The era that defined Wall Street is officially over!
To this day, the willingness of Wall Street investment banks to pay hundreds of thousands of dollars to dispense investment advice remains a mystery to me. A bunch of guys my age, or younger, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital, to decide who should get it and who should not.
Well, I'm writing all of this, because "I know somebody that knows somebody", let's call him Mr. Astor X, for the porpouse of this article, he’d never taken an accounting course, never run a business, never even had savings of his own to manage. He stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though he wrote a book about the experience, the whole thing still strikes as absurd, which is one of the reasons the money was so easy to walk away from. He figured the situation was unsustainable. Sooner rather than later, someone was going to identify him, along with a lot of people more or less like him, as a fraud. Sooner rather than later, there would come a great reckoning when Wall Street would wake up and hundreds if not thousands of young people like him, who had no business making huge bets with other people’s money, would be expelled from finance.
In his book, he had no great agenda, apart from telling what he took to be a remarkable tale, but if you got a few drinks in him and then asked what effect he thought his book would have on the world, he might have said something like, "I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers". He hoped that some bright kid, who really wanted to be an oceanographer would read his book, spurn the offer from Morgan Stanley, and set out to sea.
Somehow that message failed to come across. He was knee-deep in letters from students who wanted to know if he had any other secrets to share about Wall Street. They’d read his book as a how-to manual.
In the two decades since then, he had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-years-old to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up and sell off the pieces?
At some point, he gave up waiting for the end. There was no scandal or reversal, he assumed, that could sink the system.
Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 2007, ceased to be obscure. She predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on that month Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Few days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.From that moment, Whitney became "a guru": When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money. The amount of highly paid people inside the firms were essentially worth nothing. For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: "You’re wrong. You’re still not facing up to how badly you have mismanaged your business".
Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right!. But it’s true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms. The C.E.O.’s themselves didn’t know.
Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that basically was a campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.
At some point, Astor X could no longer contain himself and he called Whitney. This was back in March, when Wall Street’s fate still hung in the balance.He thought, If she’s right, then this really could be the end of Wall Street as we’ve known it. So Mr. X states: "I was curious to see if she made sense but also to know where this young woman who was crashing the stock market had come from".
It turned out that she made a great deal of sense and that she’d arrived on Wall Street in 1993, from the Brown University history department. "I got to New York, and I didn’t even know research existed", she says. She’d wound up at Oppenheimer and had the most incredible piece of luck: to be trained by a man who helped her establish not merely a career but a worldview. His name, she says, was Steve Eisman.
Eisman had moved on, but they kept in touch. "After I made the Citi call", she says, "one of the best things that happened was when Steve called and told me how proud he was of me".
Having never heard of Eisman, he didn’t think anything of this. But a few months later, Astor X called Whitney again and asked her, as he was asking others, whom she knew who had anticipated the cataclysm and set themselves up to make a fortune from it. There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria -to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded- without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney had a list with a half-dozen names on it. At the top was Steve Eisman.
Steve Eisman entered finance about the time Mr. X exited it. He’d grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. "I hated it", he says. "I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to "get" me a job. It’s not pretty, but that’s what happened".
He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: "I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store". He was promptly appointed the lead analyst for Ames Financial. "What I didn’t tell him was that my job had been to proofread the documents and that I hadn’t understood a word of the fucking things".
Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn’t include J.P. Morgan, but it did surround many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending the lower class of American finance.
The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. "I put a sell rating on the thing because it was a piece of shit", Eisman says. "didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes buy, hold, sell and you could pick the one you thought you should". He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. "He’s sort of a prick in a way, but he’s smart and honest and fearless"
