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.

How Tom Wolfe's Masters of the Universe Are Faring

Even though we Americans still await someone, anyone to step into the Great Leadership Vacuum of 2008 (seriously, is there ANYONE out there who wants to be the adult and speak bluntly about what lies ahead of us, post-bailout? McCain? Obama? Jim Belushi? Every passing day makes me a bigger fan of Lincoln and FDR), our great writers have begun to add their two cents. Saturday it was Tom Wolfe, who checked in on his 'Masters of the Universe' for the New York Times. Shambollocks' long and passionate admiration for Mr. Wolfe's career has already been noted. Take it away, Tommy:

So where does this leave the Masters of the Universe? In Greenwich, Conn., mainly. The hottest, brightest, most ambitious young men began abandoning investment banking in favor of hedge funds six years ago. Your correspondent can describe scenes of raging carotid-aneurytic anger as the young hotshots resigned. Security goons seized them by the elbow and marched them off the floor at six miles an hour. They couldn’t touch anything in or on their desks — not even the framed picture of Mom and Buddy and Sis, propped upright from behind by little cardboard wings covered in synthetic velvet — so furious were their superiors. Their biggest producers and future leaders were walking out on them.

Greenwich is the center of the Masters’ hedge-fund world, replacing Wall Street. For five years, the heart of Wall Street, the fabled Floor of the New York Stock Exchange, has been gradually emptying out. A hundred years ago, the Floor was a club for gentlemen oligarchs. Only men with social credentials could have one of the insider “seats” on the Floor. By last year, when your correspondent paid his one and only visit to the Floor, one member came up to another and informed him that he, like so many others recently, was leaving the Exchange for good.

“What will you be doing?”

“I’m joining the Fire Department.”

“The Fire Department? In what capacity?”

“I’ll be a firefighter. The pension plan is awesome.”

Incidentally, there are no seats on the Floor, none that this correspondent ever saw. The Exchange is already an anachronism, like Broadway. Everything is done by computer today. Hanging out on the Floor of the Exchange is like hanging out at OTB. Broadway and the Exchange are like the first thing you see when you enter Disneyland in California. You find yourself in a turn-of-the-last-century town with a trolley and an apothecary and a barber shop. That’s Broadway and Wall Street today.

It may dash your hopes for that nice warm feeling called Schadenfreude, but the Masters of the Universe are smarter than the people they left behind at the investment banks. Their hedge funds have blown up here and there, but unlike the investment banks, they are still very much in business. They have hurriedly pulled themselves into defensive positions inside their shells, like turtles. Their Armageddon, if any, will not come for two more days, which is to say, Tuesday, Sept. 30.

Most hedge funds open up a crack on Sept. 30, Dec. 31, March 31 and June 30 to give investors the chance to “redeem” their investments, meaning take their money out. These moments are called gates, like a series of gates in a prison. The gate is the limit, the fixed percentage of your money, that the fund will allow you to take out at one time. Even with these strict caps on withdrawals, some funds may end up nothing but shells.

Shed no tears for the Masters of the Universe, however, not that your correspondent actually thought you might. Most of the young Masters already have their own personal nut free and clear. “Nut” is the term for the amount of money you need salted away in weather-proof investments in order to generate enough interest to live comfortably in Greenwich on Round Hill Road, Pecksland Road or Field Point Road in a house built before the First World War in an enchanting European style, preferably made of stone featuring the odd turret, with a minimum of five acres around it and big enough to be called a manor. Every Master of the Universe knows the number.

Well, thanks Mr. Wolfe. Now I look toward the end of the month with dread, knowing that this could be The Day The Hedge Funds Die. But that is what writers should do-inform us. And leaders should lead us. Which means someone, please, anyone, step up to a podium this week and, damn the election year, tell us where we are going. I would have much more faith for this bailout if those representatives of ours who have pushed for it could tell us where we will be afterwards with confidence. Scaring people is not leadership. It's fraud.