Read the Prequel to THE Book on the Bust
1+714.673.8578. www.mixnerstrategy.com
Michael Lewis likes to make predictions, or, at a minimum, examine what went wrong in financial blow-ups, and figure out who knew what to do first.
Lewis' first book, Liar's Poker is a classic. We talked about it back in August (Mixner). Basically, the book talks about what went wrong when Salomen Brothers went from being a partnership (where the owners took a big, personal, hit if things went wrong) to a corporation (where, yes, the partners were now very rich employees, and where, yes, no one seemingly cared about what happened to the shareholders, who now held all the risks) (See Lewis, Liar's Poker).
An article in Portfolio magazine probably summarizes Lewis' next book (Lewis, The End). If you read anything about the current meltdown in the market, read this article. You're going to have to work to read the article, but every line is worth reading. The only problem is, once you've read the article, you are going to have to figure out who are you going to trust to invest your money.
Key points:
- Meredith Whitney forecast Citigroup's current problems on October 31, 2007 (Lewis, End, 116). She identified Steve Eisman as one of the folks who helped figure things out.
- Steve Eisman figured out at the end of 2004 that Greenspan's decision to lower interest rates would lead to a "terrible day of reckoning" (Lewis, End, 120). He didn't have a full handle on the situation yet.
- Greg Lippman at Deutsche Bank explained how Eisman could make money on his realization: don't short the stocks of financial institutions or home builders - short their sub-prime bonds (Lewis, End 120).
- Now Eisman, who didn't have a lot of money to invest, wanted to know which were the worst bonds of all the bonds out there. It ends up that the worst bonds were those tranches of bond financings that were rated BBB (Lewis, End, 122).
- Now for the kicker - Wall Street figured out how to take the BBB bonds and repackage them. When rated the new bonds were rated - get this - AAA. A wonderful transformation. Lewis doesn't use the word, but I will. See if you agree: this was a "smirk, smirk" transaction, at best (Lewis, End, 122). He calls it "smirk," - I call it corrupt.
- Eisman's last act in making money on the downfall of Wall Street was also insightful: He bet on the downfall of the rating institutions like Moody's (Lewis, End, 156).
Like I said, read the article, line by line. It is totally worth the effort if you want to understand what has just happened in the markets. It may help you figure out what to do the next time someone tries to sell you a bond.
When the book comes out, read the book. I'm going to.
References
Lewis, Michael. Liar's Poker. Rising Through the Wreckage on Wall Street. Penguin Books. 1989.
Lewis, Michael. The End. The era that defined Wall Street is finally, officially over. Conde Nast Portfolio. 114. http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom
Mixner, Jack. When Mortgages Were First Bundled - in 1979. Mixner Strategy blog. 25 August 2008. http://mixnerstrategy.com/blog/2008/08/when_mortgages_were_first_bund.html