Friday, November 14, 2008

The End of Wall Street

For a while I've meant to read Moneyball, the story of the Oakland A's general manager Billy Beane and his statistics-driven approach to building a winning baseball team.

What I didn't realize was that the author, Michael Lewis, was the same Michael Lewis who got famous for his book chronicling his time as a Salomon Brothers bond trader in the 1980s, Liar's Poker (which I also have yet to read).

Apparently Lewis has started to write a new book attempting to understand and explain the financial system collapse of 2008. After reading this corker of an article by Lewis in Portfolio I cannot wait for this book to come out.

Here Lewis introduces us to a handful of people in and around the industry who did see doomsday coming, and in some cases bet on it. But who themselves could not believe what, exactly, was going on.

One of these character, Steve Eisman, is a merciless character, willing to confront anyone whom he has judged as having no idea what they are doing. Here's a moment from a subprime-mortgage "trade show", at a speech by one company's CEO:
When the guy got to the part of his speech about [his company's] subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”

“Would you say that 5 percent is a probability or a possibility?” Eisman asked.

A probability, said the C.E.O., and he continued his speech.

Eisman had his hand up in the air again, waving it around. ... He had his thumb and index finger in a big circle. ...

“Yes?” the C.E.O. said, obviously irritated. “Is that another question?”

“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.
The article ends with Lewis sitting down for lunch with former Salomon Brothers CEO and "King of Wall Street" John Gutfreund, who has still not exactly forgiven him for Liar's Poker, what he calls "your fucking book".

It's crackerjack storytelling. I started reading it as my car's oil was being changed, and when they came to tell me my car was ready I was angry that they had interrupted me.

Seriously. Take the time to read the article. It's my favorite thing on the subject since The Giant Pool of Money.

(Via Kottke, who links to other Lewis pieces as well)

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