13 November 2008

terrifying and brilliant

Anyone curious to get a better handle on the current and ongoing cataclysmic implosion of the major investment institutions in this (and other) countries would do well to spend 10 or 15 minutes reading The End, Michael Lewis's incredible insider's view of the spectacular rise and more spectacular collapse of the sub-prime lending industry.

Lewis, best known for the now-classic Wall Street exposé Liar's Poker, walks us through the past ten years of staggering naivete, arrogance, hubris, greed, indifference, and (ultimately) stupidity which has damaged the US economy to the tune of a half-trillion dollars.

And counting.

That’s when Eisman finally got it. 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?”

-- Michael Lewis, on Portfolio.com

Amazing stuff.

(And props to Greber for flagging the article in the first place)

1 comment:

greebs said...

As I believe they say in your neck of the woods, 'ayup.'

Just terrifying stuff, and the fact that it's so "obvious" in retrospect is even scarier.

I know when I got out of B-school and saw the sums of money folks were paying my classmates and to a much lesser degree myself, I thought it was preposterous. But I didn't think it was evidence of a bubble waiting to burst, cause I didn't look hard enough I guess.

Michael Lewis is always great, and I'm sure his full book on this subject will be just as good.