Animal Spirits Podcast - Re-Kindled: The Big Short (EP.80)

Episode Date: May 6, 2019

Re-Kindled is a show where Michael and Ben discuss some of the best finance books ever written. On this episode, they dig into The Big Short by Michael Lewis to talk about the lessons of the financial crisis from the banks to the subprime mortgage markets to those select few who made tons of money shorting the housing market. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

So it is crazy that nobody went to jail over this. I was, like, riveted by this the second time around, which is kind of hard to do for a finance book, I think. Dude, you owe us $1.2 billion. Welcome to Rekindled with Michael and Ben. We had our heart set on calling this podcast turn the page, but at the 11th hour, somebody came in with Rekindled. And, I mean, it's just obvious in my, in both of our opinions. It was perfect. And I'm a Kindle reader, so it was just, yes, the perfect name. It rolls off the tongue better. So we made a last minute audible. And on this first episode, my idea was to reread the big short because when I read it the first time, I was blown away. And it's been, I guess, 10 years or so since it came out. And on the reread, it almost became apparent, this is the goat for finance books. Is it not? I mean, this is the best finance book of all time. hold on a minute. Like the best book about money ever written. Is that what you're saying?

The most readable book on finance. How about that? So this is my re, re-readable because I went through this book a second time while I was writing my book and I was looking for stuff about Joel Greenblatt, I think, which you tip me off to and I actually ended up not using it for the book. So Moneyball was written or published in 2003. The Blindside came out in 2000. And this book came out in 2010. But do you think, I mean, this was the book that made him world famous, was it not? Moneyball, to a certain extent, later, I think. But this one probably, yes, I think a lot of people probably don't even realize he made

the blind side because they probably just equate that to like the Sandra Bullock movie. But in terms of finance circles, I mean, this is the greatest book written about the financial crisis and it's not even close. Wow. How's that? Right? I mean, I was like riveted by this the second time around, which is kind of hard to do for a finance book, I think. Have you read too big to fail?

No, it was like 800 pages. Neither have I. Have you read Bethany and Jonah Sarah's book? All the Devils were here? No. So are you saying that my sample size is too small? I'm just saying. Anyway.

Although, no, it was fantastic. And my first initial takeaway that I told you last week was I can't believe that Lewis decided to not take the layup and profile John Paulson, who had the greatest trade of all time. I mean, there was another book written about him. I don't know if that book was being published in concert, but the fact that he chose these sort of different characters to profile for the book that weren't as big name,

they didn't have the billions and billions in profits as Paulson did in terms of shorting the housing market. It was so smart of him to do that. That's a very good point because some of the other hedge funds that bet against the market were bow posts, so Seth Klarman, Harbinger Capital, which is Phil Falkone, Haman, which is Kyle Bass, and to your point, John Paulson. So he could have went with any of those, and he didn't. And there was a funny part of the book. Somebody said, I called Goldman Sachs to ask him about Paulson, said one rich man whom Paul said had a solicited funds for. And they told me he was a third-rate

hedge fund guy who didn't know what he was talking about. Yeah, that was pretty well. And he honestly, he devoted maybe a page or two to Paulson for the whole book. So the fact that he was like a footnote. Yeah, the fact that he found these characters, which is, that's what makes his book so good is the characters, and he admitted that. And so he talked in the introduction about Liar's Poker and how it really surprised him when he wrote Liars Poker in the 80s that he thought that was going to turn people off from going into finance. But actually, right after it came out, he was getting questions from young people saying, okay, give me the secrets. I want to go work for Golden Sacks now. Do you think this book had sort of a similar impact in that it made a lot of people think

they could find these asymmetric risk profile trades and that they could find the next big short and that they could bet on the end of the world and that has hurt a lot of people. It's like you're reading my mind because I was talking to Josh about that this morning. So in the prologue, he said that they'd read my book as a how-to manual speaking about liars poker. Yep. And we saw Michael Lewis interviewed by Barry and he made that a big point that the book you write is never the book that people read. And I think that you absolutely nailed it. And that was

my takeaway, too, that this book was even more a cautionary tale on the fine industry writ large. And I think that after this book, a lot of people actually went looking for the next big short. And it probably, it's not something you hear about very much today, but it certainly was in the years after the crisis. That CDO shorting the housing market trade that Paulson and company put on and a lot of the other ones in this book that we're going to get to, that's a once in a lifetime trade. And we had people trying to find that once-in-a-lifetime trade every year. I was going to ask you, is this a once-in-a-generation type of event? I think so.

