The Big Short: Historical Context

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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.