Magazine article Mortgage Banking

LaMalfa on Books

Magazine article Mortgage Banking

LaMalfa on Books

Article excerpt

The Big Short: Inside the Doomsday Machine


W.W. Norton & Co., 2010

Interested in reading a light but engaging story about the guys who ran three small hedge funds and a trader at Deutsche Bank--all of whom foresaw the folly of providing subprime mortgages to millions of households that never should have received them? This bunch proceeded to capitalize on the situation by shorting the market, thereby making tens of millions of dollars for themselves and their investors. If that sounds like good summer reading to you, check out Michael Lewis' near-classic, The Big Short: Inside the Doomsday Machine.

Written two years ago by the author of the original Wall Street classic of the mid-1980s, Liar's Poker, you'll meet Steve Eisman, Michael Burry, three partners of Cornwall Capital and Greg Lippmann--a collection of interesting if not idiosyncratic characters who recognized they could make a fortune shorting bonds collateralized with subprime mortgages. This is their story as seen through their eyes and the author's lens.

Let's start with Eisman. He's the brilliant, foul-mouthed, rude knave who has a knack for ticking people off. Son of two Oppenheimer equity brokers, the Harvard-educated attorney, who graduated magna cum laude, began his career as an analyst covering "specialty finance"--a colloquial term for consumer finance companies like Aames Home Loans, NovaStar Mortgage and Household Finance Corporation. His understanding of such companies and how they operated made him suspicious of anything these lenders were involved in.

Burry is a physician with Asperger's syndrome who left the field of medicine because of his inability to deal with people. As a result, he gravitated to stocks, then bonds, where his ability to read and understand prospectuses led him to find ways to short mortgages. This pursuit eventually led him to American International Group (AIG) and credit default swaps (CDSes). Burry's fund made $720 million buying such swaps.

Charlie Ledley, Jamie Mai and Ben Hockett are a trio of University of California--Berkeley renegades who head to Greenwich, Connecticut, to seek fortune if not fame. They set up a hedge fund, Cornwall Capital, and spend their early years trying to get Wall Street firms to deal with them, given their limited-$110,000--capital. They retired with $80 million between them.

And then there is Lippmann, a bond trader at Deutsche Bank. He understands the quality of the collateral and sets out to find firms who'll bet against the collateral debt obligations (CDOs) and CDSes that Wall Street is creating.

Lippmann is surprised at how few firms he's able to persuade to short this market despite the data he is able to put together to support his assertion that these securities are risky and made to bet against. Lippmann himself earned $50 million in 2008 after making Deutsche Bank a profit of $3.7 billion on an $11 million bet.

According to Lewis, there isn't a single "normal" person among this cast of characters. All are brash, loud, idiosyncratic types who go their own way. They are "misfits and oddballs," writes Lewis.

On the other side of this trade are the commercial banks, domestic and foreign; the pension funds and the hedge funds; the "longs"--essentially any bond buyer interested in a (little) spread over Treasuries. …

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