The following is a synopsis of an article by Micheal Lewis titled "The End". It describes the end of Wall Street as we know it. It a good article and can be found at:
ttp://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1
- this blog is more for me to better understand and remember what I have read (special thanks to KB for sending me this article)
Michael Lewis (ML) began his career at Salomon Broths. in 1985 with no experience and left in 1988 with a lot of money. He left due to his belief that things were being manufactured and could not continue in that manner (he wrote a book - Liars Poker - detailing his experience).
Things were able to continue, contrary to his beliefs for 20 years.
In Oct 31 2007, Meredith Whitney, an analyst for Oppenheimer Securities, declared Citigroup was in such bad shape it would need to cut its dividend or go bust. And not just Citi, but almost all bankers had mismanaged their clients money incompetently.
ML claims hers comments brought Wall Street down. It is difficult to prove or disprove this; In Jan of 2008, the markets headed lower (slowly) until their eventual plunge in Oct 2008.
M Whitney had been trained at Oppenheimer by analyst Steve Eisman (SE), and it was SE who saw this coming and was able to make money from it.
SE was an analyst at Oppenheimer from 1990-2001 where he learned of the subprime mortgage mess and how badly companies operated and truly they were worth. In 2004 he joined FrontPoint Partners (a hedge fund), and worked with others (Vincent Daniel, Danny Moses) who shared his bleak opinion of wall street.
In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. FrontPoint attempted to short companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. However, these companies paid good dividends, so shorting them was costly.
In 2005 Greg Lippman (a mortgage-bond traderfrom Deutsche Bank) found a better way to short these companies. Sell short not New Century’s stock but its bonds that were backed by the subprime loans it had made. This used to be impossible to do, but Greg and others had created a way to do just that. Deutsche Bank and Goldman Sachs sold credit-default swaps, and these were, in effect, a better and more importantly, a more comprehensive way to short these companies.
And the mortgage companies continued to make loans to anyone, but how were they able to sell them to others to continue this growth. The loans are broken into various groups with AAA being the best and BBB being the worst. What was eventually done, was the BBB loans were turned into AAA loans. The rating companies like S&P, Fitch, and Moody's were all doing this.
From the people who originate the subprime loans, the fund managers who invested the mortgage bonds, the agencies that rated them, and the bankers that repackaged and resold them, a cycle of greed had been created.
But there were more buyers of these repackaged loans then there were actual loans. And so the investment banks who were selling the shorts to companies like FrontPoint were then selling out the loans again (a reverse naked short). The money from the short sale was used to pay the interest of these loans, and also used to create more loans to repackage. This caused any defaults in the loans to aggregate one hundred times over.
SE shorted the mortgage originators and home builders, and then the rating agencies and big banks (Merryl, Morgan Stanley, Lehman Brothers). A newsletter in wall street circles, Grants Interest Rate Observer, confirmed SE opinions, but still not many listened.
But it all came to a head in September when the Investment banks began falling. Most of America and the world would soon lost most of its savings and net worth.
Most except those like Steve Eisman.
