The End of Wall Street's Easy Money

An absolutely fantastic article has been written in Conde Nast's Portfolio magazine by Michael Lewis titled "The End". I'll warn you it is rather lengthy, but certainly worth the time.  If you're like me, an outsider to the world of high-stakes investment banking, you'll be riveted by the brashness and clueless behavior of bankers who often know as much about the products they sell as you or I do.

Michael chronicled the excesses of Wall Street in his 1989 best-seller, Liar's Poker.  Little did he know that 20 years later, the same greedy mistakes were still being made on Wall Street, but with one major difference: the dollars involved were much, much bigger than anything seen in the 1980s:

I thought I was writing a period piece [Liar's Poker] about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, "How quaint."

Michael primarily focuses on the story of Steve Eisman, a junior equity analyst at Oppenheimer in the 1990s. Eisman performed research on companies involved in the first subprime mortgage lending boom in the early 90s, and was legendary for his honesty and fearlessness:

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet.

Eisman's view of the world of Wall Street and especially those involved in subprime mortgages became quite jaded.  He stated, "I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold."  He eventually left Oppenheimer in 2001 to work as a hedge fund analyst, and joined FrontPoint Partners in 2004 as an investor.

From this point, Lewis' article tells the story of the craziness among the Wall Street investment community in recent years.  Bankers convincing themselves they understood the products they were selling, or underestimating just how quickly everything was starting to unravel:

Both Daniel and Moses [Eisman's co-workers] enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. “Steve’s fun to take to any Wall Street meeting,” Daniel says. “Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”

On top of it, plenty of unsuspecting Americans bought in to the ruse, thinking much money could be made from playing the "cheap mortgage / unlimited credit" game:

More generally, 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. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ”

Even senior level executives had convinced themselves that the house of cards could continue to be built higher and higher with no end in sight:

“But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”

Certainly one of the best articles I have read so far regarding the economic crisis on Wall Street, and I recommend for everyone to take time from your day to read it.  I think the key question we should be asking ourselves is, "why do these people deserve any type of bailout?"