Lewis L. - Big Selling Short. The secret springs of financial disaster

A book about the causes of the global financial crisis of 2007-2009, written in the genre of a documentary business thriller. This is a completely unexpected look at Wall Street through the eyes of eccentrics and outsiders.
Title: Big Selling Game. The secret springs of financial disaster
Author: Lewis L.
Year: 2011
Pages: 288
Format: rtf, fb2, pdf
Good quality
Russian language

“Big sell short. Secret springs of financial disaster " (eng. The Big Short: Inside the Doomsday Machine) is a book by the American writer and journalist Michael Lewis about the preconditions and development of the mortgage crisis in the United States in the 2000s.
Lewis, relying on both his own experience and conversations and interviews with the heroes of the book, describes the financial world of those years and tries to understand the causes of the crisis. The Big Selling Game is a documentary with real characters, company names and a chronology of events. The peculiarity of the book is that its main characters are the winners - those who managed to see the emerging problems in time and make money on them. The author writes not only about their role in the described events, but also talks about their characters.
The Big Selling Game became a bestseller. For 28 weeks, she was on The New York Times' best-selling documentary list. She was also featured in The Economist, Bloomberg and Amazon.com lists of the best books of 2010.
Description
From the publisher
Quote
"The most difficult things can be explained to the last dumbass, if he has no idea about them yet; but even the simplest thing cannot be convinced by someone who is firmly convinced that he knows what is at stake."
Leo Tolstoy, 1897
"The American youth revolt against money culture never happened. Why overthrow the parent's world when you can buy and sell it piece by piece?"
Michael Lewis
"Words and deeds are distinguished by a signed check."
Warren Buffett
What is this book about
International bestseller on an incredibly relevant and important topic. The book by journalist Michael Lewis tells the story of four traders who outplayed the big banks and made money from the 2007-2009 global financial crisis.
The author was interested in the mysterious and constantly increasing losses in the mortgage market, which were incurred by large banks on Wall Street. In an atmosphere of complete collapse and chaos, personal tragedies took place: the best, brightest and certainly the most selfish employees in the world began to commit suicide en masse.
Someone had to break this system! A few traders who knew almost nothing about bonds and mortgages did it and made billions of dollars. How? They were able to see what even the experts could not see. Their success story, exciting as a detective, reads in one breath.
Why the book is worth reading
A film based on the book with the rolling slogan "When it comes to money, conscience is silent" with Brad Pitt, Ryan Gosling and Christian Bale:
1) was nominated for "Golden Globe" and "Oscar";
2) won the Best Film of the Year by the Guild of American Film Critics
3) has collected favorable reviews and reviews in major media and movie blogs.
There is an interesting thought in the book about the beginner's eye, i.e. that a fresh look is sometimes more important than experience. The plot is based on stories of real Wall Street employees who managed to earn billions of dollars and see what the experts could not see.
In 2010, The Selling Game was named Book of the Year from dozens of authoritative ratings, including Amazon, The Economist and Bloomberg.
Who is the author
Michael Lewis is a renowned American writer and publicist, author of 13 books, including the international bestseller "Liar" s Poker, the Flash Boys. Lewis graduated from Princeton University, London School of Economics and became a trader at Salomon Brothers. Disillusioned with his job, Lewis left the company five years later and took up financial journalism. A series of Wall Street exposé books brought him worldwide fame. Lewis articles and essays were published in The Wall Street Journal, The Economist, The New York Times Magazine "and other reputable publications.
Tags: business, business novels, wall street, crisis, finance, loans, mortgage.

I read another great book the other day, and I want to recommend it to you - the new book by Michael Lewis “The Big Selling Game. Secret Springs of Financial Crash "(in English -" The Big Short. Inside the Doomsday Machine ", Michael Lewis)

Probably, many have read the previous book by Michael Lewis - "Poker of Liars", written twenty years ago based on real events and personal experience of the author, and revealing the wrong side of the financial world in which financial companies deceive their clients. The book made a lot of noise in its time, became a bestseller, and in 2001 it was translated into Russian and published in Russia by the publishing house "Olymp-Business". The book is no less fascinating, and I once read it with great pleasure. However, there was some dissatisfaction that she describes the events in the United States more than twenty years ago. They passed by Russia, almost without arousing any interest - in the 1980s, Russian readers had no time for foreign financial frauds, and hardly anyone understood the meaning of the term "mortgage bonds" (around which the events in the book unfold).

