Prologue I. How to love the wind The wind extinguishes the candle and kindles the fire. The same is true with chance, uncertainty, chaos: each of us would like not to hide from them, but to benefit from them. In other words, become a flame, thirsty for the wind. This is, in short,

Prologue The so-called farmhouses in Delhi have long been abandoned by farmers. The name has survived to this day, but the phrase is now used to refer to cozy luxurious weekend retreats owned by people much wealthier.

From the book The Perfect Sales Machine. 12 Proven Business Performance Strategies the author Holmes Chet

Prologue “You don't need much to live a happy life. Everything is in the person himself, in his way of thinking. Marcus Aurelius When organizations succeed, they work. That is, employees understand what they are doing and why. In these cases, we are talking about

Prologue Here's a brief summary of the current situation in the business world: every 3 minutes one corporation goes bankrupt; every 32 seconds the company's management changes; every 15 minutes the system of control over the company changes; during the first 10 years of its existence

Even if you have watched the movie of the same name, I strongly advise you to read this book. How did a handful of outsider visionaries capitalize on a mortgage crisis that no one believed in? If you are interested in the answer to the question, for what reasons did the most devastating financial crisis in the USA, then it is in front of you. In his book, financial journalist Michael Lewis talks about how the insatiable desire for wealth led to a trap, and successful financiers, brokers and analysts did not even notice how they fell into it. Only a small number of professionals were able to figure out what was happening and use the situation to their own advantage. It is curious that all these visionaries were distinguished by a complex character, and their career path did not develop in a straight line. Cynicism in them was strangely combined with sincerity; they did not take the opinions of recognized experts for granted and constantly asked uncomfortable questions. Portraits of these "outsiders", descriptions of their decisions and actions form the outline of the book. The author does not adhere to chronology, making excursions into history and explaining the work financial instruments. Michael Lewis is a financial journalist and author of several best-selling books, including Moneyball, Liar's Poker and The Flash Boys. In the late 1980s, he worked as a trader for Salomon Brothers. I recommend this fascinating and in-depth study to those readers whose professional activities are related to finance, and to those who are simply interested in knowing how money is made in the stock market.

Reluctant analyst. Steve Eisman is one of a very small number of people who not only foresaw the onset of the 2008 financial crisis, but also managed to capitalize on it. Eisman grew up in New York and graduated with honors from the University of Pennsylvania and Harvard Law School. Quickly disillusioned with his career as a lawyer, he took a job as a financial analyst at Oppenheimer in the early 1990s. At the time, no one on Wall Street really listened to analysts. One thing was expected of them - conclusions that would suit everyone. But Eisman believed that he had the right to say what he thought. Very soon, the fame of an analyst was fixed for him, the conclusions of which necessarily lead to turmoil in the market. He knew how to make a fuss and go against other people's opinions, he was distinguished by arrogance, rudeness and cockiness.

In 2002, while working as an analyst at the large hedge fund Chilton Investment, Eisman caught his eye on the statements of Household Finance Corporation. This company specialized in refinancing mortgage loans. Eisman found out that she was cheating borrowers. Household offered to take a mortgage loan for 15 years at 7%, but in reality interest rate was about 12.5%. Eisman tried through the media, public organizations and officials to disseminate this information as widely as possible. As a result, Household had to resort to pre-trial settlement of the conflict, paying a fine of $484 million. About a year later, the company was sold to the British bank HSBC for $15.5 billion. The head of Household earned $100 million from the deal. This story changed Eisman's worldview. From a Republican, he began to gradually turn into a Democrat, and in his work banking system- to see the desire of bankers to cash in on ordinary citizens. In 2004, Eisman retired and founded a hedge fund at Morgan Stanley "For a share of the reward, Morgan Stanley provided him with an office, furniture and assistants, that is, everything but money."

“Who, before the casino realized it, managed to figure out that the roulette wheel began to spin with a predictable result Who else, on the sidelines of the modern financial system, saw the broken screws of its mechanism”

Issue and sell
By 2005, the subprime mortgage industry was booming. The volume of bonds backed by such loans has increased to half a trillion dollars this year. This complex financial business was supported by poor borrowers. Many of them had no real opportunity to pay off their debts. But Wall Street financiers believed that this would not have serious consequences. Even if some borrowers become insolvent, lenders do not bear significant risks, since real estate, under the security of which loans are issued, grows in price.

