Crapping Out at the Subprime Casino

The Big Short: Inside the Doomsday Machine

(amazon.com)

Excerpted from The Big Short: Inside the Doomsday Machine by Michael Lewis. Copyright © 2010 by Michael Lewis. With permission of the publisher, W.W. Norton & Company, Inc.

The Venetian hotel—Palazzo Ducale on the outside, Divine Comedy on the inside—was overrun by thousands of white men in business casual now earning their living, one way or another, off subprime mortgages. Like all of Las Vegas, the Venetian was a jangle of seemingly random effects designed to heighten and exploit irrationality: the days that felt like nights and the nights that felt like days, the penny slots and the cash machines that spat out $100 bills, the grand hotel rooms that cost so little and made you feel so big. The point of all of it was to alter your perception of your chances and your money, and all of it depressed Steve Eisman, the CEO of FrontPoint Partners, a hedge fund that detected the subprime mess before nearly everyone else. He didn’t even like to gamble. “I wouldn’t know how to calculate odds if my life depended on it,” he said. At the end of each day his colleague Vinny would head off to play low-stakes poker, his other colleague Danny would join Deutsche Bank trader Greg Lippmann and the other bond people at the craps tables, and Eisman would go to bed. That craps was the game of choice of the bond trader was interesting, though. Craps offered the player the illusion of control—after all, he rolled the dice—and a surface complexity that masked its deeper idiocy. “For some reason, when these people are playing it they actually believe they have the power to make the dice work,” said Vinny.

Thousands and thousands of serious financial professionals, most of whom, just a few years ago, had been doing something else with their lives, were now playing craps with the money they had made off subprime mortgage bonds. The subprime mortgage industry Eisman once knew better than anyone on the planet had been a negligible corner of the capital markets. In just a few years it had somehow become the most powerful engine of profits and employment on Wall Street—and it made no economic sense. “It was like watching an unthinking machine that could not stop itself,” he said. He felt as if he had moved into a new house, opened the door to what he presumed was a small closet, and discovered an entirely new wing. “I’d been to equity conferences,” said Eisman. “This was totally different. At an equity conference you’re lucky if you get 500 people. There were 7,000 people at this thing. Just the fact that no one from the equity world was there told you that no one had figured it out. We knew no one. We still assumed we were the only ones who were short.”