Michael Lewis on 'The End' of Wall Street

by Dollars and Sense

Michael Lewis, the author of Liar's Poker, a chronicle of Wall Street excess in the 1980s, has posted an enlightening perspective on how mortgage-backed securities and derivatives were packaged, promoted, and sold by Wall Street. The article follows the career of a fund manager, Steve Eisman, who bet on the collapse of the subprime mortgage market. Eisman was proven right, but came to be genuinely shocked by the sheer mendacity and foolishness of the banks, ratings agencies, and other players involved in the subprime game. Here's a snippet of the long, but juicy article from Portfolio magazine:

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 sh**ty 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?"

 

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11/16/2008 10:06:00 AM