Recommended reading.
Michael Lewis’ “The End,” from the current Portfolio, is an astounding piece of work. Most folks will focus on the article’s final bit, where Lewis sits down with John Gutfreund, the former CEO upon whose bones Lewis made his career (and, it goes without saying, whatever you think of Lewis’ subsequent work, Liar’s Poker was a groundbreaking and wildly influential—if not, as Lewis admits, in the way he had originally intended—portrait of its era). That’s fine, there’s plenty of enjoyment to be had with it. But what you really want to focus on is the story of Steve Eisman, who runs the hedge fund FrontPoint Partners and was one of the first people to recognize the underlying weakness in the housing market and the collateralized debt obligations that grew up around it. Quoting any of this out of context does not truly do it justice, but here’s a brief example of why it’s so good:
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?”If you’re not well-versed in finance you’re going to need to read this thing a couple of times (I’m going back for the third bite right now), but as a great narrative snapshot of what went wrong—to the extent that anyone has been able to fully figure out what went wrong—I’d advise you to start here.
