The Man Who Shorted Subprime (Must Read)
The End of Wall Street's Boom – National Business News – Print – Portfolio.com.
Run don't walk to read this. It's gripping. About Steve Eisman, who started shorting every subprime play in sight back in 2005, while simultaneously proclaiming market insanity to anyone who would listen–in decidedly not-fit-to-print language.
It's long, but you won't be able to put it down.
The most amazing new insight I got from the piece: even the people who were shorting the insanity were feeding the insanity.
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?”
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?”
‘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.”
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