“From a social standpoint, the slow and perhaps unscrupulous collapse of the multi-billion dollar bond market was a disaster. From a hedge fund standpoint, this was a once in a lifetime opportunity.”

Chasing the number of loans issued, financiers cast aside doubts about their quality. Instead of lending only to solvent borrowers, they adopted a different principle: “You can lend, just don’t keep loans on your balance sheet.” That is, with the help of investment banks, these loans immediately turned into bonds, which were then purchased by investors. Long Beach Savings was the first bank to implement such a model. She quickly gained popularity. A special company, B&C mortgage, was even created, whose activities were limited to the issuance and subsequent sale of loans. This company was subsequently acquired by Lehman Brothers.

To understand what happened, we need to remember that since the 1980s, it was not stocks at all, but bonds, that is, debt securities, that brought the Wall Street bankers the lion's share of income. Bonds proved to be a more efficient and less regulated financial instrument. This business is incomprehensible to most people, but when mortgage bonds began to bring real money, the complexity of this business only added to its attractiveness.

“Even in the summer of 2006, when house prices began to fall, very few saw the ugly facts, reacted to them, and, one might say, saw the old witch in the features of a beautiful young girl.”

"Debt Towers"
The trading of bonds backed by subprime mortgages was practically incomprehensible, not only to ordinary citizens, but also to regulators. Greed, incompetence and fear made it possible. And this construction, or, as Steve Eisman later called it, the infernal machine, was assembled from various ingenious financial instruments. These included, for example, CDOs - securities secured by debentures. In fact, they masked the risk that low-quality loans carried.

“The market for “synthetic” securities has removed all restrictions on the amount of risk associated with the issuance of subprime mortgage loans. You no longer needed billions of dollars of real mortgages to bet a billion dollars. All that was needed was someone willing to take the opposite position in the deal.”

Creating a CDO looked like this. Imagine that a mortgage bond is a tower that is made up of many mortgages. The higher the floor, the lower the risk, but the lower the return. From a hundred of these towers, you take a floor, and from these hundred floors (mostly the lowest, that is, low-quality, with a BBB rating), build another tower. The investment bank Goldman Sachs has figured out a great way to downplay "perceived risks" by presenting this new "tower" of the lowest quality bonds as a "diversified portfolio of assets". And the ratings agencies, which were well paid by Goldman Sachs and other banks for the rating they needed, contrary to common sense, assigned 80% of this new prefabricated tower AAA rating. Goldman Sachs went further and created an even more confusing tool that neither investors nor synthetic CDO rating agencies could understand. There was “nothing but credit default swaps” behind these securities.

One-eyed in the "land of the blind"
Another investor who saw disaster coming was Michael Barry. He worked as a doctor, but at some point he became interested in studying the mechanisms of the stock market. Barry created the Scion Capital fund, which quickly became a very successful financial company.

“The mechanism that turned pure lead into an alloy consisting of 80% gold and 20% lead took the remaining lead and also turned it into 80% gold.”

Barry was unusually attentive and creative in working with information. He was looking for what others did not notice. He paid increased attention to the shares, which he called "pah-investments." For example, at the mention of Avant! Corporation Barry stumbled across the Internet while looking for litigation that could give him an idea for investing. Avant! was developing software, and she was accused of stealing someone else's program code. The director of the company, pleading guilty, ended up behind bars. Avant! had to pay huge fines, and the price of its shares fell from 12 to 2 dollars. Barry bought a large stake in Avant! at a low price, and then demanded reforms in the company. As a result, when the price of its shares exceeded $ 22, he made good money. Barry's acquaintances considered the story with Avant! a classic example of a typical deal for him.

“During the dark and strange period from early February to June 2007, the subprime mortgage market was like a giant balloon held at the ground by ten large firms from Wall Street."

But Barry's greatest triumph was his shorting of subprime mortgages. In 2004, he began to study them carefully. Soon, the imperfection of the system for issuing such loans became obvious to Barry. He realized that a crisis in the real estate market is inevitable, and the moment it comes, it will be possible to make good money. Barry began buying credit default swaps on subprime mortgage bonds.

