Since I can no longer stomach the three-way action going on between Verne Lundquist, Gary Danielson and Tim Tebow, I got online and found this interesting post via Sullivan. It's an article by one of my favorite authors, Michael Lewis. If you've never read Liar's Poker, you should. Lewis was basically Bud Fox before Oliver Stone created him. In fact, all of Lewis' books are excellent. For those that don't know Lewis, he's also the author who penned "Moneyball." And if you don't know what that is, you're obviously not a baseball fan. Oh yeah...he's married to my junior high crush, Tabitha Soren of MTV News fame.
Lewis tells the story of what happened by looking at two people who were relative unknowns to most of us a year ago, Meredith Whitney and Steve Eisman, both analysts. Whitney sounded the first loud alarm about a year ago, when she dropped a Halloween treat on Wall Street: Citigroup had so mismanaged their tails, they were going to have to slash their dividends. That was the pin prick to the ballon. Eisman was her mentor at Oppenheimer and one of the few guys who not only rang the alarm, but put his money behind it, cashing in when all these mismangaged lenders started crashing. After reading this, I could not help but to wonder how so many bozos on Wall Street thought it wouldn't catch up to them. I mean, were they not paying attention when that little energy trader down in Houston went teats up and people went to jail?
It really is a great article if you want to know what happened. Here's a good section:
But he couldn’t figure out exactly how the rating agencies justified turning BBB
loans into AAA-rated bonds. “I didn’t understand how they were turning all this
garbage into gold,” he says. He brought some of the bond people from Goldman
Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same
question,” says Eisman. “Where are the rating agencies in all of this? And I’d
always get the same reaction. It was a smirk.” He called Standard & Poor’s
and asked what would happen to default rates if real estate prices fell. The man
at S&P couldn’t say; its model for home prices had no ability to accept a
negative number. “They were just assuming home prices would keep going up,”
As an investor, Eisman was allowed on the quarterly conference
calls held by Moody’s but not allowed to ask questions. The people at Moody’s
were polite about their brush-off, however. The C.E.O. even invited Eisman and
his team to his office for a visit in June 2007. By then, Eisman was so certain
that the world had been turned upside down that he just assumed this guy must
know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like
he actually means it, ‘I truly believe that our rating will prove accurate.’ And
Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy
had just uttered the most preposterous statement in the history of finance. He
repeated it. And Eisman just laughed at him.”
“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.” This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.
Even after the mess that was Enron and Arthur Anderson, still no one is minding the store. Incredible.