{"id":1849,"date":"2008-12-01T00:17:47","date_gmt":"2008-11-30T16:17:47","guid":{"rendered":"http:\/\/maddruid.com\/?p=1849"},"modified":"2009-02-25T22:52:39","modified_gmt":"2009-02-25T14:52:39","slug":"1843-of-michael-lewis-on-the-subprime-mortgage","status":"publish","type":"post","link":"https:\/\/maddruid.com\/?p=1849","title":{"rendered":"[1843] Of Michael Lewis on the subprime mortgage"},"content":{"rendered":"

Michael Lewis of the Liar’s Poker<\/a>‘s fame writes:<\/p>\n

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.<\/p>\n

But he couldn\u2019t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. \u201dI didn\u2019t understand how they were turning all this garbage into gold,\u201d\u009d he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. \u201dWe always asked the same question,\u201d\u009d says Eisman. \u201dWhere are the rating agencies in all of this? And I\u2019d always get the same reaction. It was a smirk.\u201d\u009d He called Standard & Poor\u2019s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn\u2019t say; its model for home prices had no ability to accept a negative number. \u201dThey were just assuming home prices would keep going up,\u201d\u009d Eisman says. [The End of Wall Street’s Boom<\/em><\/a>. Michael Lewis. Portfolio.com. December 2008]<\/p><\/blockquote>\n

This particular article has created a buzz within the econblogosphere. Go and read it.<\/p>\n

He also takes a shot at lawyers:<\/p>\n

A full nine months earlier, Daniel and \u00adMoses had flown to Orlando for an industry conference. It had a grand title\u2014the American Securitization Forum\u2014but it was essentially a trade show for the \u00adsubprime-mortgage business: the people who originated subprime mortgages, the Wall Street firms that packaged and sold subprime mortgages, the fund managers who invested in nothing but subprime-mortgage-backed bonds, the agencies that rated subprime-\u00admortgage bonds, the lawyers who did whatever the lawyers did. Daniel and Moses thought they were paying a courtesy call on a cottage industry, but the cottage had become a castle. \u201dThere were like 6,000 people there,\u201d\u009d Daniel says. \u201dThere were so many people being fed by this industry. The entire fixed-income department of each brokerage firm is built on this. Everyone there was the long side of the trade. The wrong side of the trade. And then there was us. That\u2019s when the picture really started to become clearer, and we started to get more cynical, if that was possible. We went back home and said to Steve, \u201d\u02dcYou gotta see this.\u2019\u201d\u2030\u201d\u009d [The End of Wall Street’s Boom<\/em><\/a>. Michael Lewis. Portfolio.com. December 2008]<\/p><\/blockquote>\n

Oh, oh. It gets better:<\/p>\n

Whatever rising anger Eisman felt was offset by the man\u2019s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.\u2019s; he saw it as a basis for friendship. \u201dThen he said something that blew my mind,\u201d\u009d Eisman tells me. \u201dHe says, \u201d\u02dcI love guys like you who short my market. Without you, I don\u2019t have anything to buy.\u2019\u201d\u2030\u201d\u009d<\/p>\n

That\u2019s when Eisman finally got it. Here he\u2019d 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\u2019t enough Americans with shitty credit taking out loans to satisfy investors\u2019 appetite for the end product. The firms used Eisman\u2019s 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\u2019t create a second Peyton Manning to inflate the league\u2019s 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. \u201dThey weren\u2019t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn\u2019t afford,\u201d\u009d Eisman says. \u201dThey were creating them out of whole cloth. One hundred times over! That\u2019s why the losses are so much greater than the loans. But that\u2019s when I realized they needed us to keep the machine running. I was like, This is allowed?\u201d\u009d<\/p>\n

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, \u201dI want to short him.\u201d\u009d Lippman thought he was joking; he wasn\u2019t. \u201dGreg, I want to short his paper,\u201d\u009d Eisman repeated. \u201dSight unseen.\u201d\u009d [The End of Wall Street’s Boom<\/em><\/a>. Michael Lewis. Portfolio.com. December 2008]<\/p><\/blockquote>\n

Haha! Too funny!<\/p>\n

At the market opening in the U.S., everything\u2014every financial asset\u2014went into free fall. \u201dAll hell was breaking loose in a way I had never seen in my career,\u201d\u009d Moses says. FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he\u2019d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. \u201dI spent my morning trying to control all this energy and all this information,\u201d\u009d he says, \u201dand I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don\u2019t get headaches. At first, I thought I was having an aneurysm.\u201d\u009d [The End of Wall Street’s Boom<\/em><\/a>. Michael Lewis. Portfolio.com. December 2008]<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

Michael Lewis of the Liar’s Poker‘s fame writes: The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[119],"class_list":["post-1849","post","type-post","status-publish","format-standard","hentry","category-economics","tag-subprime-mortgage"],"_links":{"self":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts\/1849","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1849"}],"version-history":[{"count":1,"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts\/1849\/revisions"}],"predecessor-version":[{"id":2412,"href":"https:\/\/maddruid.com\/index.php?rest_route=\/wp\/v2\/posts\/1849\/revisions\/2412"}],"wp:attachment":[{"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1849"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1849"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/maddruid.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1849"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}