Michael Lewis: The End of Wall Street’s Boom

The author of “Liars Poker”, an account of the functioning (or non-functioning) of Wall Street in the 1980’s, has written an article detailing the behind the scenes events that have led us the present Wall Street issues with poisonous debt, etc.

From the article published on Portfolio.com:

“[T]he scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.  

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. ‘What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ’ Eisman says. ‘In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’ ’

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. “

Read the full article here.

I’ve had a number of parishioners laid off these past weeks – they worked in the construction industry – and there’s no work for them in the foreseeable future. The mexicans who had come to this country looking for work are leaving in droves, not because of the persecution by the sheriff’s office, but because there’s no work for them anymore. There are sections of Phoenix that that have empty houses outnumbering the occupied ones.

Do take some time to read the article. It’s a rather sobering account of how difficult the problem we’re facing is going to be to solve.

Author: Nicholas Knisely

Episcopal bishop, dad, astronomer, erstwhile dancer...