The Big Short: Inside the Doomsday Machine

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The Big Short Also by Michael Lewis Home Game Liar's Poker The Money Culture Pacific Rift Losers The New New Thing Next Moneyball Coach The Blind Side EDITED BY MICHAEL LEWIS Panic The Big Short INSIDE THE DOOMSDAY MACHINE Michael Lewis W. W. NORTON & COMPANY NEW YOR..

     The Big Short Also by Michael Lewis Home Game Liar's Poker The Money Culture Pacific Rift Losers The New New Thing Next Moneyball


The Blind Side



    The Big Short


    Michael Lewis



    Copyright (c) 2010 by Michael Lewis

    All rights reserved

    For information about permission to reproduce selections from this book, write to Permissions,

    W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, NY 10110

    ISBN: 978-0-393-07819-0

W. W. Norton & Company, Inc.

     500 Fifth Avenue, New York, N.Y. 10110www.wwnorton.com

W. W. Norton & Company Ltd. Castle House, 75/76 Wells Street, London W1T 3QT


     Michael Kinsley

    To whom I still owe an article

    The most difficult subjects can be explained to the most slow-witted man if he has

    not formed any idea of them already; but the simplest thing cannot be made clear to

    the most intelligent man if he is firmly persuaded that he knows already, without a

    shadow of doubt, what is laid before him.

    --Leo Tolstoy, 1897 Contents

    Prologue Poltergeist

    Chapter 1 A Secret Origin Story

    Chapter 2 In the Land of the Blind

    Chapter 3 "How Can a Guy Who Can't Speak English Lie?"

    Chapter 4 How to Harvest a Migrant Worker

    Chapter 5 Accidental Capitalists

    Chapter 6 Spider-Man at The Venetian

    Chapter 7 The Great Treasure Hunt

    Chapter 8 The Long Quiet

    Chapter 9 A Death of Interest

    Chapter 10 Two Men in a Boat Epilogue Everything Is Correlated




    The willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars todispense investment advice to grown-ups remains a mystery to me to this day. I was twenty-fouryears old, with no experience of, or particular interest in, guessing which stocks and bondswould rise and which would fall. Wall Street's essential function was to allocate capital: todecide who should get it and who should not. Believe me when I tell you that I hadn't the firstclue. I'd never taken an accounting course, never run a business, never even had savings of myown to manage. I'd stumbled into a job at Salomon Brothers in 1985, and stumbled out, richer,in 1988, and even though I wrote a book about the experience, the whole thing still strikes meas totally preposterous--which is one reason the money was so easy to walk away from. I figuredthe situation was unsustainable. Sooner rather than later, someone was going to identify me,along with a lot of people more or less like me, as a fraud. Sooner rather than later wouldcome a Great Reckoning, when Wall Street would wake up and hundreds, if not thousands, of youngpeople like me, who had no business making huge bets with other people's money or persuadingother people to make those bets, would be expelled from finance.

    Liar's Poker, it was called--it was inWhen I sat down to write my account of the experience--

    the spirit of a young man who thought he was getting out while the getting was good. I wasmerely scribbling down a message and stuffing it into a bottle for those who passed throughthese parts in the far distant future. Unless some insider got all of this down on paper, Ifigured, no future human would believe that it had happened.

    Up to that point, just about everything written about Wall Street had been about the stockmarket. The stock market had been, from the very beginning, where most of Wall Street lived. Mybook was mainly about the bond market, because Wall Street was now making even bigger moneypackaging and selling and shuffling around America's growing debts. This, too, I assumed wasunsustainable. I thought that I was writing a period piece about the 1980s in America, when agreat nation lost its financial mind. I expected readers of the future would be appalled that,back in 1986, the CEO of Salomon Brothers, John Gutfreund, was paid $3.1 million as he ran the

    business into the ground. I expected them to gape in wonder at the story of Howie Rubin, theSalomon mortgage bond trader, who had moved to Merrill Lynch and promptly lost $250 million. Iexpected them to be shocked that, once upon a time on Wall Street, the CEOs had only thevaguest idea of the complicated risks their bond traders were running.

