I’m reading a great book by Michael Lewis titled “The Big Short”. It’s about the housing bubble and the key players who participated in the great Ponzi scheme that was the mortgage bond business.
I have always wondered who saw it coming. According to Lewis, he could only find 6 people in the world who clearly saw it coming.
The first was Dr. Michael Burry. Dr. Burry never really practiced medicine. He suffers from Asperger’s Syndrome, a form of autism and fear of people, so he didn’t like dealing with patients. He quit medicine and became a money manager. His fund, Scion, was very successful. No point in trying to invest in it, he has closed the fund.
He saw the housing bubble coming. But, there was no way to benefit from that information since he couldn’t short the bond market. He convinced Goldman Sachs to create a credit default swap on the mortgage bond market. Goldman, in turn, convinced AIG to create and sell the product.
Burry made roughly $600 million buying swaps and betting the housing market would collapse. A few others made even more.
Burry discovered the fallibility of the mortgage bond business by simply looking at the products they contained and studying the underlying mortgages. He say the default rate was rising dramatically and the whole house of cards was being kept up by new money coming in. Mortgages that were even shakier than the ones defaulting. The rating agencies who were paid to see this did not see the problem. The highly paid Wall Street analysts did not see it coming. Even the CEOs of the big banks that lost billions did not see it coming. Yet, one former doctor who never took an economics or accounting course could see the problems by simply doing his homework.
Lewis, Burry, and the others who comment on the housing debacle don’t see the Wall Street players as greedy as much as they see them ignorant. Few do any real research and most of what gets done in with a herd mentality. The young Turks get paid far too much money for far too little value.
Goldman, however, with help from Burry saw it coming. They used AIG as their dupe. They sold credit default swaps underwritten by AIG to Burry and others. They bought swaps. Since credit default swaps are a zero sum game, AIG ate all the loses until you, the tax payer, bailed them out. They were the casino and the casino made billions in bad bets. The Goldman people are running much of your national economy. The Goldman alumni are too numerous to mention in the Obama circle, Tim Geithner being the highest profile. Before him, Hank Paulson, the guy who said AIG was too big to fail.
Goldman took money from the casino. First, in commissions by acting as the middleman is selling swaps, then by buying swaps themselves. They took AIG down, then used their insiders to save them.
Sadly, when the damage is all done the same people who crated the mess get paid again to clean it up. Since they know more about the mess than anyone they get the job. Nice work, screw millions, create bank bailouts, rake in taxpayer money to patch it up, then get paid more to peddle what’s worth anything in the debris.
Dr. Burry and Michael Lewis appeared on Sixty Minutes. It’s worth 15 minutes to watch the tape. Makes you wonder whether you will ever invest a dime with anyone purporting to be a money manager.
You can get that 60 minutes episode by following the link below:
m moneywatch.bnet.com/economic-news/…/60…michael…/403547/