In essence, credit default swaps were an insurance policy. Let's say you purchase a $100 million credit default swap in a large company's bonds. Its term is 10 years, and every year you must pay insurance premiums for, say, $200,000. If this company defaults on the bonds within 10 years, then you earn 100 million. They will be paid to you by the credit default swap seller. If the company still honors its obligations on its bonds, then you lose $ 2 million - the amount of insurance premiums for all 10 years.

“We prepared for Armageddon,” says Eisman, “but deep down we feared what if Armageddon never came.”

Barry was counting on the fact that the worst borrowers, who are at the base of the pyramid, will not be able to pay off their debts. This eventually happened, providing him with a huge jackpot. Barry fit perfectly into the small circle of people who understood the workings of the infernal machine. He was a loner who shunned people, also because he lost an eye in childhood due to an illness. The absence of an eye, Barry believed, both narrowed his field of vision and allowed him to look at the problem more broadly. His chief oddities were his acute sensitivity to injustice and his habit of always remaining as frank as possible.

“The most powerful and highly paid financiers have been completely discredited; without government intervention, they would all lose their jobs. Nevertheless, these same financiers used the government to enrich themselves.”

The infernal machine picks up speed
In January 2007, Steve Eisman attended the annual Subprime Conference in Las Vegas. The conference allowed him to understand many important things. At one of the dinners, Eisman met Vin Chau, an active player in the CDO market. Chau made a fortune buying AAA-rated CDOs backed by BBB-rated mortgage bonds. Why did he, who undoubtedly knew the true value of these securities, acquire them? Just Chau earned on volumes. Moreover, he expected that the number of “junk” CDOs in the market would increase all the time, which would allow him to earn even more.

Eisman's other discovery involved rating agencies such as Moody's and S&P. At the conference, Eisman and his partners noticed for the first time how incompetent the people who work in rating agencies are. They had neither talent nor information. Many of the employees of the rating agencies had no idea about the risks they were supposed to manage. They were distinguished by an amazing naivety, a complete lack of interest and a desire to spend as little time as possible at work. They were not even aware of the catastrophe that was about to break out.

How to make people feel richer low wages Give them cheap loans.”

After the conference, Eisman became convinced that Wall Street, and the bond market in particular, were in much worse shape than he had imagined. Greed and extraneous interests have completely taken over the market. It got out of hand and was now doomed.

“Success in investing is determined by the correct price paid for risk.”

star trader
In addition to pessimists like Iceman or Barry, there were other people in the market who realized that you could make very good money buying insurance on subprime mortgages. One of them was Howie Hubler, a star trader at Morgan Stanley. Hubler was not distinguished by good manners. If someone began to reasonably challenge his decisions, then he could easily send such an opponent to hell. In 2004, his department brought the bank 400 million in profits, and by mid-2006 - almost a billion.

Fearing the departure of Hubler, who was no longer satisfied with the work simple trader, the leadership of Morgan Stanley invited him to create and lead his own trading group. If she succeeded, she could turn into a separate investment firm, half of which would belong to Hubler. Among other things, his group had to deal with low-quality CDOs. By January 2007, Hubler had purchased CDOs for more than $16 billion. These securities seemed to him of high quality, although, of course, they were not. When the crisis hit, about 40% of Hubler's securities were completely worthless.

“Bond sellers can say and do whatever they want without being accountable to any regulator. Bond traders can use insider information without fear of being grabbed by the hand.”

Hubler knew that sooner or later he would fall into crisis situation, but underestimated the possible scale of losses. Ironically, Morgan Stanley fooled itself. It is this investment bank persuaded the rating agencies to treat consumer loans the same as for corporate loans. Rating agencies began to put the highest ratings on mortgage-backed bonds that were issued to insolvent borrowers. And Hubler and his colleagues believed in these estimates. As one risk manager at Morgan Stanley remarked, “It's one thing to bet on red or black, knowing that you're betting on red or black. And it’s quite another thing to bet on some kind of red color and not understand it.” Nevertheless, no one was tormented by remorse about this.