    And that's pretty much how I imagined it; what I never imagined is that the future reader mightlook back on any of this, or on my own peculiar experience, and say, "How quaint." Howinnocent. Not for a moment did I suspect that the financial 1980s would last for two fulldecades longer, or that the difference in degree between Wall Street and ordinary economic lifewould swell to a difference in kind. That a single bond trader might be paid $47 million a yearand feel cheated. That the mortgage bond market invented on the Salomon Brothers trading floor,which seemed like such a good idea at the time, would lead to the most purely financial

    economic disaster in history. That exactly twenty years after Howie Rubin became a scandaloushousehold name for losing $250 million, another mortgage bond trader named Howie, inside MorganStanley, would lose $9 billion on a single mortgage trade, and remain essentially unknown,

    without anyone beyond a small circle inside Morgan Stanley ever hearing about what he'd done,or why.

    When I sat down to write my first book, I had no great agenda, apart from telling what I tookto be a remarkable tale. If you'd gotten a few drinks in me and then asked what effect the bookwould have on the world, I might have said something like, "I hope that college students tryingto decide what to do with their lives might read it and decide that it's silly to phony it up,and abandon their passions or even their faint interests, to become financiers." I hoped thatsome bright kid at Ohio State University who really wanted to be an oceanographer would read mybook, spurn the offer from Goldman Sachs, and set out to sea.

    Liar's Poker was published, I was knee-Somehow that message was mainly lost. Six months after

    deep in letters from students at Ohio State University who wanted to know if I had any othersecrets to share about Wall Street. They'd read my book as a how-to manual.

    In the two decades after I left, I waited for the end of Wall Street as I had known it. Theoutrageous bonuses, the endless parade of rogue traders, the scandal that sank Drexel Burnham,the scandal that destroyed John Gutfreund and finished off Salomon Brothers, the crisisfollowing the collapse of my old boss John Meriwether's Long-Term Capital Management, theInternet bubble: Over and over again, the financial system was, in some narrow way,discredited. Yet the big Wall Street banks at the center of it just kept on growing, along withthe sums of money that they doled out to twenty-six-year-olds to perform tasks of no obvioussocial utility. The rebellion by American youth against the money culture never happened. Whybother to overturn your parents' world when you can buy it and sell off the pieces?

    At some point, I gave up waiting. There was no scandal or reversal, I assumed, sufficientlygreat to sink the system.

    Then came Meredith Whitney, with news. Whitney was an obscure analyst of financial firms for anobscure financial firm, Oppenheimer and Co., who, on October 31, 2007, ceased to be obscure. Onthat day she predicted that Citigroup had so mismanaged its affairs that it would need to slashits dividend or go bust. It's never entirely clear on any given day what causes what inside thestock market, but it was pretty clear that, on October 31, Meredith Whitney caused the marketin financial stocks to crash. By the end of the trading day, a woman whom basically no one hadever heard of, and who could have been dismissed as a nobody, had shaved 8 percent off theshares of Citigroup and $390 billion off the value of the U.S. stock market. Four days later,Citigroup CEO Chuck Prince resigned. Two weeks later, Citigroup slashed its dividend.

    From that moment, Meredith Whitney became E. F. Hutton: When she spoke, people listened. Hermessage was clear: If you want to know what these Wall Street firms are really worth, take acold, hard look at these crappy assets they're holding with borrowed money, and imagine whatthey'd fetch in a fire sale. The vast assemblages of highly paid people inside them were worth,in her view, nothing. All through 2008, she followed the bankers' and brokers' claims that theyhad put their problems behind them with this write-down or that capital raise with her ownclaim: You're wrong. You're still not facing up to how badly you have mismanaged your business.You're still not acknowledging billions of dollars in losses on subprime mortgage bonds. The

     Rivals accused Whitney ofvalue of your securities is as illusory as the value of your people.

    being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it'strue that she was, in part, guessing. There was no way she could have known what was going tohappen to these Wall Street firms, or even the extent of their losses in the subprime mortgagemarket. The CEOs themselves didn't know. "Either that or they are all liars," she said, "but Iassume they really just don't know."

    Now, obviously, Meredith Whitney didn't sink Wall Street. She'd just expressed most clearly andmost loudly a view that turned out to be far more seditious to the social order than, say, themany campaigns by various New York attorneys general against Wall Street corruption. If merescandal could have destroyed the big Wall Street investment banks, they would have vanishedlong ago. This woman wasn't saying that Wall Street bankers were corrupt. She was saying thatthey were stupid. These people whose job it was to allocate capital apparently didn't even knowhow to manage their own.

    I confess some part of me thought, If only I'd stuck around, this is the sort of catastrophe I

     The characters at the center of Citigroup's mess were the very same peoplemight have created.