And now, twenty years later, Michael Lewis wrote a new book, already about fresh events and directly affecting the whole world - about the fresh mortgage crisis of 2007-2009. in the United States, which served as a trigger to the outbreak of a global crisis.

The book, I'm not afraid of this word, is gorgeous. Based on real events, Michael Lewis managed to create an exciting book of an incomprehensible genre - a mixture of a financial thriller, a detective, a documentary investigation, a novel, and something else. At the same time, the author has combined things that are extremely rare to be found together. On the one hand, you will find detailed colorful descriptions of people, characters, surroundings, etc. at the level of a good fiction novel (besides, the book is essentially documentary, with real names, company names, dates, etc.). On the other hand, the author is extremely professional in describing the nuances of the financial world, which he is perfectly familiar with both from the inside and from numerous conversations and interviews conducted as part of a journalistic investigation.

The result is a gripping description of how the world came to its greatest crisis since the Great Depression.

The most interesting, perhaps, is not even this. What captivates the book most is that its protagonists are not the losers, but the winners. Those who made money on this crisis, not only being able to discern the problems of the financial system growing like a snowball, but also risking their money to bankrupt it. If in "Poker of Liars" Michael Lewis was more likely to denounce greedy bankers, then in "The Big Selling Game" he describes the situation through the eyes of the winners - those few people who ultimately won by winning a big jackpot in the big Game, and bringing such financial systems like AIG. Lehman Brothers, Merrill Lynch and others. They were not the cause of the financial crisis, but they were able to discern the growing problems in advance and take advantage of the situation.

In 2010, the book became the best-selling book worldwide and was named "Book of the Year" in dozens of authoritative rankings, including Amazon, The Economist and Bloomberg.

There is only one significant fly in the ointment in this barrel of honey, which should be mentioned. In the foreword, the book is recommended for a wide audience, but in my opinion, this is not entirely true. I would recommend this book not to everyone, but only to financially savvy readers. Despite the richness of descriptions of characters and details, this book is clearly not for the general public, not for housewives, since terms like "mortgage derivatives", "default swap" and the like are found regularly in it, go, by and large, without "chewing" ... If these words sound like complete gibberish to you, then you run the risk of simply not understanding what is at stake.

But if you have at least a general idea of \u200b\u200bthe meanings of these words, then I think you will get great pleasure from reading this book.

There is one more reason to buy this book - the publishing house "Alpina Publisher" has now lowered its prices. The book is now on sale at Ozone and in the publisher's store at a special price of 297 rubles. (its usual price is about 400 rubles).

Michael Lewis

Big sell short:

The secret springs of financial disaster

The most difficult things can be explained to the last dumbass if he has no idea about them yet; but even in the simplest of things, one cannot convince someone 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 wanted me to pay me hundreds of thousands of dollars for my investment advice. At that time, I, 24, had no experience in forecasting the rise and fall of stocks and bonds. And there was no particular desire to do this either. The most important function of Wall Street was the distribution of capital, in other words, it was there who decided who would get the money and who would not. And believe me, I didn't know much about all this. No accounting education, no experience in managing a company - there was no personal savings that could be disposed of. In 1985, by pure chance, I ended up at Salomon Brothers, and in 1988 I quit as a much wealthier person. Although I wrote an entire book about my work at the company, everything that happened so far seems ridiculous to me - and this is one of the reasons why I so easily gave up money. My position seemed too precarious to me. Sooner or later someone would bring me, as well as many others like me, to clean water. Sooner or later, the hour of great reckoning would have come, Wall Street would have woken up from sleep and drove out of the financial sector hundreds, if not thousands, of youths like me who had no right to risk other people's money or convince other people to risk it.

The story of my experience, titled "Liar's Poker", was told from the perspective of a young man who had time to wash his hands. It was as if I had scribbled and sealed a note in a bottle for those who will 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 something like this could ever happen.

Everything that has been written about Wall Street up to that point has been predominantly about the stock market. From the outset, Wall Street has focused on the stock market. My book dealt mainly with the bond market, as Wall Street was making much more money at the time from “bundling,” selling, and manipulating the growing US debt obligations. This situation, in my opinion, could not last forever. I felt like I was writing about the affairs of bygone days, 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, nearly ditched the company. I expected them to be struck by the story of Howie Rubin, a Salomon Brothers mortgage bond trader who moved to Merrill Lynch and immediately inflicted a $ 250 million loss on the company. vague idea of \u200b\u200bthe colossal risk that their traders take.