It's nobody's fault
The catastrophe approached gradually. Bonds by mortgage loans depreciated immediately. First, the borrower was required to pay an unbearable amount, then the bankruptcy procedure began, after which the property of the insolvent borrower was put up for sale. All this took several months. The condition of mortgage bonds was like a slow but dangerous disease. So the financial crisis that forced Bear Stearns out of the market and forced the government to bail out insurance company AIG was only the beginning.

Eisman, Barry, and a small number of other investors emerged victorious from the situation. Vin Chau's CDO business went under, but he made millions himself. Hubler broke all Wall Street records for losses brought to his employer, but his personal fortune he increased by millions of dollars. Like the director financial institutions, which were deemed “too big to fail”, neither Chau nor Hubler took any personal responsibility for their actions. Hence, many novice leaders could conclude that no one is punished for incompetent decisions.

“There are more assholes than fraudsters, but the latter are in a higher position” (Vincent [Vinnie] Daniel, accountant-auditor in Steven Eisman's team).

After the crisis subsided, theories arose according to which banks simply faced a crisis of confidence, but in fact they did not need governmental support. Researchers with more realistic views have linked the 2008 crisis to practices that arose in the 1980s after the creation of the first CDOs. Another reason was the trend on Wall Street to transform the form of ownership of financial firms-partnerships became public companies. The consequences of any erroneous decisions were thus shifted from a small group of partners to the shoulders of shareholders. In a broader sense, the cause of the crisis was greed, not only of bankers, but also of investors.

Michael Lewis

Big Short:

The secret springs of financial disaster

The most difficult things can be explained even to the last stupid, if he does not yet have an idea about them; but even in the most simple way one cannot be convinced who is firmly convinced that he knows what is at stake.

Leo Tolstoy, 1897

Prologue

Poltergeist

It remains a mystery to me to this day that a Wall Street investment bank would pay me hundreds of thousands of dollars for my investment advice. As a 24-year-old, I had no experience at the time in forecasting the ups and downs of stocks and bonds. Yes, and there was no particular desire to do this either. Wall Street's most important function was to allocate capital, in other words, to decide who got the money and who didn't. And believe me, I didn't know much about any of this. Neither accounting education, nor experience in managing a company - there were no own savings that could be disposed of. In 1985, by pure chance, I got into Salomon Brothers, and in 1988 I left there a much wealthier person. And although I have written an entire book about my work at the company, everything that has happened so far seems ridiculous to me - and this is one of the reasons why I gave up money so easily. My position seemed too precarious to me. Sooner or later, someone would lead me, as well as many others like me, to clean water. Sooner or later, the hour of the great reckoning would come, Wall Street would wake up from its sleep and drive hundreds, if not thousands of youngsters like me out of the financial sphere, who had no right to risk other people's money or convince other people to risk them.

My experience, called Liar's Poker, was told from the perspective of a young man who washed his hands in time. It was as if I had scribbled and bottled a note for those who would follow in my footsteps in the distant future. If all these events are not recorded on paper by their direct participant, I thought, no one in the future will believe that such a thing could ever happen.

Everything that has been written about Wall Street up to that point has dealt primarily with the stock market. From the beginning, Wall Street has focused on the stock market. My book, however, focused mainly on the bond market, because Wall Street at the time was making much more money bundling, selling, and manipulating growing US debt. This situation, in my opinion, could not last forever. I felt like I was writing about a bygone era, the 1980s, when the American people lost their financial sanity. I expected readers of the future to be horrified to learn how in 1986, Salomon Brothers CEO John Gutfreund, who received $ 3.1 million, almost ruined the company. Thought they'd be startled by the story of Howie Rubin, the Salomon Brothers mortgage-bond trader who moved to Merrill Lynch and immediately inflicted a $250 million loss on the company. a vague idea of ​​the colossal risk their traders are taking.

