If you want to figure out how the world works, then the two best places to learn from are: i) Scott Adams' "Dilbert" cartoon, and ii) almost anything written by Michael Lewis (he has written several books, and became famous after his book "Liar's Poker").

This post is about a Michael Lewis article I just read (Conde Nast Portfolio, Dec 8, 2008, text starting on page 116). There have been a few excellent articles in CNP in the last few months, although most are the usual blather.

Title: "The End [of Wall Street]"

I am not making any of this up, it is sellected quotes and if you want more, you have to get the rest of it yourself.

Phil Scott, if you are reading this, I think it will crack you up.

"To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital--to decide who should get it and who should not. Believe me when I tell you that I hadn't the first clue."

"I'd never taken an accounting course, never run a business, never even had savings of my own to manange. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later."


"In the two decades since then, I had been waiting for the end of Wall Street. the outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of [LTCM]: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they kept on growing, along with the sums of money that they doled out to 26-year-olds to perform the tasks of no obvious social utility. The rebelion by American youth against the money culture never happened."


"It's never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31 [2007], Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market."


"This woman wasn't saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn't even know how to manage their own."

Lewis goes on to talk about Steve Eisman, a kind of "hero" to the story.

"He [Eisman] was promptly appointed the lead analyst for Ames Financial. 'What I didn't tell him was that my job had been to proofread the documents and that I hadn't understood a word of the fucking things.'"


"Eisman says in his defense, 'I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit waht it sold.'"


"One of his [Eisman's] first jobs, as a junior accountant at Arthur Andersen, was to audit Salomon Brother's books. 'It was shocking,' he says. 'No one could explain to me what they were doing.'"


the article has, on page 119, a full page "graphic" of "stars" in the financial world, about 20, who is going up to get wings and halos, who is going down in flames. You all would recognize the names and faces if you were reading the papers.

Eisman said "What most people don't realize is that the fixed-income world dwarfs the equity world,"..."The equity world is like a fucking zit compared with the bond market."

"Eisman knew subprime lenders could be scumbags. What he underestimated wast the total unabashed complicity of the upper class of American capitalism."

"I didn't understand how they were turning all this garbage into gold," he says.

"Eisman still didn't fully understand how the apparatus worked. But, he knew Wall Street had build A DOOMSDAY MACHINE."

"These bonds could then be sold to investors--pension funds, insurance companies--who were allowed to invest only in highly rated securities. 'I cannot fucking believe this is allowed--I must have said that a thousand times in the past two years,' Eisman says."

Here is the biggie (page 156):

"That's when Eisman finally got it. here he'd been making these side bets [CDOs] with  Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There were'nt enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantaxy football: When a fantasy player draftss Peyton manning, he doesn't create a second Peyton Manning to inflate theleagues stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying Goldman Sachs the interest on a subprime mortgage. In fact, there was no mortgage at all. 'They weren't satisfied getting lots of unqualified buyers to borrwo money to buy a house they could not afford,' Eisman says. 'They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. Bbuth that's when I realized they needed us to keep the machine running. I was like "This is allowed?"'"

"Oh, my God, this is like owning a gold mine."

The article ended with Lewis discussing some interactions with Lewis' former boss (when he, Lewis, was at Saloman brothers), John Gutfreund, generally known, at least by some people, as "the King of Wall Street" and at the lunch table Gutfreund said to Lewis:

"Your...fucking...book" [Liar's Poker]

and

"Your fucking book destroyed my career [he was forced to resign], and it made yours."

So, now y'all know a little bit more about how "the crooks" operate. For the benefit of the few, at the expense of the many. And, realize how these guys are majorly responsible for the mess the world economy is in right now.