In The Big Short: Inside the Doomsday Machine, Michael Lewis tells the fascinating story of Steve Eisman, a Wall Street money manager who was one of the first to realize something was amiss with the whole subprime mortgage industry — and the securitization process that obscured the inherent risks of these mortgages in particular.
Eisman initially bought the explanation of the bankers that subprime mortgages — which sought to offer cheap loans to people who, given their low (or non-existent) incomes, often could not get afford them — were a fantastic way to help poor people participate in the American Dream of owning their own home. “I thought it was partly a response to growing inequality,” Eisman once said. “The distribution of income in this country was skewed and becoming more skewed, and the result was that you have more subprime customers.”
But of course, as Lewis notes, “Eisman was paid to see the sense in subprime lending.” The company he worked for, Oppenheimer, “quickly became one of the leading bankers to the new industry, in no small part because Eisman was one of its leading proponents. “I took a lot of subprime mortgages public,” says Eisman. “And the story they liked to tell was that ‘we’re helping the consumer. Because we’re taking them out of his high interest rate credit card debt and putting him into lower interest rate mortgage debt.’ And I believed that story.”
But, then, something changed. When Eisman started taking a good look at the way these financial instruments actually worked, he realized there was something very, very disconcerting going on. While many of the mortgages were being provided with no initial down-payment and a 2-year flat interest rate, these interest rates subsequently spiked up in the years to follow — and, what’s worse, the banks who were making these deals deliberately misled their customers about this. “It was blatant fraud,” said Eisman. “They were tricking their customers.” As Lewis writes:
Eisman was genuinely shocked. “It never entered my mind that this could possibly happen,” he said. “This [the Household Finance Corporation] wasn’t just another company — this was the biggest company by far making subprime loans. And it was engaged in just blatant fraud. They should have taken the CEO out and hung him up by the fucking testicles. Instead they sold the company and the CEO made a hundred million dollars. And I thought, Whoa! That one didn’t end the way it should have.”
“That,” Eisman added, “is when I started to see the social implications.” After all, “if you are going to start a regulatory regime from scratch, you’d design it to protect middle- and lower-middle-income people, because the opportunity for them to get ripped off was so high. Instead what we had was a regime where those were the people who were protected the least.” Lewis documents Eisman’s remarkable conversion:
Obsessing over Household [Finance Corporation], he attended a lunch organized by a big Wall Street firm. The guest speaker was Herb Sandler, the CEO of a giant savings and loan called Golden West Financial Corporation. “Someone asked him if he believed in the free checking model,” recalls Eisman. “And he said, ‘Turn off your tape recorders.’ Everyone turned off their tape recorders. And he explained that they avoided free checking because it was really a tax on poor people — in the form of fines for overdrawing their checking accounts. And that banks that used it were really just banking on being able to rip off poor people even more than they could if they charged them for their checks.”
Eisman asked, “Are any regulators interested in this?”
“No,” said Sandler.
“That’s when I decided the system was really, ‘Fuck the poor.'”
Interestingly, Lewis recounts how Eisman, in his youth, has been a “strident Republican.”
He joined right-wing organizations, voted for Reagan twice, and even loved Robert Bork. It wasn’t until he got to Wall Street, oddly, that his politics drifted left. He attributed his first baby steps back to the middle of the political spectrum to the end of the cold war. “I wasn’t as right-wing because there wasn’t as much to be right-wing about.” By the time Household’s CEO, Bill Aldinger, collected his $100 million, Eisman was on his way to becoming the financial market’s first socialist. “When you are 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.”
This, among countless other reasons, is why we are taking to the streets of dozens of cities around the world today. This, if anything, is why Wall Street needs to be occupied until our demands for social justice and real democracy are met. Today will forever be remembered as the day the people rose up against the abuse of the bankers and the corporate control over our political system. Today, September 17, is the day that indignation goes global. And things will never be the same again.
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