Sunday, March 14, 2010

Short Sellers as Heroes

by Michael Osinski

Twenty years ago, when I worked at Salomon Brothers, every person on Wall Street had read two books: Frank J. Fabozzi’s “Fixed Income Analysis” and Michael Lewis’s “Liars’ Poker.”

The latter was Lewis’s debut, a devastating account of his four-year career as a bond trader at Salomon, which culminated in the crash of 1987. He has gone on to write best sellers on politics (“Trail Fever”), Silicon Valley (“The New New Thing”), sports (“Moneyball,” “The Blind Side”) and fatherhood (“Home Game”). The man, as they say, has range.
Still, Lewis is best known for writing about money and the people who will do anything to make it, so it’s not surprising that two decades after leaving Wall Street he has returned to survey the scene of the latest crash.

“The Big Short” is a chronicle of four sets of players in the subprime mortgage market who had the foresight and gumption to short the diciest mortgage deals: Steve Eisman of FrontPoint, Greg Lippmann at Deutsche Bank, the three partners at Cornwall Capital, and most indelibly, Michael Burry of Scion Capital. They all walked away from the rubble with pockets full of gold and reputations as geniuses.

Short-sellers are usually cast as villains, but by pitting them against the deluded complacency of most in the finance industry, Lewis turns them into paragons of courage and virtue. Like all great storytellers, he loads the dice. We hear from the good guys’ wives and learn plenty about the personal traumas they’ve overcome. The bad guys wear their hair slicked back and say stupid, venal things. Their wives were not interviewed.

Perils of Shorting

If subtlety is scarce in “The Big Short,” the story is nevertheless told with a brisk and riveting style. Lewis does an extraordinary job elucidating the perils of shorting the very bonds that buoyed the American economy after Sept. 11, 2001, and made a fortune for every firm on the Street.

He also explains the arcane details of these securities with surprising fluidity. Lewis shows how the risky, subordinate bonds in structures of subprime mortgages (or “towers” as he calls them) were shuffled together to make the misunderstood and extremely unstable collateralized debt obligations (CDOs) and -― hang in there folks, almost done ―-how insurance policies called credit default swaps (CDS) were created to short, or bet against, the CDOs and subprime structures.

Read the rest here.

Michael Osinski retired from Wall Street and now runs the Widow’s Hole Oyster Co. in Greenport, New York.