This is the picture I painted; but the fact that after getting acquainted with my story and my recollections the readers would say: “How interesting” I could not even imagine. How naive of me! For a second, I could not admit that the 1980s in the world of finance 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-backed bond market, which began in the trading floor of Salomon Brothers and seemed like a great idea at the time, would turn into one of the biggest financial disasters in history. That exactly 20 years after Howie Rubin disgraced himself all over the country by spending $ 250 million, another Morgan Stanley trader, also named Howie, will lose $ 9 billion on one deal. And at the same time, only a narrow circle of people in the company itself will know what he did and why.

Starting to work on the first book, I did not set myself global goals, but just wanted to tell the world an exciting, from my point of view, story. But if you gave me a drink or two and were curious about the effect this book should have on readers, I would say something like, “I hope it falls into the hands of college students who are struggling to decide on their careers; they will read it, understand that it is not worth making money from fraud and deceit and give up the fiery or timid dream of becoming financiers. " I cherished the hope that some Ohio State University prodigy who dreamed of becoming an oceanographer would read my book, turn down Goldman Sachs' offer, and go sail the seas.

However, my hopes were dashed. Six months after Liar's Poker was published, I was inundated with letters from Ohio State University students wanting to know 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 to come. Bonuses that went beyond decency, an endless string of fraudulent traders, the scandal that drowned Drexel Burnham, the scandal that destroyed John Gutfreund and ended Salomon Brothers, the crisis that followed the collapse of Long-Term Capital Management, which belonged to 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, continued to grow, as did the fees they paid 26-year-olds for socially useless jobs. The American youth revolt against money culture never happened. Why overthrow your parents' world when you can buy and sell it piece by piece?

In the end, I despaired of 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 unknown financial analyst from an unknown financial firm Oppenheimer & Co., became known to the whole world. On that day, she predicted that if Citigroup, whose business was in a very deplorable state, did not radically cut dividends, she would face imminent bankruptcy. Causal relationships in the stock market defy straightforward interpretation, but it was clear that the forecast made by Meredith Whitney on October 31 led to the collapse of the securities market. By the end of the trading day, exactly as predicted by a woman few knew existed, Citigroup shares were down 8% and the US stock market lost $ 390 billion. Citigroup CEO Chuck Prince left office four days later. Two weeks later, the bank cut its dividend.

From that moment on, Meredith Whitney became a figure whose authority could not be ignored. She said - they listened to her. And her advice was simple. Want to know the real value of Wall Street companies? Take a closer look at the dubious assets that were leveraged 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 penny. Throughout 2008, to the statements of bankers and brokers that they solved the difficulties with the help of write-offs and raising capital, she answered the same: “You are wrong! You still don't understand how illiterate you are in managing your company. You still refuse to acknowledge billions of dollars in losses on substandard mortgage bonds. The value of your securities is as illusory as the qualifications of your people. " Whitney's opponents argued that she was greatly overestimated; bloggers said that she was just lucky. Yes, her predictions came true. But she really relied a lot on intuition. How could she know what was going to happen to Wall Street companies, or what losses they would incur in the subprime mortgage market, when even CEOs didn’t know. 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 ruined Wall Street. She only clearly and loudly expressed her point of view, which in the end turned out to be much more disastrous for the situation in society than the numerous campaigns against corruption on Wall Street conducted by New York prosecutors. If an ordinary scandal could destroy the investment banks of Wall Street, they would have ceased to exist long ago. This woman did not say a word about the corruption of the bankers. She reproached them for stupidity. As it turned out, people whose direct responsibilities included managing other people's capital could not really dispose of even their own funds.

Big Selling Short [Secret Springs of Financial Crash] Lewis Michael

Prologue Poltergeist

Prologue

Poltergeist

In the end, I despaired of waiting. No scandal or failure can destroy this system, I concluded.