I think so many things set up, and it was not just a culmination of one cycle, but many cycles building on top of one another, that not saying that financial crises are not going to happen in the future, but one like this, this was just, I hate to use it, but perfect storm. This was just a culmination of so many different things. So I don't know if you caught this, but he dedicated the book. It said, for Michael Kinsley. to whom I still owe an article. And Michael Kinsley of the new republic in the U.S., they published Liars Poker, or helped write

Liars Poker, and published as the anonymous exposés that he was writing when he was at Solomon Brothers. Oh, yeah, that he told very about that. That was great. Whose name did he use? It was a female's name, I thought. And you know who discovered him was, he told us to ban, it was Chevy Chase's father. Yeah, which is pretty funny. Or some connection to that, which is, yes, that Chevy Chase.

So the biggest character in the book was Steve Isman, who was played by Steve Carell in the movie. And the funny part to me that stood out was he wrote in the introduction, and he talked about Meredith Whitney calling for Citigroup to have their dividend cut. And he said, from that moment on, Meredith Whitney became E.F. Hutton, when she spoke, people listened. And it just is amazing to me how being right once in a row in finance can give you so much slack in terms of becoming a celebrity, basically. I mean, she's kind of gone now. I honestly don't know what she's doing. But for a while there, she was the person that called the downfall of the banks. Yeah, she was everywhere. She was, yeah, certainly ubiquitous at the time. So Michael Lewis is easily one of the best character developers ever. So this book has 11 chapters. And in chapter nine, it started with Howie Hubler had grown up in New Jersey. And I'm thinking, wait, this book is almost over. Who the hell is Howie Hubler? I forgot about that part and I never really. It said that was the whole kicker for that one was crazy. He lost more money than any trader in the history of Wall Street and he still walked away with millions of dollars, which was, I mean, it's kind of hard to not come away disgusted after you read this book as well, which I think is one of the reasons so many people's brains got broken after the financial crisis because there was so much just shady activity that went on and very few people ever got any comeuppance. And a lot of these. banking CEOs and people that work for the banks and the people that made a lot of money off

of, frankly, people's houses walked away with millions of dollars. And you can tell Lewis obviously felt that same way, too, to read the book. Joe Casano, who was the head of AIGFP, who was really at the heart of all these toxic collateralized debt obligations and the credit default swaps. There was a part of the book where it said one day, so there's a trader who said one day he got me on the phone and was pissed off about a trade that had lost money. He said, when you lose money, it's my fucking money. Say it, I said. I said what? Say, Joe, it's your fucking money. So I said, it's your fucking money, Joe. And this guy, Joe Casano, was fired in March of 2008. He received a $280 million in cash and an additional $34 million in bonuses and continue to receive $1 million

a month until the end of September 2008. And of course, AIG was bailed out by the government, which is really the taxpayers to the tune of $130-something billion. And why was he there? Congress asked, the CEO. AIG wanted to retain the 20-year knowledge that Mr. Casano had, which is hilarious considering the fact that they lost $500 billion worth of toxic debt. So a lot of people are angry. And actually, don't you think that this book sort of led to Occupy Wall Street in a way?

Yeah, I mean, this was definitely the one, this became like a popular culture book where people outside of finance Reddit. it. And when talking about the CDOs and subprime stuff and the stuff that banks did, I like this quote, he said, any business where you can sell a product and make money without having to worry about how the product performs is going to attract sleazy people, which is exactly what happened here. And he's one of them, obviously. And the other one I like, he said, how do you make poor people feel wealthy when wages are stagnant? You give them cheap loans. And some of the stats in here about CDOs and subprime were pretty crazy to me. So he said in 1996, 65% of subprime loans were

fixed rate. By 2005, 75% of them were some sort of floating rate usually fixed for the first two years, which I guess I kind of forgot this. They would start out at a fixed rate of 6% for two years and then jump to 11% after that, which almost seems criminal that those products were even allowed to be put out there in the first place. So a lot of these products that the CDOs were an amalgamation of a lot of mortgage bonds. And he explained this so simply. He is such a brilliant writer. And Ben, you can remember back to the CFA study days when we're learning about mortgage bonds at different tranches and stuff. And I think this just nails it in words that anybody can understand. These cash flows were always problematic, as the borrowers had the right to pay off

