Friday, November 21, 2008

Return to Wall Street

Michael Lewis, author of Liar's Poker, returns to Wall Street for a thoughtful look at the meltdown.

"“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 . . .

"But Eisman couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says . . .

"“You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says."

In other words, they were all crooks. They were all rotten. Top to bottom, from the biggest to the smallest, and the people who were supposed to separate truth from fact were a willing part of the con.

This is really worth reading.

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2 Comments:

Blogger Lance Larka said...

Wow.

uhm, can I say that again?

No, I won't do so. You get the idea.

I'm a natural pessimist (my wife says I'm an optimist because I get up everyday try to make things better...but i digress) and I've thought for years that our financial situation as a nation is a mess.

18 months ago I started my own business as a consultant for laboratories. I called my CPA and asked what expenses I should track. I was appalled (as a citizen) to hear what I could 'expense out' and still go through an audit smiling. As a small business owner I was doing pretty good. I could deduct things that as a corporate citizen was not possible.

Basically anything I spend for my business is deductible from my revenue including about $0.50 per mile I drive.

This is ridiculous.

I spend money for my business in order to get more revenue. I don't think that should be deducted from my gross revenue. After all, if I do it right I will simply pass those expenses on to customers who end up using my services. If I don't get the business, well then that is my problem isn't it?

I think that if the USA tax code did not have such provisions our country as a whole would be in a much sounded state.

8:23 PM  
Blogger Foxessa said...

I read Liar's Poker back in the day.

Haven't read this one, but I have listened to several interviews with the author this last week.

Love, C.

11:09 AM  

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