I confess that the thought never leaves me that, had I not fired from the company, the blame for this disaster could well have fallen on my shoulders. My former colleagues at Salomon Brothers were involved in the Citigroup crash; I have attended corporate training courses with some of them. In March 2008, I called Meredith Whitney. Our conversation took place shortly before the bankruptcy of investment bank Bear Stearns, when his fate hung in the balance. If she is right, I thought then, then the end of the financial world as it has existed since the 1980s is already close. I wanted not only to understand how meaningful her predictions were, but also to learn more about the woman whose every word was a nail in the coffin of the stock market.

The Brown University graduate began her work on Wall Street in 1994. “When I came to New York, I didn’t even know that there was such a field as analytical research,” she recalls. At first she was lucky enough to get a job at Oppenheimer & Co., and then a rare success awaited her: training under the guidance of a person who participated not only in her career, but also in shaping her worldview. His name was Steve Eisman. “The best thing that happened to me after speaking with the leadership of Citigroup was a call from Steve, who said he was proud of me.” Since I had never heard of Steve Eisman before, her words did not make much of an impression on me.

And then I learned from the news that a little-known hedge fund manager named John Paulson made about $ 20 billion for investors and put almost $ 4 billion in his pocket. Before that, no one else on Wall Street had been able to make that kind of money so quickly. Moreover, he got them in a game against the very low-quality mortgage bonds, on which Citigroup and many other large Wall Street investment banks were pierced. These investment banks are like the casinos of Las Vegas: they determine the probability. A client who tries to play a zero-sum game against them wins only from time to time, but not systematically, and of course, his winnings will keep casino owners out of the world. Nevertheless, John Paulson was a Wall Street client. And we got an example of the same incompetence that Meredith Whitney made a name for herself against. The casino miscalculated in determining its own odds, and this did not escape the eyes of at least one person. I called Whitney, hoping to see if she knew anyone who had foreseen a cataclysm in the subprime mortgage industry and had a decent warmth on it. Who, before the casino realized, had time to realize that the roulette wheel began to spin with a predictable result? Who else on the sidelines of the modern financial system has seen the broken cogs of its mechanism?

This took place at the end of 2008. Then many experts claimed that they foresaw the coming crisis, but there were far fewer real visionaries. And even fewer are those who have the courage to bet on their prediction. It’s too hard to confront mass hysteria — not letting financial news fool you, admitting that powerful financiers are either lying or wrong — and not going crazy. Whitney named half a dozen names, mostly investors, whom she could personally vouch for. John Paulson was mentioned on the list. And in the first place was Steve Eisman.

From the book Ball of Predators author Brooke Connie

From the book Insider. Stock thriller author Ilyin Victor Vladimirovich

From the book Essays on Investment, Corporate Finance and Company Management author Buffett Warren

Prologue Our shareholder group is quite unusual in some ways, which has influenced the way we report to you. For example, at the end of each year, about 98% of the shares held by shareholders are owned by people who were shareholders at the beginning of the year. Therefore our

From the book I see you naked. How to prepare for a presentation and deliver it brilliantly author Hoff Ron

PROLOGUE This is perhaps the most helpful piece of advice you'll find in this book, if you find something funny, try not to forget it. Keep this in mind. It may very well turn out to be a real gold mine. I will cite only one

From the book Jack. My years at GE by Byrne John

From the book Protocols of the Kyoto Sages. The global warming myth author Vasily Pozdyshev

From the book Greed and the Glory of Wall Street by Stuart James

From the book Stock Market Magicians. Interview with top traders author Schwager Jack D.

Prologue "The novel ... was called" The Big Scoreboard "... It told how two earthlings - a man and a woman - were kidnapped by unearthly creatures. This pair was exhibited at a zoo on a planet called Zircon-212. On one wall of the abode of these fictional characters hung a large board,

From the book Lighting a Star. First-person history of Kyivstar author Litovchenko Igor

Prologue The fullness of life is the sum of our dreams, aspirations and deeds; moments of weakness, despair and inspiration; feelings of defeat and victory. It's always a coping story. Circumstances, conditions, but first of all - yourself. Igor Litovchenko In the old Soviet film "Let's Live

From the book Antifragility [How to Benefit from Chaos] author Taleb Nassim Nicholas

Prologue I. How to love the wind The wind extinguishes the candle and kindles the fire. The same is the case 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,

From the book Breakthrough Economies [In Search of the Next Economic Miracle] author Sharma Ruchir

