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Thursday, November 13, 2008

Michael Lewis Gives A Post-Mortem

Today is nuts. The web is just alive with great material about the end of Old Capital. Is it just a coincidence that the Republicans have been run out of town on a rail at exactly the same time that Wall Street decided to kill itself? Hmm, I'll let that one be rhetorical.

Michael Lewis, author of Liar's Poker and Moneyball, wrote in yesterday's Conde Nast Portfolio a post-mortem of the Wall Street we knew. What killed the golden calf? A truly toxic combination of greed and arrogance. But mostly just pure, unadulterated greed.

And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
This is some far-out, Apocalypse Now kind of financial irresponsibility. I'm glad the guys who ran those investment banks are out-of-pocket. No one would match that insanity by hiring one of those CEOs to head, I don't know, the Treasury Department. Guess again.

The Bush Administration. Making dumbfoundingly awful decisions all the way through to January 19, 2009.

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