    I'd worked with at Salomon Brothers; a few of them had been in my Salomon Brothers trainingclass. At some point I couldn't contain myself: I called Meredith Whitney. This was back inMarch 2008, just before the failure of Bear Stearns, when the outcome still hung in thebalance. I thought, If she's right, this really could be the moment when the financial worldgets put back into the box from which it escaped in the early 1980s. I was curious to see ifshe made sense, but also to know where this young woman who was crashing the stock market withher every utterance had come from.

    She'd arrived on Wall Street in 1994, out of the Brown University Department of English. "I gotto New York and I didn't even know research existed," she says. She'd wound up landing a job atOppenheimer and Co. and then had the most incredible piece of luck: to be trained by a man whohelped her to establish not merely a career but a worldview. His name, she said, was SteveEisman. "After I made the Citi call," she said, "one of the best things that happened was whenSteve called and told me how proud he was of me." Having never heard of Steve Eisman, I didn'tthink anything of this.

    But then I read the news that a little-known New York hedge fund manager named John Paulson hadmade $20 billion or so for his investors and nearly $4 billion for himself. This was more moneythan anyone had ever made so quickly on Wall Street. Moreover, he had done it by bettingagainst the very subprime mortgage bonds now sinking Citigroup and every other big Wall Streetinvestment bank. Wall Street investment banks are like Las Vegas casinos: They set the odds.The customer who plays zero-sum games against them may win from time to time but neversystematically, and never so spectacularly that he bankrupts the casino. Yet John Paulson hadbeen a Wall Street customer. Here was the mirror image of the same incompetence MeredithWhitney was making her name pointing out. The casino had misjudged, badly, the odds of its owngame, and at least one person had noticed. I called Whitney again to ask her, as I was askingothers, if she knew anyone who had anticipated the subprime mortgage cataclysm, thus settinghimself up in advance to make a fortune from it. Who else had noticed, before the casino caughton, that the roulette wheel had become predictable? Who else inside the black box of modernfinance had grasped the flaws of its machinery?

    It was then late 2008. By then there was a long and growing list of pundits who claimed theypredicted the catastrophe, but a far shorter list of people who actually did. Of those, evenfewer had the nerve to bet on their vision. It's not easy to stand apart from mass hysteria--tobelieve that most of what's in the financial news is wrong, to believe that most importantfinancial people are either lying or deluded--without being insane. Whitney rattled off a listwith a half-dozen names on it, mainly investors she had personally advised. In the middle wasJohn Paulson. At the top was Steve Eisman.

    The Big Short


    A Secret Origin Story

    Eisman entered finance about the time I exited it. He'd grown up in New York City, gone toyeshiva schools, graduated from the University of Pennsylvania magna cum laude, and then withhonors from Harvard Law School. In 1991 he was a thirty-year-old corporate lawyer wondering whyhe ever thought he'd enjoy being a lawyer. "I hated it," he says. "I hated being a lawyer. Myparents worked as brokers at Oppenheimer securities. They managed to finagle me a job. It's notpretty but that's what happened."

    Oppenheimer was among the last of the old-fashioned Wall Street partnerships and survived onthe scraps left behind by Goldman Sachs and Morgan Stanley. It felt less like a corporationthan a family business. Lillian and Elliot Eisman had been giving financial advice toindividual investors on behalf of Oppenheimer since the early 1960s. (Lillian had created theirbrokerage business inside of Oppenheimer, and Elliot, who had started out as a criminalattorney, had joined her after being spooked once too often by midlevel Mafia clients.) Belovedand respected by colleagues and clients alike, they could hire whomever they pleased. Beforerescuing their son from his legal career they'd installed his old nanny on the Oppenheimertrading floor. On his way to reporting to his mother and father, Eisman passed the woman whohad once changed his diapers. Oppenheimer had a nepotism rule, however; if Lillian and Elliotwanted to hire their son, they had to pay his salary for the first year, while othersdetermined if he was worth paying at all.

