It's even worse than you think

Michael Lewis writes a great article in Portfolio online about the, let's say, inevitability, of what's happened to economy, or wall street, or the markets -- take your pick. You can file this under "if you're so smart why aren't you rich", or, my personal favorite, "it seemed like a good idea at the time."

Michael Lewis is the author of two of my favorite non-fiction books, Moneyball and Liars Poker. Moneyball is about the use of modern statistical and quantitative methods in managing baseball, and Liars Poker about his experiences on Wall Street at 24. This is from the Portfolio article:
"I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from.

I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance."

The article gets quite technical and I didn't follow more than 50% of the financial chicanery but the overall message is comes through loud and clear:
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 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.

It's a good, but depressing article.
Posted on November 13, 2008 and filed under Life, Politics.