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    Study Guide - The Big Short (A BookCaps Study Guide)
    Study Guide - The Big Short (A BookCaps Study Guide)
    Study Guide - The Big Short (A BookCaps Study Guide)
    Ebook132 pages2 hours

    Study Guide - The Big Short (A BookCaps Study Guide)

    By BookCaps

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    About this ebook

    Michael Lewis's "The Big Short" packs a lot of concepts into a short space; if it's been awhile since you read the book or if you just need a quick refresher, let us help.

    This study guide explains all the key concepts and people in the book, as well as gives a summary of what's learned in each chapter. This book is based off of the updated and expanded version.

    BookCap Study Guides do not contain text from the actual book, and are not meant to be purchased as alternatives to reading the book. This study guide is an unofficial companion and not endorsed by the author or publisher of the book.

    We all need refreshers every now and then. Whether you are a student trying to cram for that big final, or someone just trying to understand a book more, BookCaps can help. We are a small, but growing company, and are adding titles every month.

    LanguageEnglish
    PublisherBookCaps
    Release dateApr 22, 2013
    ISBN9781301822041
    Study Guide - The Big Short (A BookCaps Study Guide)
    Author

    BookCaps

    We all need refreshers every now and then. Whether you are a student trying to cram for that big final, or someone just trying to understand a book more, BookCaps can help. We are a small, but growing company, and are adding titles every month.Visit www.bookcaps.com to see more of our books, or contact us with any questions.

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      Book preview

      Study Guide - The Big Short (A BookCaps Study Guide) - BookCaps

      Michael Lewis’s

      THE BIG SHORT

      STUDY GUIDE

      By BookCaps Study Guides/Golgotha Press

      © 2011 by Golgotha Press, Inc.

      Published at SmashWords

      Note:

      This book is not endorsed by the author or publisher of Michael Lewis’ book; it is an unofficial study guide meant to assist you as you read the book. It is not meant to replace the book

      Historical Background

      When Michael Lewis wrote the prologue to his book The Big Short, published in 2010, he was still mystified that a Wall Street investment firm had bothered to hire him, fresh out of college in the 1980s, with minimal knowledge of finance, and that his superiors entrusted him with huge sums of money and paid him a sizable amount to give investment advice to their customers. He was shocked that the CEOs and others from his own and other Wall Street firms were either ignorant or involved in making choices that would destroy their businesses—and that they were being rewarded for it with multi-million dollar salaries. He had hoped that the young, career-minded people who read his first book, Liar’s Poker, would heed it as a warning and choose a more meaningful life path. Instead, he found himself deluged with letters from them wanting to know more of his secrets about Wall Street. He could not see how the repackaging and selling of debts could successfully continue long-term, and he was surprised to discover that what he had seen as an oddity in America’s financial history—the constant scandals, the enormous salaries and bonuses, the ongoing prosperity of Wall Street firms in spite of all their problems—would continue for several decades more and that his views and insights as expressed in Liar’s Poker would be called quaint and innocent.

      Michael Lewis Meets Meredith Whitney

      In fact, Lewis had given up waiting for Wall Street to return to sanity, when a new voice emerged from an unexpected place. Meredith Whitney, a young unknown financial firms analyst working for what at the time was an unknown financial firm, Oppenheimer and Co., predicted events with such clarity and precision that she rapidly caught and commanded Wall Street’s attention. Whitney’s statement about Citigroup’s poor management of their business caused significant waves within both Citigroup itself and Wall Street as a whole. What set Whitney apart was her willingness to give an accurate, unbiased assessment of the real (that is, the non-existent) worth of the subprime mortgage bonds that had become such a popular investment tool. The effects of her assessment were immediate and palpable: financial stocks crashed on October 31, 2007; Citigroup’s CEO resigned; and as predicted by Whitney, Citigroup itself was forced to slash its dividend—all within a few weeks.

      Intrigued, Lewis called Whitney in 2008 to find out more about what she thought as well as where she came from. He discovered that she had started working at Oppenheimer after graduating with a degree in English from Brown University. At Oppenheimer, she was fortunate enough to have been trained by Steve Eisman, a fact that meant little to Lewis at first. However, after reading about John Paulson’s unprecedented $24 billion stock market win, achieved by short selling the subprime mortgage bonds that had been so lucrative for Wall Street, Lewis started to put things together. He was curious to know Whitney’s opinion of who, of the many who claimed to have predicted the subprime mortgage bond disaster, actually did. According to Lewis, Whitney named only a handful of people, among them John Paulson. But the most notable one according to Whitney was Steve Eisman … and it’s here that Lewis’s story begins.

