The End: Michael Lewis Revisits Wall Street Swindling
February 1st, 2009This piece makes a great epilogue for my 2006 Wall Street Chop Shop essay.
Via: Portfolio:
Now 36, Daniel grew up a lower-middle-class kid in Queens. One of his first jobs, as a junior accountant at Arthur Andersen, was to audit Salomon Brothers’ books. “It was shocking,” he says. “No one could explain to me what they were doing.” He left accounting in the middle of the internet boom to become a research analyst, looking at companies that made subprime loans. “I was the only guy I knew covering companies that were all going to go bust,” he says. “I saw how the sausage was made in the economy, and it was really freaky.”
…
By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a fucking zit compared with the bond market.”
…
Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
…
Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
This particular dinner was hosted by Deutsche Bank, whose head trader, Greg Lippman, was the fellow who had introduced Eisman to the subprime bond market. Eisman went and found Lippman, pointed back to his own dinner companion, and said, “I want to short him.” Lippman thought he was joking; he wasn’t. “Greg, I want to short his paper,” Eisman repeated. “Sight unseen.”
i just spent a large chunk of my Sunday reading that article.
whoa. thanks for posting that.
that has got to be one of the best articles ever posted on cryptogon.
i cannot believe the author and many of the main people quoted do not read cryptogon. the “sausage” comment seems like an oblique reference to Kevin’s groundbreaking “chop shop” article.
for anyone interested in what is happening in the disastrous world of finance, i would recommend they read this article, very carefully.
@tochigi:
I started reading it but stalled out when it starting getting into that “financial stuff” that I’ve always had to struggle to understand. Then again, maybe it was just my candida-fatigue kicking in and making my attention-span and focus all lazy. Maybe I should try diving into it again sometime this coming week. But what I did read communicated to me pretty loudly and clearly that the financial markets of the post-80’s world were all just a big unwieldy scam that had to unwind in a pretty huge and scary way sooner or later.
@Loveandlight:
i think the article is very well written, so even if you are not that interested in the technicla details, the story is compelling and jigs very closely to what Kevin has told us of his own experiences. a scam from top to bottom and the Wall St. bosses didn’t have a clue about what kind of monster they were creating. as long as the money was flowing in they just didn’t give a fcuk.
and to any and all:
THAT IS WHY I QUIT
@Dagobaz,
I hope you can see the Moon tonight. A cresent holding the cresent of the moon! There are stranger things happening in our world than finance. I hope that you find peace in your decisions, whatever they may be.