Prologue The so-called farmhouses in Delhi have long ceased to have farmers. The name has survived to this day, but now the phrase is used to refer to cozy luxurious nests for privacy on weekends, owned by people of much wealthier

From the book The Perfect Sales Machine. 12 proven business performance strategies by Holmes Chet

Prologue “Not much is needed for a happy life. Everything is in the person himself, in his way of thinking. " Marcus Aurelius When organizations do well, they work. That is, employees understand what they are doing and why. In these cases, we are talking about

From the author's book

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

Even if you have watched the film 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, in fact, there was the most destructive financial crisis in the United States, then it is before you. In his book, financial journalist Michael Lewis talks about how the relentless pursuit of enrichment 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 have been able to figure out what is happening and take advantage of the situation to their personal advantage. It is curious that all these visionaries were distinguished by a complex character, and their career path did not develop in a straightforward manner. Cynicism in them was strangely combined with sincerity; they did not take the opinions of recognized experts on faith and constantly asked uncomfortable questions. The portraits of these "outsiders", the description of their decisions and actions, constitute the outline of the book. The author does not adhere to chronology, making excursions into history and explaining the work of financial instruments. Michael Lewis is a financial journalist and author of several bestselling books including Moneyball, Liar's Poker and Flash Boys. In the late 1980s, he worked as a trader at Salomon Brothers. I recommend this fascinating and in-depth study for those readers whose professional activities are related to finance, and those who are simply interested in knowing how money is made in the stock market.

An intractable analyst. Steve Eisman is one of the very few 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 City and graduated with honors from the University of Pennsylvania and Harvard Law School. Quickly disillusioned with a 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 entrenched for him, whose conclusions necessarily lead to turmoil in the market. He knew how to make a fuss and go contrary to other people's opinions, he was distinguished by his arrogance, rudeness and cockiness.

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

“Who, before the casino caught on, managed to realize that the roulette wheel began to spin with a predictable result. Who else on the sidelines of the modern financial system saw the broken cogs of its mechanism”

Give out and sell
By 2005, the subprime mortgage industry was booming. The volume of bonds secured by such loans has increased this year to half a trillion dollars. 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 it would have little impact. Even if some of the borrowers turn out to be insolvent, lenders do not bear significant risks, since real estate, against which loans are issued, grows in value.

“From a social point of view, the slow and possibly bad-faith collapse of the multibillion-dollar bond market was a disaster. From a hedge fund perspective, it was a once-in-a-lifetime opportunity. ”

Chasing the number of loans issued, the financiers cast aside doubts about their quality. Instead of giving loans only to solvent borrowers, they adopted another principle “You can lend, just don’t keep loans on your balance sheet”. That is, with the help of investment banks, these loans were immediately converted into bonds, which were then purchased by investors. Long Beach Savings Bank was the first to introduce 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, you need to remember that since the 1980s, it was not stocks at all, but bonds, that is, debt securities that brought the lion's share of income to Wall Street bankers. Bonds have proven to be a more efficient and less regulated financial instrument. Most people don't understand this business, but when mortgage bonds began to bring in real money, the complexity of this business only added to its appeal.

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

Debt Towers
Trading in bonds backed by low-quality mortgage loans was virtually incomprehensible, not only for ordinary citizens, but also for regulators. Greed, incompetence, and fear made her possible. And this structure was assembled, or, as Steve Eisman later called it, the infernal machine, was from various ingenious financial instruments. These included, for example, CDOs - securities backed by debt obligations. In essence, they masked the risk posed by low-quality loans.

“The market for 'synthetic' securities has removed all restrictions on the amount of risk associated with the issuance of low-quality mortgage loans. To bet on a billion, you no longer needed real mortgages worth a billion dollars. All that was required was the one who wanted to take the opposite position in the deal ”.

The creation of CDO looked like this. Imagine a mortgage bond is a tower made up of many mortgages. The higher the floor, the less risk, but less profitability. From a hundred of these towers you take one floor, and from these hundred floors (mostly the lowest, that is, low-quality, with a BBB rating), build another tower. Investment bank Goldman Sachs has devised an excellent way to reduce perceived risks, and presented this new tower of the lowest quality bonds as a “diversified portfolio of assets”. And the rating agencies, which Goldman Sachs and other banks paid well for the grade they wanted, defied common sense to assign 80% of this new modular tower an AAA rating. Goldman Sachs went further - created an even more confusing tool that neither investors nor rating agencies could understand synthetic CDOs. Behind these securities "there was nothing but default swaps."