anytime they pleased. This was the single biggest reason that bond investors initially had been reluctant to invest in home mortgage loans. Mortgage borrowers typically repaid their loans only when interest rates fell. Right. Yeah. Right. That was a good explanation. So a lot of these, So the problem was even once these characters identified what to short or how to bet against the housing market, it wasn't that easy. So New Century, which was a housing company, for instance, paid a 20% dividend and its shares cost 12% a year to borrow. So for the pleasure of shorting 100 million dollars of New Century shares, I has been forked out $32 million a year. You know what one of the biggest takeaways I got from this book is that I can't remember

what the exact Charlie Munger quote is, but he said, you know, if you make a bunch of money buying gold, because you're planning on the end of the world. No one's going to like you anyway because you're just a jerk. It was something along those lines. But like making money during a crisis towards the end when all these bets finally paid off. And like you said, it took a long time for it to happen because a lot of these people were starting to short stuff in 2005 and 2006 before it really rolled over. And I got the sense that it didn't make any of these people happy to make all this money.

In fact, a lot of them were miserable. They were losing clients. They were stressed out all the time. So I think making money. on something like this is so challenging. We always talk about the behavioral side of making money in a hugely high-performing investment. But to short the world like this, none of these people were really happy to have it happen because they were just more worried about the systematic problems that it was causing. Yeah, so we'll get to Michael Burry in a minute. But just getting back to what exactly

these products were, Michael Lewis wrote, the CDO was in effect a credit laundering service for residents of lower middle class America. For Wall Street, it was a machine that turned lead into gold. Do you think this, I've seen this one a million times, this anecdote, how in Bakerfield, California, a Mexican strawberry picker with an income of 14 grand and no English, was ever, was lent to every penny he needed to buy a home for over $700,000. Do you think that one could be made up? I feel like you see that all the time. Yeah. But did that really have, I mean, maybe it did, but that was kind of one of the, but even if it's in that like that league, that stuff like that happened. And it did.

millions of times over. So let's start with Steve Eisman, who to your point was a protagonist of the book, played by Steve Carell. And he had a background in the subprime market, because he was an early analyst in this market at Oppenheimer. He had a great line in the book. He was talking about a company called Lomas Financial Corporation. By the way, we may need earmuffs for this episode because there are so many great F-bombs in this book that I want to use from these quotes. But anyway, go ahead. So the Lomas Financial Corporation and a conference call said they were hedged. And Eisman said, the Loemannes Financial Corporation is a perfectly hedged financial institution.

It loses money in every conceivable interest rate environment. The best thing about Steve Eisman in this book was the fact that he would call everyone and everything, which I think is something not a lot of people are willing to do because maybe people don't think confrontation. But he was calling out bank CEOs and people who were running these mortgage companies. He called everyone out and basically said, here's exactly what's going to happen. And then it did. And he, yeah, he was probably.

I mean, he's got to be the best character in the book, right? I mean, him and Bury, it's pretty close, but... He said about the bank CEOs, they didn't know their own balance sheet. One time he got invited to a meeting with the Bank of America CEO, this guy, Ken Lewis. He said, I was sitting there listening to him, and I had an epiphany. I said to myself, oh, my God, he's dumb. So here's another one. At a publicly event in Hong Kong, after the chairman of HSBC, which is like one of the biggest banks in the world,

claimed that his bank subprime losses were, quote, unquote, contained. Isman raised his hand and said, you don't actually believe that, do you? because your whole book is fucked. And there was so many instances where this guy did this. The other one, when he was debating Bill Miller, was that not an unbelievable story? So he's debating Bill Miller about the merits of Bear Stearns as an investment. And this is before stuff really hit the fan. So this is still in March, in the spring of 2008, before stuff really got bad, like, in the fall.

And Bill Miller was saying, listen, I'm buying Bear Stearns because there's really no instance in history I can point to where an investment bank of this size went under. And Eisman was basically saying, good luck. And he said, just so you know, from the time you started talking, Bear Stearn's stock has fallen more than 20 points, would you like to buy more now? And that very next Monday is when J.P. Morgan bought him for two bucks a share. Brutal.

