the big short - michael lewis

[...]... home loans they were making When Eisman had bugged them for these, they’d pretended that the fact was irrelevant, as they had sold all the loans off to people who packaged them into mortgage bonds: The risk was no longer theirs This was untrue All retained some small fraction of the loans they originated, and the companies were allowed to book as profit the expected future value of those loans The accounting... rates on their debts In the early 1990s, the first subprime mortgage lenders— The Money Store, Greentree, Aames—sold shares to the public, so that they might grow faster By the mid-1990s, dozens of small consumer lending companies were coming to market each year The subprime lending industry was fragmented Because the lenders sold many—though not all—of the loans they made to other investors, in the form... a higher interest rate The buyer of the second tranche the second story of the skyscraper—took the next wave of prepayments and in exchange received the second highest interest rate, and so on The investor in the top floor of the building received the lowest rate of interest but had the greatest assurance that his investment wouldn’t end before he wanted it to The big fear of the 1980s mortgage bond... Stearns the CEO was a former bond guy Ever since the 1980s, when the leading bond firm, Salomon Brothers, had made so much money that it looked as if it was in a different industry than the other firms, the bond market had been where the big money was made “It was the golden rule,” said Eisman The people who have the gold make the rules.” Most people didn’t understand how what amounted to a two-decade... fixed-rate, meaning that typical subprime borrowers might be getting screwed, but at least they knew for sure how much they owed each month until they paid off the loan By 2005, 75 percent of subprime loans were some form of floating-rate, usually fixed for the first two years The original cast of subprime financiers had been sunk by the small fraction of the loans they made that they had kept on their... both the U.S housing market and Wall Street They knew most of the subprime lenders the guys on the ground making the loans Many were the very same characters who had created the late 1990s debacle Eisman was predisposed to suspect the worst of whatever Goldman Sachs might be doing with the debts of lower-middle-class Americans “You have to understand,” he says “I did subprime first I lived with the. .. bonuses, the endless parade of rogue traders, the scandal that sank Drexel Burnham, the scandal that destroyed John Gutfreund and finished off Salomon Brothers, the crisis following the collapse of my old boss John Meriwether’s Long- Term Capital Management, the Internet bubble: Over and over again, the financial system was, in some narrow way, discredited Yet the big Wall Street banks at the center... dozens of them, certain he was the only one apart from the lawyers who drafted them to do so—even though you could get them all for $100 a year from 10KWizard.com As he explained in an e-mail: So you take something like NovaStar, which was an originate and sell subprime mortgage lender, an archetype at the time The names [of the bonds] would be NHEL 200 4-1 , NHEL 200 4-2 , NHEL 200 4-3 , NHEL 200 5-1 , etc... 200 4-3 , NHEL 200 5-1 , etc NHEL 200 4-1 would for instance contain loans from the first few months of 2004 and the last few months of 2003, and 200 4-2 would have loans from the middle part, and 200 4-3 would get the latter part of 2004 You could pull these prospectuses, and just quickly check the pulse of what was happening in the subprime mortgage portion of the originate-and-sell industry And you’d see that... wasn’t conventional therapy “Work group,” it was called A handful of professionals gathered with a trained psychotherapist to share their problems in a safe environment Eisman would burst in late to these meetings, talk through whatever was bothering him, and then rush off before the others had a chance to tell him about their problems After he’d done this a couple of times, the therapist said something . Correlated Afterword Acknowledgments PENGUIN BOOKS THE BIG SHORT ‘If you read only one book about the causes of the recent financial crisis, let it be Michael Lewis s The Big Short Washington Post ‘Terrific …. Yet the big Wall Street banks at the center of it just kept on growing, along with the sums of money that they doled out to twenty-six-year-olds to perform tasks of no obvious social utility. The. about the men who profited from the financial crisis and enjoy it so much that you laugh out loud? In the hands of Michael Lewis, anything is possible’ Sunday Times ABOUT THE AUTHOR Michael Lewis