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have cleaned up Household. We thought, Holy crap, there are so many people worse than that." The second new fact was in Merrill Lynch's second-quarter results. In July 2007, Merrill Lynch announced yet another sensationally profitable quarter, but admitted it had suffered a decline in revenues from mortgage trading due to losses in subprime bonds. What sounded to most investors like a trivial piece of information was to Eisman the big news: Merrill Lynch owned a meaningful amount of subprime mortgage securities. Merrill's CFO, Jeff Edwards, told Bloomberg News that the market need not worry about this, as "active risk management" had allowed Merrill Lynch to reduce its exposure to the lower-rated subprime bonds. "I don't want to get too deep into exactly how we positioned ourselves at any one point in time," Edwards said, but went deep enough to say that the market was paying too much attention to whatever Merrill happened to be doing with subprime mortgage bonds. Or, as Edwards elliptically put it, "There's a disproportionate focus on a particular asset class in a particular country."

Eisman didn't think so--and two weeks later persuaded a UBS analyst named Glenn Schorr to escort him to a small meeting between Edwards and Merrill Lynch's biggest shareholders. The Merrill CFO began by explaining that this little subprime mortgage problem Merrill Lynch seemed to have was firmly under the control of Merrill Lynch's models. "We're not that far into the meeting," said someone who was there. "Jeff is still giving his prepared remarks and Steve just bursts out, 'Well, your models are wrong!' This very awkward silence comes over the room. Do you laugh? Do you try to think up some question so everyone can move on? Steve was sitting at the end of the table and he starts to put his papers in order really conspicuously--as if to say, 'If it wasn't rude, I'd walk out now.'"

Eisman, for his part, considered the event a polite exchange of views, after which he lost interest. "There was nothing more to say. I just figured, You know what? This guy doesn't get it."

On the surface, these big Wall Street firms appeared robust; below the surface, Eisman was beginning to think, their problems might not be confined to a potential loss of revenue. If they really didn't believe the subprime mortgage market was a problem for them, the subprime mortgage market might be the end of them. He and his team now set about searching for hidden subprime risk: Who was hiding what? "We called it The Great Treasure Hunt," he said. They didn't know for sure if these firms were in some way on the other side of the bets he'd been making against subprime bonds, but the more he looked, the more sure he became that they didn't know either. He'd go to meetings with Wall Street CEOs and ask them the most basic questions about their balance sheets. "They didn't know," he said. "They didn't know their own balance sheets." Once, he got himself invited to a meeting with the CEO of Bank of America, Ken Lewis. "I was sitting there listening to him. I had an epiphany. I said to myself, 'Oh my God, he's dumb!' A lightbulb went off. The guy running one of the biggest banks in the world is dumb!" They shorted Bank of America, along with UBS, Citigroup, Lehman Brothers, and a few others. They weren't allowed to short Morgan Stanley because they were owned by Morgan Stanley, but if they could have, they would have. Not long after they established their shorts against the big Wall Street banks, they had a visit from a prominent analyst who covered the firms, Brad Hintz, at Sanford C. Bernstein & Co. Hintz asked Eisman what he was up to.

"We just shorted Merrill Lynch," said Eisman.

"Why?" asked Hintz.

"We have a simple thesis," said Eisman. "There is going to be a calamity, and whenever there is a calamity, Merrill is there." When it came time to bankrupt Orange County with bad advice, Merrill was there. When the Internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was