I mean, Bill Miller is probably one of the greatest minds in all of investing. And he couldn't see this type of stuff. So one thing that I thought was really fascinating about, Steve Eism, to your point of just asking questions over and over, he said, I can't add. I think in stories, I need help with numbers. To that point, he brought in this kid, or not a kid anymore, Vincent Daniel from Queens, who was really like the math guy, because Isman is not a numbers guy, at least

according to him. He's really a storyteller. Right. Yeah. And the other probably the biggest scene in the movie where they went to that conference, that was my favorite part where Isman took all of his analysts and stuff and went to the conference. And that's when they really figured out, like, oh, my gosh, these people on this.

the other side of these mortgage deals have no idea what's going on. And the craziest one to me was they found some of these loans where the person defaulted on their very first payment. And so Danny Moses, was he the one who was on Patrick's Investor with the Best Podcast? He thought out, he said, who lends money to people who can't make their first loan payment? And then the other side was, well, who takes out a loan that can't make the first payment either? And that's kind of how crazy this stuff was. And I think one of the things people don't understand about interest rates and taking out credit is that it's not really the level of rates that matters. It's how easier are people willing to extend credit. So rates right now are much lower than they were

in the lead up to the crisis. But that really has nothing to do with how crazy things can get because it all depends on the lending standards and how willing these banks are to actually give money to people. So to that point, Michael Burry, who we'll get to a minute, said what you want to watch are the lenders, not the borrowers. The borrowers will always be willing to take a great deal for themselves. It's up to the lenders to show restraint, and when they lose it, watch out. By 2003, he knew that the borrowers had already lost it, and by 2005, he saw that the lenders had lost it, too. Their conference they went to was in Las Vegas. It was like a mortgage originator conference, and a friend told him that he'd met a stripper who had five separate

home equity loans in Vegas in, like, 2007, just to show how crazy it was. So they said that, normally at a conference there's 500 or so people. There was 7,000 people here. This was a conference about subprime mortgages. And he sat next to this guy, Wing Chow, and Greg Lippman, who also is another great character that we'll get to. So at the end of the meal, Steve Eisman grabbed Lippman, and he said, whatever that guy is borrowing, I want to short it, sight unseen. Or whatever that guy is buying. I'm sorry. That was great. That's almost like the Michael Mobeson thing, like in terms of skill and luck is involved in the markets. like if you can try to lose on purpose, like that show us how much the difference is between skill

and luck. Like it's hard to lose on purpose. But these people almost were losing on purpose. This was like the one anecdote where that kind of goes wrong. Well, you know, there was something that Isman said that really was like a, huh, moment for me. It's always said that bonds are the smart money. Right. Right. Yeah. So Isman said, you always knew that fixed income guys thought they knew more than you. And generally that was true. I wasn't a fixed income guy. but here I take in this position that was a bet against their whole industry, and I wanted to know if they knew something, I didn't. And of course, the answer is they didn't. So maybe this throws a little bit of shade on bonds of the smart money. Yeah, definitely. And again,

a lot of it has to do with the incentives involved. So let's move on to Michael Barre. Yes, he was the best one. He was, him and Eisenman are kind of neck and neck for me. but I loved the fact that when he talked about how he figured out his investing strategy. So he was a doctor who was basically writing on these message boards at night, and he became something of an underground value investing here to a lot of people because he was putting out these thoughts and ideas. He's like Jesse Livermore today. Yeah.

The guy on Twitter. Yeah, if he ever wrote anymore. So he said, Burry did not think investing could be reduced to a formula or learned from any one model. The more he studied Buffett, the less he thought Buffett could be. copied. And he said he also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it would be the most popular school in the world with an impossibly high tuition. So it must not be true, which is just perfect that he kind of figured this out, which honestly is a place a lot of investors never get to. I would say that most

people never get there. So Michael Bari, when he finally decided to leave medicine, was seated by a legendary investor, Joel Greenblatt. And he said something along the lines of like, I was waiting for you to quit medicine. Yeah, who supposedly in the 90s for like 10 years had 50% annual returns with Gotham Capital. And has written, the little book that beats the market is probably his most famous book, but has written a ton of really good books. And it's probably one of the better communicators and value investors that there is. And he saw some promise in Bury.