    Eisman's parents, old-fashioned value investors at heart, had always told him that the best wayto learn about Wall Street was to work as an equity analyst. He started in equity analysis,working for the people who shaped public opinion about public companies. Oppenheimer employedtwenty-five or so analysts, most of whose analysis went ignored by the rest of Wall Street."The only way to get paid as an analyst at Oppenheimer was being right and making enough noiseabout it that people noticed it," says Alice Schroeder, who covered insurance companies forOppenheimer, moved to Morgan Stanley, and eventually wound up being Warren Buffett's officialbiographer. She added, "There was a counterculture element to Oppenheimer. The people at thebig firms were all being paid to be consensus." Eisman turned out to have a special talent formaking noise and breaking with consensus opinion. He started as a junior equity analyst, ahelpmate, not expected to offer his own opinions. That changed in December 1991, less than ayear into the new job. A subprime mortgage lender called Aames Financial went public, and noone at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer'sbankers, who hoped to be hired by Aames, stomped around the research department looking foranyone who knew anything about the mortgage business. "I'm a junior analyst and I'm just tryingto figure out which end is up," says Eisman, "but I told him that as a lawyer I'd worked on adeal for The Money Store." He was promptly appointed the lead analyst for Aames Financial."What I didn't tell him was that my job had been to proofread the documents and that I hadn'tunderstood a word of the fucking things."

    Aames Financial, like The Money Store, belonged to a new category of firms extending loans tocash-strapped Americans, known euphemistically as "specialty finance." The category did notinclude Goldman Sachs or J.P. Morgan but did include many little-known companies involved oneway or another in the early 1990s boom in subprime mortgage lending. Aames was the firstsubprime mortgage lender to go public. The second company for which Eisman was given soleresponsibility was called Lomas Financial Corp. Lomas had just emerged from bankruptcy. "I puta sell rating on the thing because it was a piece of shit. I didn't know that you weren'tsupposed to put sell ratings on companies. I thought there were three boxes--buy, hold, sell--and you could pick the one you thought you should." He was pressured to be a bit more upbeat,but upbeat did not come naturally to Steve Eisman. He could fake upbeat, and sometimes did, buthe was happier not bothering. "I could hear him shouting into his phone from down the hall,"says a former colleague. "Joyfully engaged in bashing the stocks of the companies he covered.Whatever he's thinking, it comes out of his mouth." Eisman stuck to his sell rating on LomasFinancial, even after the Lomas Financial Corporation announced that investors needn't worry

    about its financial condition, as it had hedged its market risk. "The single greatest line Iever wrote as an analyst," says Eisman, "was after Lomas said they were hedged." He recited theline from memory: "'The Lomas Financial Corporation is a perfectly hedged financialinstitution: it loses money in every conceivable interest rate environment.' I enjoyed writingthat sentence more than any sentence I ever wrote." A few months after he published that line,the Lomas Financial Corporation returned to bankruptcy.

    Eisman quickly established himself as one of the few analysts at Oppenheimer whose opinionsmight stir the markets. "It was like going back to school for me," he said. "I would learnabout an industry and I would go and write a paper about it." Wall Street people came to viewhim as a genuine character. He dressed half-fastidiously, as if someone had gone to greattrouble to buy him nice new clothes but not told him exactly how they should be worn. Hisshort-cropped blond hair looked as if he had cut it himself. The focal point of his soft,expressive, not unkind face was his mouth, mainly because it was usually at least half open,even while he ate. It was as if he feared that he might not be able to express whatever thoughthad just flitted through his mind quickly enough before the next one came, and so kept thechannel perpetually clear. His other features all arranged themselves, almost dutifully, aroundthe incipient thought. It was the opposite of a poker face.

    In his dealings with the outside world, a pattern emerged. The growing number of people whoworked for Steve Eisman loved him, or were at least amused by him, and appreciated hiswillingness and ability to part with both his money and his knowledge. "He's a born teacher,"says one woman who worked for him. "And he's fiercely protective of women." He identified withthe little guy and the underdog without ever exactly being one himself. Important men who mighthave expected from Eisman some sign of deference or respect, on the other hand, often came awayfrom encounters with him shocked and outraged. "A lot of people don't get Steve," MeredithWhitney had told me, "but the people who get him love him." One of the people who didn't getSteve was the head of a large U.S. brokerage firm, who listened to Eisman explain in front ofseveral dozen investors at lunch why he, the brokerage firm head, didn't understand his ownbusiness, then watched him leave in the middle of the lunch and never return. ("I had to go tothe bathroom," says Eisman. "I don't know why I never went back.") After the lunch, the guy hadannounced he'd never again agree to enter any room with Steve Eisman in it. The president of alarge Japanese real estate firm was another. He'd sent Eisman his company's financialstatements and then followed, with an interpreter, to solicit Eisman's investment. "You don'teven own stock in your company," said Eisman, after the typically elaborate Japanesebusinessman introductions. The interpreter conferred with the CEO.

