Steve Eisman, the ‘big short’ investor who bet on the crash
NEW YORK: The global financial crisis devastated American communities, wiped out savings and brought banking giants to their knees.
But it also enriched a handful of investors who had bet that the financial house of cards behind American real estate lending would collapse.
Steve Eisman is among this exclusive circle of Wall Street Cassandras, with a bank account and investment portfolio that grew as bankruptcies piled up among homeowners who had taken out adjustable-rate subprime mortgages.
His audacious gamble is recounted in the 2015 movie ‘The Big Short’, in which the actor Steve Carell plays a Mark Baum, a fictionalised version of Eisman.
Between 2004 and 2007, Eisman, who is married to an ex-banker, ran an investment portfolio at the hedge fund FrontPoint Partners.
His job was to invest wealthy clients’ money in the banking sector, which was riding high on the success of lending to higher-risk, or ‘subprime’, borrowers.
The banks spread this risk across the world, selling pieces of it in the form of complex instruments known as collateralised debt obligations, or CDOs, and securities backed by residential mortgages.
But, even with a Harvard Law degree, Eisman understood little about such exotic financial products with bewildering acronyms. 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.
“How could someone make a mortgage loan when the customer can only afford to pay for the first three 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.