But the crazy thing is that when Bury started shorting this stuff in 2005 and 2006, and it went against him, Greenblatt wanted it immediately. get out and have him take these bets off. And I mean, the crazy thing is you hear about all these numbers about how good they did once, you know, stuff finally hit the fan. But in 2007, the S&P was up by like 10%. Burry was down almost 20%. And he was shorting all this subprime CDO stuff. And at that point, he decided to put a gate on his fund, which essentially locked it up. And coming from Greenblatt's perspective, I can kind of see where he was coming from because you have this hedge fund, who was a fundamental bottom-up stock picker, who then decides to short the

housing market and these CEOs that, I mean, honestly, even reading about them now, it's kind of hard to understand, I think, for the layperson. But at the time, no one knew what these things were, what they did or how they would react more or less. Obviously, the banks who were selling them didn't understand them. And so I kind of understand where Greenblatt was coming from, but Burry would explain this stuff to him. And Greenblatt, again, one of the greatest investors of all time maybe, it was totally over his head. And he was really putting, he wanted to sue Burry to get out of those positions. So Greenblatt actually contacted Michael Lewis after the book was written. And this was in the epilogue. Greenblatt said that, A, he never wanted a fight with Michael

Burry. B, he only asked for his money back because he had investors asking for their money back. And C, and Michael Lewis wrote about this in the book, that Bury was not communicating, clearly what he was doing, so they didn't understand. And Michael Bury was a value. investor and was not necessarily a short seller. So when he went into this macro stuff, he was way out of his element. So to your point, it's not that surprising that the investors were like, wait, this is not what we were paying you to do. And they had the angle where Burry has Asperger's syndrome, which you realize later in life. And that makes it hard to communicate effectively. And so I'm guessing that there was a huge disconnect between what he was doing and how he was

portraying it to clients. Yes. We spoke about often that after the dot-com bubble blew up, it was like a value investor's oasis. Right. So in 2001, the S&P 500 was down 12%. Sion was up, his fund was up 55%. 55. S&P 500 in 2002, down 22. Sion up 16.

And then the rebound in 2003, S&P up 29%, Sion up 50%. And by 2004, he was managing $600 million. And once everything blew up by summer of 2008, which is honestly before the markets really blew up, but it was when the housing stuff really started blowing up. So his Cyan capital from November 1st in 2000 had gained almost 500%. And at the same time, the S&P had gained 2%.

The crazy thing is, to your point about Greenblatt needing money because his investors were getting money, it says in 2007 alone, Burry made his investor $750 million, but he only had $600 million under management. And honestly, you could think, like, well, investors are dumb. But part of the reason is anything that did well during the crisis, investors used that as an ATM to get money out to put into other strategies that they had to show up. So anything that did good effectively at that time got penalized. And there was a lot of actually CTAs and managed futures funds that were kind of the same way where their AUM did go up as

much as you think because people didn't have enough money. They had to take it from something that was doing well. So Bari said if there was one moment, I might have caved. That was it when Joel Greenblatt was pressure games. He said Joel was like a godfather to me. Could you imagine an alternative path, which is easily imaginable where he was like, you know what, I'm out. I don't need this. Here's your money back. And so, Bari said, I hated discussing ideas with investors because then you become the defender of the idea and that influences your thought process.

Once you become an idea as defender, you had a harder time changing your mind about it. And he also wrote, a money manager. So we don't think about like the emotional toll that these ups and downs take on these people. He said a money manager does not go from being a near nobody to being nearly universally applauded to being nearly universally vilified without some effect. Yeah, again, I think this was so mentally taxing. And the people that think, like, in hindsight, oh, man, I wish I would have done something like that.

I could have made a ton of money. It was so hard. You can really get the feeling. And this was after the fact that they knew the outcome. These people still talked about, like, they had like a traumatic experience. And I mean, the best mic drop after it happened was Gotham didn't say anything to him after they made, they basically doubled their money. and he sent off an email that just said, you're welcome.

And he decided he was going to kick him out of the fund, and then they asked what the price would be because they took a stake in his actual hedge fund company. They gave him a million dollars to seat him. And he said, how about you keep the tens of millions you nearly prevented me from earning you last year and we called it even? Like such a mic drop. Like that, I mean, just like, see you later.

So one of the reasons why this was so hard, especially because nobody knew at the time or nobody could see the future, was that these instruments weren't working in the way that they thought. So you saw cracks in the housing market, but the credit default swaps weren't moving. So he said, what if credit default swaps are fraud? I'm asking myself that question all the time and never have I felt like I should be thinking that way more than now. No way we should be down 5% this year just in mortgage credit default swaps.

