Oh. My. God. How the econopocalypse happened
Porfolio.com has a long article that explains, in excruiating, on-the-ground detail, how the econopocalypse came upon us: The End of Wall Street's Boom.
If you read nothing else about the stock market, read this. It helps to make sense of it all. It helps to understand how the movement of money through Wall Street, with each layer taking its cut, encouraged the submerged and "shadow" layers to create money on the books out of nothing at all, creating asset futures that they knew would never come due.
It's told from the point of view of Steve Eisman, a manager at hedge fund FrontPoint. Eisman was famous for being a doomsayer, for harassing people looking to deal with the question, "How are you going to screw me?" If the answer satisfied him enough he'd go ahead with the deal anyway. Eisman's company was heavily leveraged into credit default swaps, cheap-shorting the expectation that CDOs would fail. The thing was, Eisman admitted that for the two years his hedge fund rode this wave, he didn't understand where the money was coming from. After laying into a particularly loathesome example of a CDO dealer, the dealer replies: "I love guys like you who short my market. Without you, I don't have anything to buy."
That's when Eisman finally got it. Here he'd been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche [the lowest-rated, highest-risk/reward band of a bond investment vehicle - Elf] without fully understanding why those firms were so eager to make the bets. Now he saw. There weren't enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn't create a second Peyton Manning to inflate the league's stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. But that's when I realized they needed us to keep the machine running. I was like, This is allowed?"
If you read nothing else about the stock market, read this. It helps to make sense of it all. It helps to understand how the movement of money through Wall Street, with each layer taking its cut, encouraged the submerged and "shadow" layers to create money on the books out of nothing at all, creating asset futures that they knew would never come due.
It's told from the point of view of Steve Eisman, a manager at hedge fund FrontPoint. Eisman was famous for being a doomsayer, for harassing people looking to deal with the question, "How are you going to screw me?" If the answer satisfied him enough he'd go ahead with the deal anyway. Eisman's company was heavily leveraged into credit default swaps, cheap-shorting the expectation that CDOs would fail. The thing was, Eisman admitted that for the two years his hedge fund rode this wave, he didn't understand where the money was coming from. After laying into a particularly loathesome example of a CDO dealer, the dealer replies: "I love guys like you who short my market. Without you, I don't have anything to buy."
That's when Eisman finally got it. Here he'd been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche [the lowest-rated, highest-risk/reward band of a bond investment vehicle - Elf] without fully understanding why those firms were so eager to make the bets. Now he saw. There weren't enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn't create a second Peyton Manning to inflate the league's stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. But that's when I realized they needed us to keep the machine running. I was like, This is allowed?"