Sunday, January 18, 2009

The End of the Wall Street Boom


Michael Lewis is best known for his books Liar's Poker, The New New Thing, and Moneyball: The Art of Winning an Unfair Game. Lewis started his career in finance as a bond trader at Solomon Brothers. In Liar's Poker he gave a first-person account of how bond traders and salesmen truly work, their personalities, and their culture. The account was less than flattering to most and lead Lewis to conclude that anyone could make millions on Wall Street if they were in the "right place at the right time".

In this new article, The End of the Wall Street Boom, Lewis gives the best account of of the subprime mortgage business and the "phoney baloney" use of credit default swaps currently available. He delves into the craziness of it all and names many of the key players. It is a very good description of greed gone wrong.
I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility.
He couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold".
The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.”
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.

The End of the Wall Street Boom


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