It basically sounds like the industry was so new that the banks didn't know what to price them. So even when subprime mortgages started falling 20, 30%, the CDOs weren't really falling as much. And the other crazy one, so they talked about Morgan Stanley had a credit default swap that like they, when they figured out how to price it, it was almost a certain to pay off. So they said for to pay back everything, a pool of losses in this subprime thing of mortgages. It only have to fall four, you know, four percent in terms of default, which is like less than what happened in a regular time period. And so like the hurdle rate for making money of these things was so small. But again, it just it wasn't easy for people under. standard at the time. So these credit default swaps were insurance on bonds defaulting. And basically, as we know now, they all did. So Michael Burry was paying two and a half percent for this. AIG underwrote the credit default swaps for 12 basis points. Right. I know. It's unbelievable. They were given this away for free. So Goldman was the underwriter. Pocket of the difference.

They would write $20 billion in credit default swaps and take $400 million in risk free profits. So that's why this just kept going and going and going and going because it was really what felt like risk-free money at the time. And obviously we know how it turned out that it wasn't risk-free money because these bank stocks pretty much all lost 90%. The funniest one to me about the banking thing was Eisman said they decided to short Merrill and they put zero due diligence in on it other than he said, we have a simple thesis. There's going to be a calamity and whenever there is a calamity, Merrill is there. Amazing. So when the market finally did start to crack, Michael Lewis is such a great writer. So he said it was the first time in two years that Goldman Sachs had not moved the trade against him at the end of the month. That was the first time they moved our marks accurately

because they were getting in on the trade themselves. That was Barry speaking. Here's Michael Lewis. The market was finally accepting the diagnosis of its own disorder. Right. And that was also you could see the turn where these banks finally realize, like, oh, we need to turn it around and not only put all this stuff, get all this stuff off of our books, but we need to start shorting this stuff too, which I think is Goldman was probably the first one to realize it. So it is crazy that nobody went to jail over this. Yes. I mean, I don't know how you would have litigated it and whatever, but like there was obviously

criminal activity in terms of were people just, was it actual criminal behavior or were they just idiots? Michael Lewis said there were more morons and crooks. but the crooks were higher up. Yes. And his other quote that I liked was the big Wall Street firm seemingly so shrewd and self-interested had somehow become the dumb money. And so he said at a first, Merrill said they had $7 billion in losses.

And like a few weeks later admitted, okay, it's actually $50 billion. Which they had, I mean, maybe they didn't know exactly, but they had to, that's a big difference, obviously. Yeah. So the Cornwall capital is another one that was, this is almost like a Silicon Valley story because these guys started the fund in their garage. And they had like $110,000 in a Charles Schwab account. And it grew a little bit because they were buying like these leaps, which are these very far out of the money call options on stocks.

And it grew their money a little bit. And they turned a million dollar bet into more than $80 million. And again, it's just these guys in their garage. And I think they were the ones that came off as the most scared. Like they were worried that the whole system was going to come down. And the crazy one to me was, so they, it says in March 2007, they bought insurance against a collapse for Bear Stearns for less than three-tenths of one percent. They put down 300 grand to make $105 million. Because again, it was the Bill Miller idea. Like, there's no way a company

like Bear Stearns that has been around for so long could ever possibly go under. So obviously, these things were ridiculously mispriced. Quote, the bookies were offering you odds of somewhere between six to one and ten to one when the odds of it working out felt more like two to one. Anyone in the business of making smarts bets couldn't not do it. I think honestly the biggest maybe criminals in all this, and this was in the latest Michael Lewis podcast as well about referees, is the rating agencies. And he said in late May, once they started to, once they started to realize like these things

are really going under, the big rating agencies, S&P and Moody's decided that they were going to reconsider their bond rating models. but they only started it for new, newly rated bonds. And so these guys from Cornwall Capital hired a lawyer and called Moody's and said, listen, if you're going to rate these new bonds like this, shouldn't you rate the old ones? And they wouldn't do it yet. So it was again, they were so far behind the eight ball. But I just don't see how that business model is still in play where they get paid by the actual bond issuers to come up with ratings on their own debt.

It just boggles a mind that nothing changed coming out of the crisis from that. Greg Lippman was one of the more colorful characters in the book. He was played by Ryan Gosling in the movie, right? Yeah. I think the movie's worth a rewatch. I only saw it when it came out. It was hard for me to, I didn't think that, I mean, the movie obviously didn't live up to the book for me, but it was, they had enough good actors in it. It was all right.

