, money, and your grip on reality.
You could not write this as fiction. Nobody would believe you.
Golf With Steve Eisman
The chapter opens with Eisman playing golf at the Bali Hai Golf Club in Las Vegas, the day before the conference begins. January 28, 2007. And it is exactly what you would expect.
He shows up in gym shorts, a t-shirt, and sneakers. His colleagues Vinny and Danny are mortified. Danny begs him to at least wear a collared shirt. Eisman drives the cart to the clubhouse and comes back wearing a hoodie over the t-shirt. Problem solved, apparently.
But the golf itself is the real show. Eisman hits the ball into a sand trap, walks into the sand, picks it up with his hand, and tosses it near Vinny’s ball on the fairway. Over and over. No shame. No attempt to hide it. As Vinny puts it, “Because his memory is so selective, he has no scars from prior experience.” The man plays golf the way a kid plays Monopoly when nobody is watching.
This little golf scene tells you everything about how Eisman is going to behave at this conference.
The Dinner That Changed Everything
After golf, they head to a dinner hosted by Greg Lippmann at the Wynn hotel. Lippmann was short $10 billion in subprime mortgage bonds. That was costing him $100 million a year in premiums. His investors were getting nervous. Some were quitting.
So Lippmann did something clever. He rented a private teppanyaki room and seated his hedge fund clients next to the people on the other side of their bets. The idea: let the shorts see, face to face, how dumb the buyers actually were. Stop worrying that the other side knows something you don’t. They don’t.
And this is where Eisman meets Wing Chau.
Wing Chau ran something called Harding Advisory. He was a CDO manager. When Eisman asked what a CDO manager actually does, the answer was essentially: not much. The job was to buy up the worst slices of subprime mortgage bonds, the triple-B-rated garbage at the bottom of the pile, and repackage them into new towers of debt called CDOs. The rating agencies would then magically declare 80 percent of this repackaged garbage as triple-A. Pension funds and insurance companies could buy them without breaking any rules.
They took the worst stuff, the material that everyone knew was risky, put it in a new box, and a rating agency said it was safe. It’s like taking rotten meat, putting it in a fancy wrapper, and having a health inspector stamp it Grade A. Except the health inspector is getting paid by the butcher.
Wing Chau had gone from making $140,000 a year at New York Life Insurance to taking home $26 million a year as a CDO manager. “Two guys and a Bloomberg terminal in New Jersey” was Wall Street shorthand for the typical CDO manager. The less they asked, the more business they got.
And here is the part that blew Eisman’s mind. Wing Chau told him, almost proudly, “I love guys like you who short my market. Without you I don’t have anything to buy.”
Let me explain why this is insane. Eisman’s side bets against subprime bonds, his credit default swaps, were being used to create synthetic CDOs. Fake bonds that mimicked real ones. There weren’t enough actual terrible mortgages in America to satisfy the demand. So Wall Street was using bets like Eisman’s to manufacture more of the product out of thin air.
As Eisman put it later: “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford. They were creating them out of whole cloth. One hundred times over!”
After dinner, Eisman grabbed Lippmann, pointed at Wing Chau, and said, “Whatever that guy is buying, I want to short it.” Lippmann thought he was joking. Eisman was dead serious. From that point on, he specifically targeted Wing Chau’s CDOs.
Cornwall Capital Shoots Guns and Crashes a Conference
Meanwhile, Charlie Ledley from Cornwall Capital was at an indoor shooting range a few miles from the Strip, firing an Uzi at a photograph of Saddam Hussein. Bear Stearns CDO salesmen had invited him. Why? Because the easiest way to expense a day of playing Full Metal Jacket to your Wall Street firm was to bring a client along. And the least important client is the one whose opinion doesn’t matter.
Cornwall Capital was basically two guys with $30 million. The big firms called them Cornhole Capital behind their backs. But Charlie and Ben showed up at the conference anyway. They hadn’t pre-registered. They just walked in. “If you just kind of show up at these things,” Jamie had told Charlie, “they almost always let you in.”
They wandered The Venetian trying to find anyone who could explain why their bet was wrong. Nobody could. The insiders had two arguments. First, the CDO buyer will never go away. Second, subprime loans have never defaulted in large numbers before. Lewis draws a brilliant comparison here to the roulette tables visible from the conference floor, where screens show the last twenty spins. Gamblers stare at those screens and convince themselves that because it came up black eight times in a row, red is “due.” The entire subprime industry was doing the same thing. Using a short, meaningless history to predict the future.
“Usually, when you do a trade, you can find some smart people on the other side of it,” Ben said. “In this instance we couldn’t.”
