I read this article by Michael Lewis in Portfolio and it's a very well written piece about the ignorance of Wall Street for some time combined with his viewpoint having worked at Salomon Brothers in 1986 where the start of this madness originated.
http://www.portfolio.com/news-markets/national-ne…
Also talks about how the existence of the credit default swap (CDS) market made this crisis significantly worse because not only were the actual underlying homeowner loans crashing, but these synethically created loans as well.
"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 Short 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?”
great read
"When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit."
"Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things."
Great article, thanks for the link.
Thanks for posting this. It was very interesting. A great review of the subprime crisis.
www.sharpeinvesting.com
“It’s laissez-faire until you get in deep shit”
This is what WSO should be about: sharing resources. Solid post.
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