The end of Wall Street

Michael Lewis made his mark in the world of business reporting with the publication of "Liar's Poker," the often outrageous account of his experiences at Salomon Brothers in the mid-80s. The book was a great read, laying out the “Greed is good” craziness that enveloped the financial markets. Looking back, Lewis figured that at some point Wall Street "would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.” Except it never happened. Well, not then anyway. Writing in the December issue of Portfolio, Lewis profiles a little-known analyst turned hedge fund manager named Steve Eisman, who figured out at an early stage what would happen to the mortgage business. I know, that's what they all say. But Eisman not only knew the end was near, he was willing to put lots of money on it.

It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.

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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.

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The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

Towards the end of the piece, Lewis describes his lunch with John Gutfreund, the former CEO of Salomon who was a central character in "Liar's Poker."

As he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren’t the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression. And he was saying, very deliberately, “Your…fucking…book.” I smiled back, though it wasn’t quite a smile. “Your fucking book destroyed my career, and it made yours,” he said. I didn’t think of it that way and said so, sort of.