Investor who bet on crash
by residential mortgages.
But, even with a Harvard Law degree, Eisman understood little about such exotic financial products with bewildering acronyms. And at a 2004 conference in Las Vegas, he learned he was not the only one.
He soon learned, after travelling next to Florida, California, Nevada and Arizona, epicentres of the subprime crisis, about the loose lending standards applied by mortgage originators and banks.
With graying hair and a square, athletic build, the middle-aged financier’s frank talk contrasts sharply with the typical Wall Street jargon.
Shorting against the world
“How could someone make a mortgage loan when the customer can only afford to pay for the first 3 years?” he asked during an interview with AFP at the Manhattan offices of Neuberger Berman, his new employer.
He reached out to the ratings agency Standard & Poor’s, which had stamped its vaunted ‘ AAA’ rating, the highest possible, on CDO and RMBS (residential mortgagebacked securities) assets.
They said their models did not include negative scenarios.
But Eisman identified a set of dubious loans and de- cided to bet they would fall, convincing Goldman Sachs and Deutsche Bank to issue Credit-Default Swaps, which are insurance policies against borrower defaults.
“When you are short, the whole world is against you,” he said.
Early in 2007, mortgage defaults began to pile up as investors who had been specu- lating that real estate prices would rise suddenly pulled out, causing prices to tumble.
Greenspan failed
In eight months, 84 real estate lenders in the United States went bankrupt. But the value of Eisman’s portfolio powered higher, rising from $700 million to $1.5 billion and higher.
“I told someone I felt like Noah,” he said, referring to the Biblical patriarch who foresaw the global flood.
“Do you think Noah was happy?”
In Eisman’s view, the guilty ones are the bankers and traders convinced of their own omniscience.
“It’s very hard to argue with someone who thinks he is God because he makes a lot of money,” said Eisman.
Now one of the most influential voices on Wall Street, Eisman is also a fierce critic of former Federal Reserve Chairman Alan Greenspan, a longtime proponent of deregulation.
Prior to reforms enacted in 2010, regulators had two tasks: keeping the banking system sound and protecting consumers from bad actors in the financial sector, said Eisman.
“They did as bad a job as anybody could do anything in the history of planet earth,” he said.
Others frequently ask what the next “big short” will be, Eisman says, but “the truth is I simply do not have an answer and do not want to have an answer to this question.”
“For the first time in my working life, which is more than 30 years, I would regard the financial system as safe,” he said, adding that he had recently bought bank stocks.
But he cannot say the same for banks across the Atlantic.
“The European banking system remains undercapitalized,” said Eisman.
And he recently made a profit – betting shares in Deutsche Bank would fall as the bank’s financial difficulties worsen.