I decided to re-read this book because of the recent movie and because day after the I saw the movie, I read a NYT Op-Ed piece that disagreed with the premise of the film, by pointing out that in 2005 and 2006, the housing market was slowing down and there was no recession. In the opinion of the writer, it took a Fed increase in rates in 2007-2008 to drive the bus off the cliff. I thought that it was interesting argument nonetheless, I was skeptical and googled the writer. He is an academic at a think-tank affiliated with James Madison University. The Board of the entity is led by one of the Koch brothers. Ed Meese is also on the board. So, one can only conclude that an axe was being ground. I've now added Op-Ed articles to the lengthening list of stuff I no longer read. Back to Michael Lewis, who I am reminded here, is one helluva writer.
Steve Eisman (Steve Carelll) in NY and Michael Burry (Christian Bale) in California were two who saw the end coming as debt piled upon debt in the real estate world, and who sought to profit while everyone else optimistically kept lending, creating and selling. Interestingly, both were equity managers who became so surprised at the real estate bubble that they had to investigate the bond market. Burry was first and he approached Wall Street firms seeking to short the sub-prime market. They gladly found a way to do so - credit default swaps. Eisman only entered the market after he was approached by a Deutsche Bank trader, Greg Lippman (Ryan Gosling), who was selling the swaps in order to create a market from which he could personally profit. The entity on the other side of the trade in the early years was AIG. Goldman joined Deutsche as the prime market makers.
The absurdity of what was going on can best be summarized in one sentence about Long Beach Savings, a wholly owned sub of Washington Mutual, the largest thrift institution in America. "In Bakersfield, California, a Mexican strawberry picker an income of $14,000 and no English was lent every penny he needed to buy a house of $724,000." In 2007, the banks making the trades that allowed the skeptics to short the sub-prime mortgage market started to get cold feet. One by one, they began to back off, and slowly the market stopped. Some banks were trying to buy back CDOs and the shorts began to wonder if they ever would be paid. As skeptics, they began to wonder who on the other side of the trade had the balance sheet to pay-off when things hit the fan. By the end of 2007, the rout of the longs was on. Michael Burry's fund doubled in value over the course of two summer months. For all intents and purposes, the collapse of Lehman on Sept. 18, 2008 signaled the end of the 'old order'. Wall Street had greedily bet that home prices would go up forever and came close to eviscerating the financial system in the process. Only the intervention of Hank Paulsen and Ben Bernanke, each of whom in one way or another enabled the bubble, saved the Wall Street firms and presumably, the economy
Interestingly, Lewis closes with a discussion of the 1980's as the pre-cursor to the Great Recession. He reminds us that Salomon Brothers was the first investment bank to convert from a partnership to a public company. When Wall Street's leaders were no longer concerned about their personal liability, it was much easier to pile on the leverage and reap the profits before sowing the whirlwind.
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