One-eyed in the "land of the blind"
Another investor who noticed the disaster approaching 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 Scion Capital, which quickly became a very successful financial company.

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

Barry was incredibly attentive and creative in working with information. He looked for what others did not notice. He paid special attention to stocks, which he called “ugh-investments”. For example, the mention of Avant! Corporation Barry stumbled across the Internet while looking for lawsuits that might suggest an investment idea to him. Avant! was engaged in software development, 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 its share price fell from $ 12 to $ 2. 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 transaction for him.

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

But Barry's greatest triumph was his short-run on low-quality mortgages. In 2004, he began to study them closely. Soon the imperfection of the system for issuing such loans became obvious to Barry. He realized that a crisis in the real estate market was inevitable, and at the moment when it came, there would be an opportunity to make good money. Barry began buying credit default swaps on low-quality mortgage bonds.

In essence, default swaps were an insurance policy. Suppose you are buying a $ 100 million default swap in bonds of a large company. Its term is 10 years, and every year you have to pay insurance premiums in the amount of, say, $ 200,000. If this company defaults on its bonds within 10 years, then you earn 100 million. The seller of the default swap will pay you. If the company nevertheless fulfills 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 counted on the fact that the worst borrowers at the bottom of the pyramid would 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 work of the hellish machine. He was a loner, avoiding people, including because in childhood due to illness, he lost an eye. The absence of an eye, Barry believed, both narrowed his field of vision and allowed him to look at the problem more broadly. His main oddities were an acute sensitivity to injustice and a habit of always being extremely frank.

“The most influential and highest paid financiers have been completely discredited; without government intervention, they would all lose their jobs. Nevertheless, these same financiers used the government for their own enrichment ”.

Hell's machine picks up speed
In January 2007, Steve Eisman attended the annual Low Quality Paper 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, bought them? Just Chau earned on the volumes. Moreover, he hoped that the number of “junk” CDOs on the market would increase all the time, which would allow him to earn even more.

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

“How to make people feel wealthier with low wages. Give them cheap loans.”

After the conference, Eisman was finally convinced that Wall Street, and especially the bond market, was in a much worse state than he had imagined. Greed and extraneous interests have completely taken over the market. He was out of control and was now doomed.

"Success in an investment is determined by the correct price paid for the risk."

Star trader
In addition to pessimists like Eisman or Barry, there were other people in the market who realized that you could make very good money buying insurance for low-quality mortgages. One of them was Howie Hubler, a star trader at Morgan Stanley. Hubler was not well-mannered. 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 profit, and by mid-2006 - almost a billion.

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

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

Hubler knew that sooner or later he would find himself in a crisis situation, but he underestimated the possible scale of the losses. Ironically, Morgan Stanley deceived itself. It was this investment bank that convinced the rating agencies to treat consumer loans the same as corporate loans. Rating agencies began giving top marks to mortgage-backed bonds that were issued to insolvent borrowers. And Hubler and his colleagues believed in these estimates. As one Morgan Stanley risk manager commented, “It's one thing to bet on red or black, knowing you are betting on red or black. It’s quite another to bet on some kind of red and not understand it. ” Nevertheless, no one was tormented by remorse about this.

It's nobody's fault
The catastrophe was approaching gradually. Mortgage bonds took a long time to depreciate. 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 come to the aid of insurance company AIG was just the beginning.

Eisman, Barry and a small number of investors emerged victorious from the situation. Vin Chau's CDO management business went downhill, but he himself managed to make millions. Hubler broke all Wall Street records in losses incurred by his employer, but he increased his personal fortune by millions of dollars. Like the directors of financial institutions deemed “too big to fail,” neither Chau nor Hubler had any personal responsibility for their actions. Hence, many novice leaders could conclude that they do not punish anyone for incompetent decisions.

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

After the crisis subsided, theories arose that banks were simply faced with a crisis of confidence, but in fact they did not need government support. Researchers with more realistic views have linked the 2008 crisis to practices that emerged in the 1980s after the creation of the first CDOs. Another reason for this was the tendency on Wall Street to reorganize the form of ownership, financial partnerships became public companies. The consequences of any erroneous decisions were thus transferred 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.