I have been meaning to get to that article, and had it up in my browser, <a href="http://www.irvinehousingblog.com/forums/viewthread/3501/P50/#80904">ever since awgee linked it here</a>. I wish he had started a thread just for the article, and I thank everyone for eventually doing it here. It is a must read. Michael Lewis is not only a fantastic writer, but he does write from the knowledge of being behind the scenes of it all.
Here are some highlights (warning: I am tired and will try to edit for language, but don't kill the messenger if a f-bomb slips past me)...
<em>
Eisman started out running a $60 million equity fund but was now short around $600 million of various ?subprime-related securities. In the spring of 2007, the market strengthened. But, says Eisman, ?credit quality always gets better in March and April. And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. We just thought that was moronic.?
He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies??they were making 10 times more rating C.D.O.?s than they were rating G.M. bonds, and it was all going to end??and, finally, the biggest Wall Street firms because of their exposure to C.D.O.?s. He wasn?t allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others. Not long after that, FrontPoint had a visit from Sanford C. Bernstein?s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. ?We just shorted Merrill Lynch,? Eisman told him.
?Why?? asked Hintz.
?We have a simple thesis,? Eisman explained. ?There is going to be a calamity, and whenever there is a calamity, Merrill is there.? When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman?s logic?the logic of Wall Street?s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.</em>
Gotta love the local OC reference!
<em>On July 19, 2007, the same day that Federal Reserve Chairman Ben Bernanke told the U.S. Senate that he anticipated as much as $100 billion in losses in the subprime-mortgage market, FrontPoint did something unusual: It hosted its own conference call. It had had calls with its tiny population of investors, but this time FrontPoint opened it up. Steve Eisman had become a poorly kept secret. Five hundred people called in to hear what he had to say, and another 500 logged on afterward to listen to a recording of it. He explained the strange alchemy of the C.D.O. and said that he expected losses of up to $300 billion from this sliver of the market alone. To evaluate the situation, he urged his audience to ?just throw your model in the garbage can. The models are all backward-looking.
The models don?t have any idea of what this world has become?. For the first time in their lives, people in the asset-backed-securitization world are actually having to think.? He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. ?The rating agencies are scared to death,? he said. ?They?re scared to death about doing nothing because they?ll look like fools if they do nothing.?
On September 18, 2008, Danny Moses came to work as usual at 6:30 a.m. Earlier that week, Lehman Brothers had filed for bankruptcy. The day before, the Dow had fallen 449 points to its lowest level in four years. Overnight, European governments announced a ban on short-selling, but that served as faint warning for what happened next.
At the market opening in the U.S., everything?every financial asset?went into free fall. ?All hell was breaking loose in a way I had never seen in my career,? 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?d 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. ?I spent my morning trying to control all this energy and all this information,? he says, ?and 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?t get headaches. At first, I thought I was having an aneurysm.?
Moses stood up, wobbled, then turned to Daniel and said, ?I gotta leave. Get out of here. Now.? Daniel thought about calling an ambulance but instead took Moses out for a walk.
Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick?s Cathedral. ?We just sat there,? Moses says. ?Watching the people pass.?
This was what they had been waiting for: total collapse. ?The investment-banking industry is fucked,? Eisman had told me a few weeks earlier. ?These guys are only beginning to understand how fucked they are. It?s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ?Holy shit, I?m wrong!??? Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.
Not so for hedge fund managers who had seen it coming. ?As we sat there, we were weirdly calm,? Moses says. ?We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed.? Eisman was appalled. ?Look,? he said. ?I?m short. I don?t want the country to go into a depression. I just want it to fucking deleverage.? He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. ?That Wall Street has gone down because of this is justice,? he says. ?They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.?
Truth to tell, there wasn?t a whole lot of hand-wringing inside FrontPoint either. The only one among them who wrestled a bit with his conscience was Daniel. ?Vinny, being from Queens, needs to see the dark side of everything,? Eisman says. To which Daniel replies, ?The way we thought about it was, ?By shorting this market we?re creating the liquidity to keep the market going.???
?It was like feeding the monster,? Eisman says of the market for subprime bonds. ?We fed the monster until it blew up.?</em>
Awgee just posted a link that said: "The End" in citing to this article. While that was the thesis of this article in reference to the credit/bond/CDO/CDS market, this whole thing is far from over. Just when I think I am being too bearish, I run across something that makes me think I am not bearish enough. This is not the only thing that I have seen lately that makes me bearish, but I am sure it will not be the last and you will all see as much of it comes to fruition.
And... damn it! I am tired of being a bear, and I am really ready to be a bull again, but damn... there is no reason to yet.
