Home > Work > The Big Short: Inside the Doomsday Machine
141 " Pope Benedict XVI was the first to predict the crisis in the global financial system…Italian Finance Minister Giulio Tremonti said. "
― Michael Lewis , The Big Short: Inside the Doomsday Machine
142 " Alan Greenspan assures us that home prices are not prone to bubbles—or major deflations—on any national scale,” he’d said. “This is ridiculous, of course…. In 1933, during the fourth year of the Great Depression, the United States found itself in the midst of a housing crisis that put housing starts at 10% of the level of 1925. Roughly half of all mortgage debt was in default. "
143 " the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him. —Leo Tolstoy, 1897 "
144 " The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side—the entire financial system, essentially—had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. "
145 " What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they’re still all wrong. "
146 " I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it’d be the most popular school in the world, with an impossibly high tuition. So it must not be true.” Investing "
147 " When you’re a conservative Republican, you never think people are making money by ripping other people off,” he said. His mind was now fully open to the possibility. “I now realized there was an entire industry, called consumer finance, that basically existed to rip people off.” Denied "
148 " To succeed in a spectacular fashion you had to be spectacularly unusual. "
149 " The shareholders who financed the risk taking had no real understanding of what the risk takers were doing, and, as the risk taking grew ever more complex, their understanding diminished. All that was clear was that the profits to be had from smart people making complicated bets overwhelmed anything that could be had from servicing customers, or allocating capital to productive enterprise. "
150 " The problem wasn’t that Lehman Brothers had been allowed to fail. The problem was that Lehman Brothers had been allowed to succeed. "
151 " No partnership, for that matter, would have hired me, or anyone remotely like me. Was there ever any correlation between an ability to get into, and out of, Princeton, and a talent for taking financial risk? At "
152 " At the top of Charlie Ledley’s list of concerns, after Cornwall Capital had laid its bets against subprime loans, was that the powers that be might step in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers. After "
153 " Back in 1995, Munger had given a talk at Harvard Business School called “The Psychology of Human Misjudgment.” If you wanted to predict how people would behave, Munger said, you only had to look at their incentives. FedEx couldn’t get its night shift to finish on time; they tried everything to speed it up but nothing worked—until they stopped paying night shift workers by the hour and started to pay them by the shift. Xerox created a new, better machine only to have it sell less well than the inferior older ones—until they figured out the salesmen got a bigger commission for selling the older one. “Well, you can say, ‘Everybody knows that,’” said Munger. “I think I’ve been in the top five percent of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.” Munger’s "
154 " By early 2009 the risks and losses associated with more than a trillion dollars’ worth of bad investments were transferred from big Wall Street firms to the U.S. taxpayer. "
155 " But there’s a difference between an old-fashioned financial panic and what had happened on Wall Street in 2008. In an old-fashioned panic, perception creates its own reality: Someone shouts “Fire!” in a crowded theater and the audience crushes each other to death in its rush for the exits. On Wall Street in 2008 the reality finally overwhelmed perceptions: A crowded theater burned down with a lot of people still in their seats. Every major firm on Wall Street was either bankrupt or fatally intertwined with a bankrupt system. The problem wasn’t that Lehman Brothers had been allowed to fail. The problem was that Lehman Brothers had been allowed to succeed. This "
156 " He concluded that there was effectively no way for an accountant assigned to audit a giant Wall Street firm to figure out whether it was making money or losing money. "
157 " If mere scandal could have destroyed the big Wall Street investment banks, they would have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying that they were stupid. "
158 " In Eisman’s view, the unwillingness of the U.S. government to allow the bankers to fail was less a solution than a symptom of a still deeply dysfunctional financial system. "
159 " I now realized there was an entire industry, called consumer finance, that basically existed to rip people off. "
160 " In early July, Morgan Stanley received its first wake-up call. It came from Greg Lippmann and his bosses at Deutsche Bank, who, in a conference call, told Howie Hubler and his bosses that the $4 billion in credit default swaps Hubler had sold Deutsche Bank’s CDO desk six months earlier had moved in Deutsche Bank’s favor. Could Morgan Stanley please wire $1.2 billion to Deutsche Bank by the end of the day? Or, as Lippmann actually put it—according to someone who heard the exchange—Dude, you owe us one point two billion. "