    "In Japan it is not customary for management to own stock," he said at length.

    Eisman noted that the guy's financial statements didn't actually disclose any of the reallyimportant details about the guy's company; but, rather than simply say that, he lifted thestatement in the air, as if disposing of a turd. "This...this is toilet paper," he said."Translate that."

    "The Japanese guy takes off his glasses," recalled a witness to the strange encounter. "Hislips are quavering. World War Three is about to break out. 'Toy-lay paper? Toy-lay paper?'"

    A hedge fund manager who counted Eisman as a friend set out to explain him to me but quit aminute into it--after he'd described Eisman exposing various bigwigs as either liars or idiots--and started to laugh. "He's sort of a prick in a way, but he's smart and honest and fearless."

    "Even on Wall Street people think he's rude and obnoxious and aggressive," says Eisman's wife,Valerie Feigen, who worked at J.P. Morgan before quitting to open the women's clothing storeEdit New York, and to raise their children. "He has no interest in manners. Believe me, I'vetried and I've tried and I've tried." After she'd brought him home for the first time, hermother had said, "Well, we can't use him but we can definitely auction him off at UJA."* Eismanhad what amounted to a talent for offending people. "He's not tactically rude," his wifeexplains. "He's sincerely rude. He knows everyone thinks of him as a character but he doesn'tthink of himself that way. Steven lives inside his head."

    When asked about the pattern of upset he leaves in his wake, Eisman simply looks puzzled, evena bit wounded. "I forget myself sometimes," he says with a shrug.

    Here was the first of many theories about Eisman: He was simply so much more interested inwhatever was rattling around his brain than he was in whoever happened to be standing in frontof him that the one overwhelmed the other. This theory struck others who knew Eisman well asincomplete. His mother, Lillian, offered a second theory. "Steven actually has twopersonalities," she said carefully. One was that of the boy to whom she had given the brand-newbicycle he so desperately craved, only to have him pedal it into Central Park, lend it to a kidhe'd never met, and watch it vanish into the distance. The other was that of the young man whoset out to study the Talmud, not because he had the slightest interest in God but because hewas curious about its internal contradictions. His mother had been appointed chairman of theBoard of Jewish Education in New York City, and Eisman was combing the Talmud forinconsistencies. "Who else studies Talmud so that they can find the mistakes?" asks his mother.Later, after Eisman became seriously rich and had to think about how to give money away, helanded on an organization called Footsteps, devoted to helping Hasidic Jews flee theirreligion. He couldn't even give away his money without picking a fight.

    By pretty much every account, Eisman was a curious character. And he'd walked onto Wall Streetat the very beginning of a curious phase. The creation of the mortgage bond market, a decadeearlier, had extended Wall Street into a place it had never before been: the debts of ordinaryAmericans. At first the new bond market machine concerned itself with the more solvent half ofthe American population. Now, with the extension of the mortgage bond market into the affairsof less creditworthy Americans, it found its fuel in the debts of the less solvent half.

    The mortgage bond was different in important ways from old-fashioned corporate and governmentbonds. A mortgage bond wasn't a single giant loan for an explicit fixed term. A mortgage bondwas a claim on the cash flows from a pool of thousands of individual home mortgages. These cashflows were always problematic, as the borrowers had the right to pay off any time they pleased.This was the single biggest reason that bond investors initially had been reluctant to investin home mortgage loans: Mortgage borrowers typically repaid their loans only when interestrates fell, and they could refinance more cheaply, leaving the owner of a mortgage bond holdinga pile of cash, to invest at lower interest rates. The investor in home loans didn't know howlong his investment would last, only that he would get his money back when he least wanted it.To limit this uncertainty, the people I'd worked with at Salomon Brothers, who created themortgage bond market, had come up with a clever solution. They took giant pools of home loansand carved up the payments made by homeowners into pieces, called tranches. The buyer of thefirst tranche was like the owner of the ground floor in a flood: He got hit with the first waveof mortgage prepayments. In exchange, he received a higher interest rate. The buyer of thesecond tranche--the second story of the skyscraper--took the next wave of prepayments and inexchange received the second highest interest rate, and so on. The investor in the top floor ofthe building received the lowest rate of interest but had the greatest assurance that hisinvestment wouldn't end before he wanted it to.