      Plot Summary

      Michael Lewis’s The Big Short recounts in a vivid and accessible way the events leading up to the near disastrous 2008 Wall Street crash following the unraveling of the subprime real estate, bond, and derivatives market. The book uses three basic modes to guide the story: 1) the descriptions of the main characters—their thoughts, personalities, lives, insights, and actions relative to the subprime bond market; 2) the history and ongoing developments that led up to and drove the events of 2008; and 3) the explanation (as much as possible) in layman’s terms of the complex financial concepts and instruments that provide the basis of the story. Lewis also attempts to set forth the broader social, political, economic, and moral implications of the events in question, but he does this mostly in a subtle way that is interwoven with the story and its characters.

      The Main Idea

      The main gist of Lewis’s story has to do with the intersection of Wall Street and the subprime housing market. Before that time, the world of high finance had always been closed to the lower-income masses of Americans; but now, the lending institutions and Wall Street investment banks had devised ways of maximizing the minimal income and debts of the lower and middle classes. Home loans were being made to people who couldn’t afford to repay them; teaser rates were being offered for two-year periods, to be followed by higher, unaffordable interest rates; floating-rate mortgages encouraged increases in the principal until payments became too expensive; and on and on. Suffice it to say that the lending practices were irresponsible to the point of being ridiculous, and it was on this shaky basis that Wall Street decided to build its equally shaky and perhaps even more dubious mortgage bond and derivatives industry. That industry, which few people genuinely understood (least of all, the CEOs of the Wall Street firms), included credit default swaps and collateralized debt obligations composed of misrated subprime bonds that were destined to fail, though they were presented as being relatively riskless. The whole situation spelled obvious disaster, but Wall Street’s traders were evidently blinded by greed, because no one within Wall Street seemed to see it. Those who did see it, most notably, Scion, FrontPoint, Cornwall Capital, and Greg Lippmann, bet against it and made significant profits—although in almost every case those profits came with their own less easily definable price. Most of the rest of the financial world didn’t catch on until the last minute and had to be bailed out by the U.S. government. Yet somehow, even though billions were lost and a number of firms either went bankrupt or nearly bankrupt, a lot of people still got rich—no matter which side they bet on. That was one of the stranger aspects of the story.

      Lewis’s Writing Style

      Speaking of stories, Lewis does an excellent job of creating a colorful and interesting tale out of a potentially confusing and dull subject. Do not, however, expect an immediately clear understanding of the concepts and events. One of the techniques Lewis uses in The Big Short is mystery: he gradually guides us into an understanding, apparently so that we can experience the same confusion and initial disbelief that those involved must have experienced during the actual unfoldment of the crisis.

      Finally, no summary can encompass the vividness and human touch created by the many personal details that bring the book to life. Even if you have no interest in finance, the book is well worth reading for its human interest and for its broader implications for both American and global social and economic issues.

      Key People / Companies In the Book

      FrontPoint Partners

      With regard to its characters, the story centers mostly around three hedge funds: Steve Eisman’s FrontPoint Partners; Michael Burry’s Scion Capital; and Cornwall Capital, which was jointly run by Charlie Ledley, Jamie Mai, and Ben Hockett. Of the three, the most professional in terms of its partners’ backgrounds was FrontPoint Partners, which aside from Eisman included Vinny Daniels, Danny Moses, and Porter Collins, all of whom followed Eisman from the Wall Street firm Oppenheimer and Co. Eisman himself was a well-known sell-side equity analyst, a maverick who never failed to tell it exactly as he saw it, often insulting highly placed people in the process. But Eisman had a soft side, too, in that he favored the underdog and was therefore always ready to stick up for the less fortunate. Vinny Daniels was the numbers man, the accountant and analyst with a dark side, presumably because he was from Queens. Danny Moses was FrontPoint’s head trader, and Porter Collins was an ex-Olympic rower who apparently was also an analyst (his job was never clearly specified in the book).

      Michael Burry, Greg Lippman

      The second hedge fund, Scion Capital, was founded by Dr. Michael Burry. Burry first became known as a genius stock investor while still a neurology student, when he did his trades in his spare time in the wee hours of the morning. His astounding returns quickly attracted the attention of the investing circuit, including what appeared to be major Wall Street funds; and when he started giving advice through his own late-night value investing blog (in the middle of the dot-com bubble, no less), he got the impression that it was helping other investors. When he decided to leave medicine and start his own hedge fund, to his surprise, he soon received several sizable investment offers from two major investment funds, Gotham Capital and White Mountains Insurance Group. But Burry’s mind was too brilliant to remain static. Driven by the intensity characteristic of those with Asperger’s syndrome, which he later discovered he had, Burry studied everything he could about credit default swaps and the subprime mortgage bond market. He was the first to foresee the disastrous events of 2008, so, armed with the insight gained from an unusually thorough analysis, he decided to make a bet against the subprime mortgage bond market. Greg Lippmann, the head bond trader at Deutsche Bank,

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