This is the picture I painted; but the fact that after reading my story and my reminiscences, readers would say: “How interesting,” I could not even imagine. How naive of me! Not for a second could I imagine that in the world of finance the 1980s would drag on for another good two decades, or that the quantitative gap between Wall Street and the real economy would eventually grow into a qualitative one. That a trader can make $47 million a year and feel left out. That the mortgage bond market, which started on the floor of Salomon Brothers and seemed like a great idea at the time, would turn out to be one of the biggest financial disasters in history. That exactly 20 years after Howie Rubin was embarrassed across the country by embezzling $250 million, another trader from Morgan Stanley, also named Howie, will lose $9 billion on one transaction. And at the same time, only a narrow circle of people in the company itself will know what he did and why.

When I started working on the first book, I did not set myself global tasks, but just wanted to tell the world an exciting, from my point of view, story. But if, after giving me a drink or two, you were curious about what effect this book would have on readers, I would say something along the lines of: “I hope it will fall into the hands of college students who cannot decide on their careers; they will read it, understand that it is not worth making money on fraud and deceit, and give up the fiery or timid dream of becoming financiers. I cherished the hope that some wunderkind at Ohio State University with a dream of being an oceanographer would read my book, turn down an offer from Goldman Sachs, and sail the seas.

However, my hopes were not justified. Six months after the publication of Liar's Poker, I was inundated with letters from students at Ohio State University, eager to see if I had any other Wall Street secrets in store. My book became their guide to action.

Twenty years after leaving the company, I waited for the end of the Wall Street I knew was about to come. The outrageous bonuses, the endless string of fraudulent traders, the scandal that sank Drexel Burnham, the scandal that destroyed John Gutfreund and led to the decline of Salomon Brothers, the crisis that followed the collapse of Long-Term Capital Management, which was owned by my former boss, John Meriwether, soap bubble of internet companies. The financial system has discredited itself again and again. Yet the big Wall Street banks, mired in scandals up to their ears, continued to rise, as did the fees they paid 26-year-olds for socially useless work. The uprising of American youth against money culture never happened. Why overthrow the world of parents when it can be bought and sold piecemeal?

Finally, I gave up waiting. No scandal or failure can destroy this system, I concluded.

And then Meredith Whitney appears on the scene with her statement. On October 31, 2007, Whitney, an obscure financial analyst at an obscure financial firm Oppenheimer & Co., became known to the whole world. On that day, she predicted that if Citigroup, which was in a very deplorable state, did not drastically cut its dividends, it would face imminent bankruptcy. The causal relationships in the stock market are not amenable to unambiguous interpretation, but it was clear that the forecast made by Meredith Whitney on October 31 led to a collapse in the stock market. By the end of the trading day, exactly as predicted by the woman few knew existed, Citigroup stock fell 8% and the US stock market lost $390 billion. Four days later, Citigroup CEO Chuck Prince resigned. Two weeks later, the bank reduced the amount of dividends.

From that moment on, Meredith Whitney became a figure whose authority could not be ignored. She said she was taken care of. And her advice was simple. Want to know the real value of Wall Street companies? Take a closer look at the questionable assets that were borrowed to buy, and imagine what they would get for them in the event of an urgent sale. All these crowds of highly paid workers are not worth, in her opinion, a broken penny. Throughout 2008, to the statements of bankers and brokers that they had solved their difficulties with the help of write-offs and capital raising, she answered the same thing: “You are wrong! You still do not understand how illiterately you manage your company. You still refuse to recognize billions of dollars in losses on subprime mortgage bonds. The value of your securities is as illusory as the qualifications of your people." Whitney's opponents have argued that she is grossly overrated; bloggers said that she was just lucky. Yes, her predictions came true. But she really relied heavily on her intuition. How could she have known what would happen to Wall Street companies, or what losses they would incur in the subprime mortgage market, when even the CEOs didn't know. "It's either that or they're all lying," Meredith said, "but I don't think they really knew anything."

Of course, it wasn't Meredith Whitney who killed Wall Street. She only expressed her point of view clearly and loudly, which in the end turned out to be much more destructive for the situation in society than the numerous campaigns against corruption on Wall Street conducted by New York prosecutors. If an ordinary scandal could wipe out Wall Street's investment banks, they would have ceased to exist a long time ago. This woman did not say a word about the corruption of the bankers. She reproached them for their stupidity. As it turned out, people whose direct duties included managing other people's capital could not properly manage even their own funds.