    The big fear of the 1980s mortgage bond investor was that he would be repaid too quickly, notthat he would fail to be repaid at all. The pool of loans underlying the mortgage bondconformed to the standards, in their size and the credit quality of the borrowers, set by oneof several government agencies: Freddie Mac, Fannie Mae, and Ginnie Mae. The loans carried, ineffect, government guarantees; if the homeowners defaulted, the government paid off theirdebts. When Steve Eisman stumbled into this new, rapidly growing industry of specialty finance,the mortgage bond was about to be put to a new use: making loans that did not qualify forgovernment guarantees. The purpose was to extend credit to less and less creditworthyhomeowners, not so that they might buy a house but so that they could cash out whatever equitythey had in the house they already owned.

    The mortgage bonds created from subprime home loans extended the logic invented to address theproblem of early repayment to cope with the problem of no repayment at all. The investor in thefirst floor, or tranche, would be exposed not to prepayments but to actual losses. He took the

    first losses until his investment was entirely wiped out, whereupon the losses hit the guy onthe second floor. And so on.

    In the early 1990s, just a pair of Wall Street analysts devoted their careers to understandingthe effects of extending credit into places where that sun didn't often shine. Steve Eisman wasone; the other was Sy Jacobs. Jacobs had gone through the same Salomon Brothers trainingprogram that I had, and now worked for a small investment bank called Alex Brown. "I satthrough the Salomon training program and got to hear what this great new securitization modelLewie Ranieri was creating was going to do," he recalls. (Ranieri was the closest thing themortgage bond market had to a founding father.) The implications of turning home mortgages intobonds were mind-bogglingly vast. One man's liability had always been another man's asset, butnow more and more of the liabilities could be turned into bits of paper that you could sell toanyone. In short order, the Salomon Brothers trading floor gave birth to small markets in bondsfunded by all sorts of strange stuff: credit card receivables, aircraft leases, auto loans,health club dues. To invent a new market was only a matter of finding a new asset to hock. Themost obvious untapped asset in America was still the home. People with first mortgages had vastamounts of equity locked up in their houses; why shouldn't this untapped equity, too, besecuritized? "The thinking in subprime," says Jacobs, "was there was this social stigma tobeing a second mortgage borrower and there really shouldn't be. If your credit rating was alittle worse, you paid a lot more--and a lot more than you really should. If we can mass marketthe bonds, we can drive down the cost to borrowers. They can replace high interest rate creditcard debt with lower interest rate mortgage debt. And it will become a self-fulfillingprophecy."

    The growing interface between high finance and lower-middle-class America was assumed to begood for lower-middle-class America. This new efficiency in the capital markets would allowlower-middle-class Americans to pay lower and lower interest rates on their debts. In the early1990s, the first subprime mortgage lenders--The Money Store, Greentree, Aames--sold shares tothe public, so that they might grow faster. By the mid-1990s, dozens of small consumer lendingcompanies were coming to market each year. The subprime lending industry was fragmented.Because the lenders sold many--though not all--of the loans they made to other investors, inthe form of mortgage bonds, the industry was also fraught with moral hazard. "It was a fast-buck business," says Jacobs. "Any business where you can sell a product and make money withouthaving to worry how the product performs is going to attract sleazy people. That was the seamyunderbelly of the good idea. Eisman and I both believed in the big idea and we both met somereally sleazy characters. That was our job: to figure out which of the characters were theright ones to pull off the big idea."

    Subprime mortgage lending was still a trivial fraction of the U.S. credit markets--a few tensof billions in loans each year--but its existence made sense, even to Steve Eisman. "I thoughtit was partly a response to growing income inequality," he said. "The distribution of income inthis country was skewed and becoming more skewed, and the result was that you have moresubprime customers." Of course, Eisman was paid to see the sense in subprime lending:Oppenheimer quickly became one of the leading bankers to the new industry, in no small partbecause Eisman was one of its leading proponents. "I took a lot of subprime companies public,"says Eisman. "And the story they liked to tell was that 'we're helping the consumer. Becausewe're taking him out of his high interest rate credit card debt and putting him into lowerinterest rate mortgage debt.' And I believed that story." Then something changed.

