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December 14, 2008

Steve Eisman, Our Secret Spiritual Brother

Be sure to read this long, fantastic piece by Michael Lewis about how Wall Street obliterated the world economy. Its focus is Steve Eisman, a hedge fund analyst who got the housing bubble right.

I'm especially fascinated by the way the housing bubble hysteria worked exactly the same as the Iraq WMD hysteria. Ie, all the powerful "serious" people were screaming that reality was a certain way, while it obviously was the opposite. But even though many of those in the bowels of the relevant institutions understood the official version of reality was bullshit, there were only a small number of individuals willing to say so. And in both cases, the mindset of this small number of individuals was the same. Eisman sounds eerily like Scott Ritter or Glen Rangwala.

Certainly I was willing to bet $1000 Iraq had nothing for exactly the reasons Eisman made the bets he did. Like Eisman, I knew from direct experience in school and at work that the people running America are generally liars, or idiots, or lying idiots—and you must interpret everything they say with that in mind. Like Eisman, I knew you will never find this out by reading the New York Times. And like him, I nevertheless am continuously shocked by this, and what the people in charge can get away with:

There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. 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...

Eisman wasn’ analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. "You have to understand,” Eisman says in his defense, "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."

Harboring suspicions about people’s morals and telling investors that companies don’t deserve their capital wasn’t, in the 1990s or at any other time, the fast track to success...

Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged.

"The one thing Steve always says," [Eisman's co-worker Vincent] Daniel explains, “is you must assume they are lying to you. They will always lie to you."

Eisman’s willingness to be abrasive in order to get to the heart of the matter was obvious to all; what was harder to see was his credulity: He actually wanted to believe in the system. As quick as he was to cry bullshit when he saw it, he was still shocked by bad behavior...

"I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years," Eisman says.

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. "The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?"

Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to fucking deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. ..."Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

The rest.

It's tempting to throw up your hands and blame this all on immutable human nature. But the consequences are so serious that we can't. Whether or not humans can do better, we have to act as though they can, because it's our only shot at avoiding extinction.

—Jonathan Schwarz

Posted at December 14, 2008 12:10 PM

That article made the rounds in the industry a few weeks ago. It's pretty awesome, particularly how DB and GS were using Eisman's shorting of sub-prime CDOs to generate *additional* CDOs.

Posted by: James Cape at December 14, 2008 01:12 PM

When I was 11 yrs old my Dad( may GOD rest his soul) gave me several long talks about bankers, realitors, and other swindlers.

Posted by: Mike Meyer at December 14, 2008 01:48 PM

But it is immutable human nature.

Every form of known life is by it's own nature a system to compete and win in the game of resources.
You might be different (or so think) -- but it will always be a part of reality that people will jack you for your jewels.

The problem is your Keynesian economics that try to ignore immutable human nature, or pretend it doesn't exist.

I can identify with the Austrians; they may be "crazy" but they are right.

Posted by: meshuga at December 14, 2008 01:55 PM

meshuga, you've got a very nineteenth century view of biology. Read this:

Posted by: saurabh at December 14, 2008 02:39 PM

The plover is engaged in what is known in biology circles as the "long con."

Posted by: Jonathan Schwarz at December 14, 2008 02:53 PM

Iraq war is different, innocent people died. This financial calamity seems to affect - not exclusively, but for the most part - the affluent, the rich, the bond traders.

I mean, if someone with $14K income lived in an expensive house for a couple of years and now has to move out - it doesn't sound like this individual has been robbed.

Of course now the middle class will have to bail out the rich, but that's nothing unusual; definitely less injurious than, say, the looming social security reform, or the current health care system.

So, what's the big deal?

Posted by: abb1 at December 14, 2008 04:42 PM

I don't see anything wrong with meshuga's view of biology, but I disagree with its apparent view of the right way to organize society to account for that biology (i.e. that the best way to keep a bunch of arsonists from setting fires is to give them gasoline and matches).

There's more there there than can fit into a comment, though, so I'll leave it for a posting someday.

Posted by: John Caruso at December 14, 2008 04:43 PM

i.e. that the best way to keep a bunch of arsonists from setting fires is to give them gasoline and matches

?? Beg the question much?

saurabh: I read it but don't get your point.

Posted by: meshuga at December 14, 2008 08:58 PM

Maybe if the global goes really, really kaput this will save the environment. But I imagine the cost to ordinary people, in terms of hardship, will be staggering.

Posted by: Jonathan Versen at December 14, 2008 09:20 PM

Even in the 19th century biologists realized that how animal societies worked depended on whether resources were abundant or not. The British did much of their work in the tropics, where resources are abundant so tended to see more individual competition, compared to the Russians who mainly saw animals cooperating in regions of relatively scarce resources

Posted by: BillCinSD at December 14, 2008 10:10 PM

Every form of known life is by it's own nature a system to compete and win in the game of resources.

obviously you have NEVER seen cute overload. epic fail, dude...

Posted by: almostinfamous at December 14, 2008 10:49 PM

Bill C, the examples of animals co-operating when there are scarce resources and competing when there are plenty doesn't make the least bit of sense. I would think it would be the opposite in both cases.