Then the opening ceremony hit them in the face. The moderator, a guy named John Devaney who ran a subprime hedge fund, got up and delivered what was basically a drunken confession. He called the rating agencies whores. He said the securities were worthless. He said they all knew it. When he finished, the room went completely silent. Nobody argued with him. They just pretended he hadn’t spoken.
This scared Charlie and Ben, but for a different reason than you might think. If the market was starting to become self-aware, the window to place their bets was closing fast. They thought they had six months. Now they worried they had one week.
Spider-Man Enters the Building
The morning after the Wing Chau dinner, Eisman woke up inside The Venetian and got his first look at the bond market conference. Seven thousand people. Fake Renaissance frescoes. Penny slots near the entrance and hundred-dollar ATMs by the exits.
Eisman saw it clearly. A few years ago, subprime mortgages were a tiny, boring corner of the market. Now seven thousand people were making their living off it. At an equity conference, you’d be lucky to get five hundred.
Deutsche Bank had arranged private meetings for Eisman with lenders, banks, and rating agencies. They even sent along a salesman named Ryan Stark to babysit him. “He wanted to make sure we knew we were there to buy the bonds,” Danny recalled. They were supposed to pretend they were buyers, not spies.
But Eisman could not help himself. The chapter title makes sense here. Eisman genuinely saw himself as Spider-Man. Not as a joke. He identified with Peter Parker on an uncomfortably detailed level, right down to the parallels in their biographies. He saw himself as a crusader against sinister authority. And at the Option One speech, Spider-Man came out.
The CEO of Option One was giving a presentation about their subprime loan portfolio, claiming they expected a modest loss rate of 5 percent. Eisman raised his hand. It wasn’t a Q&A. The guy was mid-speech. But when the CEO called on him, Eisman asked: “Would you say that five percent is a probability or a possibility?”
A probability, the CEO said, and kept going.
Eisman’s hand went up again. But this time he wasn’t asking a question. He was making a zero with his thumb and index finger. Zero. Zero probability that the default rate would be only 5 percent. Before the CEO could respond, Eisman’s cell phone rang. He answered it, said “Excuse me, I need to take this call,” and walked out. It was his wife. She admits later: “It wasn’t important at all. I was a prop.”
The Ratings Agencies: The Real Villains
After the Option One incident, something shifted in Eisman. He stopped picking fights and started genuinely trying to understand. He wanted to know if these people knew something he didn’t. Could it really be this obvious?
What he found was even worse than he expected. The rating agencies were staffed by people who, as Vinny put it, were “all like government employees.” They wore J.C. Penney suits with ties that matched too well. They couldn’t name the traders at Goldman and Lehman who were exploiting loopholes in their models. The smartest ones left for Wall Street firms so they could then manipulate their former employers.
Everyone said 5 percent loan losses. It was a party line.
“When you sit down with Richard Posner,” Eisman said, “you know it’s Richard Posner. When you sit down with the ratings agencies you know it’s the ratings agencies.”
These were the gatekeepers. The people whose entire job was to tell investors what was safe and what wasn’t. And they were the least qualified, least paid, least curious people in the building. The foxes weren’t guarding the henhouse. The foxes had hired the chickens to guard themselves.
Coming Home Changed
They left for Las Vegas shorting less than $300 million in subprime bonds. They came back and raised it to $550 million, with new bets specifically against Wing Chau’s CDOs. Their entire fund was only $500 million, so the position now overwhelmed everything else they owned.
Their first day back in the office, they shorted the stock of Moody’s Corporation at $73.25 a share.
As Vinny summarized the trip: “That was the moment when we said, ‘Holy shit, this isn’t just credit. This is a fictitious Ponzi scheme.’”
The question was no longer “Do these bond market people know something we don’t?” It had changed to something darker: “Do they deserve merely to be fired, or should they be put in jail?”
Danny thought most people in the industry were blinded by their own interests. Vinny, as always, had the darker read: “There were more morons than crooks, but the crooks were higher up.”
What I love about this chapter is the setting. Las Vegas. A city built on the idea that you can trick people into ignoring the odds. And here were seven thousand financial professionals, inside a fake Italian palace, inside a casino, celebrating an industry that was already collapsing beneath their feet. The homeowners who had taken out the terrible loans that powered this whole machine? They were right there too, Danny noticed. Serving drinks. Spinning wheels. Rolling dice. A friend of Danny’s met a stripper that weekend who had five separate home equity loans.
You really cannot make this stuff up. And the fact that it all happened in Las Vegas, in a building designed to make people delusional about money, is the kind of irony that only reality can produce.
Previous: Chapter 5: Accidental Capitalists