After every great crisis, a simple question arises: Who knew?
It’s no different as the experts try to figure out if any one saw the subprime-mortage debacle and all its fallout coming down the tracks.
Turns out Meredith Whitney and Steve Eisman, two relatively unknown financial analysts, predicted the disaster and issued warnings.
Their insights, for the most part, were scorned or ignored, but now they’ve achieved the status of prophets.
Michael Lewis, a writer of non-fiction who has a novelist’s eye for detail and dramatist’s ear for dialogue, tells their story in the December issue of Portfolio in a piece called, “The End.”
Lewis places his narrative in the context of Liar’s Poker (1989), his autobiographical look at the markets based on his time as a bond trader in an over-heated market.
“Not for a moment did I suspect that the financial 1980s would last two full decades longer, or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind,” Lewis writes.
But after two decades of waiting for the end of Wall Street, Lewis finally got to see the collapse of investment banking as he knew it.
He dates the beginning of the end at Oct. 31, 2007, the day that Whitney, an analyst for Oppenheimer & Co., predicted Citigroup might have to cut its dividend because its affairs were a mess.
“Whitney caused the market in financial stocks to crash,” Lewis writes.
“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. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.”
Whitney saw what others should have seen: The emperor had no clothes. Citigroup had borrowed a ton of money to buy a lot of mortgage-related assets that weren’t worth nearly as much as they thought or claimed.
Whitney’s insights have made her a star, a Fox News regular who thrives by telling the gloomy truth.
It doesn’t hurt, too, that Whitney, 38, seems to be leading an interesting life. A Brown University history major, she’s married to John Charles Layfield, a rare combination of professional wrestler (as John Bradshaw Layfield and/or JBL) and financial analyst.
Whitney tells Lewis that she was lucky to have worked with Eisman, who served as her mentor when they both were at Oppenheimer in the 1990s. (The company was bought and became CIBC World Markets. Now it’s Oppenheimer again.)
Eisman gave her a “worldview,” Whitney says. And she notes that he was one of the few people on Wall Street smart enough to see beyond the flim-flam of the subprime mortgage rhetoric. Intrigued, Lewis tracks down Eisman, who is now an analyst at FrontPoint Partners, LLC, a hedge fund purchased in 2006 by Morgan Stanley.
Eisman turns out to be a non-fiction writer’s dream, a larger-than life character who (profanely) speaks his mind and is constitutionally suspicious of anything he is told.
“He’s sort of a prick in a way, but he’s smart and honest and fearless,” one of Eisman’s friends (yes, friends) tells Lewis.
“You have to understand,” Eisman says, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”
Lesson learned, Eisman bet against the market and won. Wall Street got another prophet and Michael Lewis got another non-fiction star.
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