Posted by: tiffa at December 15, 2008 09:24 AM

This has nothing to do with competing or cooperating, it's just a con. If someone sells you a copper ring as gold, this guy is neither competing or cooperating, he is conning you; it's something like a non-violent robbery.

And it's exactly the same with selling a bunch of useless pieces of paper camouflaged as valuable contracts.

A group of people (mortgage dealers) with a help from another group of people (bankers, investment advisers) conned the third group of people (investors) - and that's all there is to it.

Now nobody trusts anybody anymore and that is supposed be the greatest calamity of our times, when in fact no one is to be trusted in the first place.

And everyone is terribly upset, like that girl from that movie - Dogville, it's called?

Come on, people, you know perfectly well that this is all about ripping you off and nothing else; when did you start taking TV commercials seriously?

Posted by: abb1 at December 15, 2008 10:21 AM

As a complete financial outsider, I was really happy this article was posted. I usually take a "borrow it simple, pay it off fast" approach to debt. I've often wondered how many of my peers were driving huge new cars & living in huge new houses while I drove an old small car & lived in a small, simple house, knowing they made the same amount of money I did. I kinda understand now.

I was trying to explain this to my wife last night, and the best I could come up with is asking a bank for a loan, and as collateral putting up your future gambling winnings. And having an outside agency give this a thumbs up.

It's a real shame there will be no one serving any jail time - I doubt there will be any repercussions at all. In fact, I bet in 20 years the people that brewed this disaster will be sitting in even more powerful positions, thinking of how to bilk my kids...

Posted by: Dave at December 15, 2008 10:31 AM

That's right, Dave, YOUR kids are next.

Posted by: Mike Meyer at December 15, 2008 11:36 AM


where resources are abundant many similar species can compete to create an advantage for their particular set of genes. With scarce resources there is usually less genetic diversity, and the group works together to avoid outright extinction. Other animals in the same scarce environment face the same ultimate consequence, so some develop complementary behaviors that promote mutual survival.

Posted by: lurking gnome at December 15, 2008 02:09 PM

This article was like watching a film in another language with no subtitles. The myth below the story came through -- Eisman is an ethical renegade who nevertheless made money by furthering the banks' nefarious practices -- but what was actually occurring within the game, and what it meant in terms of the crash ... ??? shorting his paper??? ... sorry, speak only a little financialese. Enough to keep up with Kunstler, but not enough to translate multiple pages of incomprehensible industry jargon.

The ironic thing is this spiritual brother of ours kept asking other people to 'say it in English' and explain it again. Maybe the author of the article should take that advice.

Posted by: zigzag at December 15, 2008 05:29 PM

Mike Meyer: sorry, I don't follow the poster personalities around here - was that an ironic statement? You didn't flesh it out very much.

zigzag - wikipedia is your friend. Your right, it was filled with quite a bit of jargon, but poking around wikipedia I got at least the gist of what was being discussed. What I'd like to know is how much money Eisman & Co. made? I mean if you short something & it's value goes to zero - who buys it back?

Posted by: Dave at December 15, 2008 06:32 PM

Thanks, Lurking Gnome for the assist with Tiffa's point. i would have said something closer to with lots of resources most of one's possible mates will survive, so there'll be plenty around when the time comes. With few resources acting collectively assures there likely will be mates for others and myself

Posted by: BillCinSD at December 15, 2008 07:19 PM

Dave: As in "next to be bilked" but more than likely its OUR grandkids.

Posted by: Mike Meyer at December 15, 2008 09:17 PM

I mean if you short something & it's value goes to zero - who buys it back?

Dave, you buy it back since you sold it to begin with:

If you short a stock, you borrow a share from somebody, sell it high, and when it goes to about zero you buy the share back and return it to the person you borrowed it from, smirking "Here's your cheap stock back". Or...

You do a naked short. Sell the stock (that you do not own) high and pray the price goes down so you can buy at a lower price and actually deliver the shares originally sold. Ask for forgiveness if this takes a while. Or...

You go short on options/futures and simply take a reverse position later to "offset" the trade. Like matter meeting anti-matter, or playing both ends against the middle, or some such....

You undertake a reverse spin double axel short and just steal the money (coming in low and grabbing high). Don't forget to take the first derivative.

Posted by: bobbyp at December 16, 2008 12:32 AM

Explain to me again the big deal about extinction.

Posted by: bobbyp at December 16, 2008 12:40 AM

Nothing at all is wrong with extinction. Deplorable specieists, always whining about extinction.

Posted by: abb1 at December 16, 2008 02:31 AM

Mike Meyer: Thanks for the reply & agreed.

bobbyp: You just summarized in a few paragraphs something that's been swimming around in my head. Nice job! I could actually explain this process to someone else now ;-)

Posted by: Dave at December 16, 2008 11:07 AM

Sell the stock (that you do not own)

Amazing how many things are permitted on Wall Street that would get you arrested anywhere else.

Posted by: SteveB at December 16, 2008 01:15 PM

It's all for the best, so that the wisdom of crowds could be fully realized and work its miracles, you know. A day-trader makes a short sell - we all benefit. Later when he kills himself we'll all benefit again.

Posted by: abb1 at December 16, 2008 01:27 PM