    Vincent Daniel had grown up in Queens, without any of the perks Steve Eisman took for granted.And yet if you met them you might guess that it was Vinny who had grown up in high style onPark Avenue and Eisman who had been raised in the small duplex on Eighty-second Avenue. Eismanwas brazen and grandiose and focused on the big kill. Vinny was careful and wary and interestedin details. He was young and fit, with thick, dark hair and handsome features, but hisappearance was overshadowed by his concerned expression--mouth ever poised to frown, eyebrowsever ready to rise. He had little to lose but still seemed perpetually worried that somethingimportant was about to be taken from him. His father had been murdered when he was a small boy-

    -though no one ever talked about that--and his mother had found a job as a bookkeeper at acommodities trading firm. She'd raised Vinny and his brother alone. Maybe it was Queens, maybeit was what had happened to his father, or maybe it was just the way Vincent Daniel was wired,but he viewed his fellow man with the most intense suspicion. It was with the awe of a champion

    dark."speaking of an even greater champion that Steve Eisman said, "Vinny is

    Eisman was an upper-middle-class kid who had been faintly surprised when he wound up at Penninstead of Yale. Vinny was a lower-middle-class kid whose mother was proud of him for gettinginto any college at all and prouder still when, in 1994, after Vinny graduated from SUNY-Binghamton, he'd gotten himself hired in Manhattan by Arthur Andersen, the accounting firm thatwould be destroyed a few years later, in the Enron scandal. "Growing up in Queens, you veryquickly figure out where the money is," said Vinny. "It's in Manhattan." His first assignmentin Manhattan, as a junior accountant, was to audit Salomon Brothers. He was instantly struck bythe opacity of an investment bank's books. None of his fellow accountants was able to explainwhy the traders were doing what they were doing. "I didn't know what I was doing," said Vinny."But the scary thing was, my managers didn't know anything either. I asked these basicquestions--like, Why do they own this mortgage bond? Are they just betting on it, or is it partof some larger strategy? I thought I needed to know. It's really difficult to audit a companyif you can't connect the dots."

    He concluded that there was effectively no way for an accountant assigned to audit a giant WallStreet firm to figure out whether it was making money or losing money. They were giant blackboxes, whose hidden gears were in constant motion. Several months into the audit, Vinny'smanager grew tired of his questions. "He couldn't explain it to me. He said, 'Vinny, it's notyour job. I hired you to do XYZ, do XYZ and shut your mouth.' I walked out of his office andsaid, 'I gotta get out of here.'"

    Vinny went looking for another job. An old school friend of his worked at a place calledOppenheimer and Co. and was making good money. He handed Vinny's resume in to human resources,and it made its way to Steve Eisman, who turned out to be looking for someone to help him parsethe increasingly arcane accounting used by subprime mortgage originators. "I can't add," saysEisman. "I think in stories. I need help with numbers." Vinny heard that Eisman could bedifficult and was surprised that, when they met, Eisman seemed interested only in whetherthey'd be able to get along. "He seemed to be just looking for a good egg," says Vinny. They'dmet twice when Eisman phoned him out of the blue. Vinny assumed he was about to be offered ajob, but soon after they started to talk, Eisman received an emergency call on the other lineand put Vinny on hold. Vinny sat waiting for fifteen minutes in silence, but Eisman never cameback on the line.

    Two months later, Eisman called him back. When could Vinny start?

    Eisman didn't particularly recall why he had put Vinny on hold and never picked up again, anymore than he recalled why he had gone to the bathroom in the middle of lunch with a big-timeCEO and never returned. Vinny soon found his own explanation: When he'd picked up the otherline, Eisman had been informed that his first child, a newborn son named Max, had died.Valerie, sick with the flu, had been awakened by a night nurse, who informed her that she, thenight nurse, had rolled on top of the baby in her sleep and smothered him. A decade later, thepeople closest to Eisman would describe this as an event that changed his relationship to theworld around him. "Steven always thought he had an angel on his shoulder," said Valerie."Nothing bad ever happened to Steven. He was protected and he was safe. After Max, the angel onhis shoulder was done. Anything can happen to anyone at any time." From that moment, shenoticed many changes in her husband, large and small, and Eisman did not disagree. "From thepoint of view of the history of the universe, Max's death was not a big deal," said Eisman. "Itwas just my big deal."

    At any rate, Vinny and Eisman never talked about what had happened. All Vinny knew was that theEisman he went to work for was obviously not quite the same Eisman he'd met several monthsearlier. The Eisman Vinny had interviewed with was, by the standards of Wall Street analysts,honest. He was not completely uncooperative. Oppenheimer was among the leading bankers to the

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