So towards the end, when it started crumbling down, he said to Morgan Stanley, because they were saying, well, our model show 77, our show 95. And he's like, it's 77. We see 95. He goes, dude, you owe us $1.2 billion. dollars. He was good. I mean, he's like the arrogant kind of guy you picture as a, like these other people that were profiled are kind of on the outskirts, but Lipman is like the finance guy. And so he said one of his Deutsche Bank colleagues said to him that he's going to call him chicken little now because he's talking about the end of the world. And Lipman said,

F you, I'm sure your house. The other one was, his other argument was he was pounding the table on this stuff. And I think he got a little bit of his intel from guys like Burry and Eisenman. But once he figured it out, he ran with it. And he really, like, put his foot on a gas pedal. Well, he also introduced this idea to John Paulson. And he was basically screaming about it to everybody that would listen. They were like, why are you trying to screw up your own bank? He's like, I don't care. I just work for Deutsche Bank. Like, I'm not married to them. And no one, no one would listen to him. So he said, you know, why is no one listened to me? And a lot of people would say, like, you're right. But it's not my job to short the subprime mortgage market.

And he kind of said, oh, wait, that's why this opportunity exists. it's no one's job to do this or understand this. So he had, didn't he find like the second smartest kid in China to run this analysis for him? Right. Yeah. You finally needed a little math behind it, but yeah, once it happened. So I guess the bottom line with all that, like there was math geniuses and Jim Grant hired

an engineer PhD to look at this and nobody could figure out what exactly was in these products. Right. Yeah. And that was the other one, the fact that even the bond rating agencies didn't have all the information when Isman and his team went to them and said, you know, give us some information on this that we can use. And they said, we have the same amount of information you do. And he's like, well, how do you rate these things if you don't have that? Wasn't there a story? I don't know if it was in the greatest trade ever or this book or the movie

where they were at like the U.S. Open and somebody said to one of the bank CEOs asked about these products and the bank CEO replied, what's a credit default swap? Right. So when I, in early 2007, I was kind of in the market for a new job. I was about to get married at the time and had a buddy who worked for a CDO servicer at a bank in Chicago. And he said, I know you're in the market for a new job. You're not really in banking, but come interview with us. I think it's a great job. People are making tons of money. And I went to this bank, and it was tons of young people. I mean, I'm talking, we're all under 30. We're all like the VPs of this CDO servicer. And I, again, I had no idea what a CDO was. I basically had to Google it.

And I told my friend that I'm like, I don't know what this is. And he said, no one here does either. But as long as you put a little work in and Google it, you know, just show that you're looking. Don't worry. Just Google it. And these guys were working 70, 80 hour weeks trying to service these things. And honestly, they had no idea what they were. And I got a job offer, but I turned it down because they told me, they asked, are you married?

And I said, no, I'm engaged. I'm going to be married in a few months. And they said, oh, that's probably not a good thing because he works so much here. And so ended up not working out. And boy, am I glad I didn't take that job because it was like six months later. Everything blew up and the whole unit basically was shut down. Wow. Yeah.

I just, the whole book kind of brought some flashbacks back to the whole thing. And it does kind of make you angry all over again at a lot of this stuff. But again, my biggest takeaway from an investing perspective was just how hard it had to be for these guys. So Burry said after he made his like $800 million in 2007, and basically her, heard nothing from his investors in terms of thanks. Like, oh, my Lord, I can't believe you did this for us. He said, even when it was clear that it was a big year and I was proven right, there was no triumph in it. Making money was nothing like I thought it would be. Great lesson. That's a lesson that probably people like, yeah, I'd like to figure that on my own. Yeah, right. But just all the,

everything coming at him from all sides and I think he kind of started shutting things down and probably would have liked to invest it more if he could have, but he just couldn't get the money from investors to do it. So a lot of these names on this list, a lot of people that made money from the big short, probably haven't fared so well in the ensuing 10 years since. Yeah, I mean, you see them in the headlines everyone in some while, you know, person who's short at the mortgage market is doing this now or this. And I think a lot of them seem to have kind of gone out of the spotlight a little bit and probably they just didn't need to do much more. But yeah, there aren't many people in the book who killed it who have killed it since, which makes sense. I

I guess. But, which just, again, show us how hard it is to do something like this and pull it off. It's almost that once in a lifetime thing. Like, when you win big of the casino, like walk out and get out of there. So when we spoke about doing this, I said, you know what, I'm not going to reread this. I already reread it. I'm just going to skim it. But it stuck me back in. I didn't finish the final two chapters. But this book is absolutely, I don't know if it's the best book in finance history. It's got to be up there, though. Yeah. I'm on total recency bias. mode here, but after reading it again, I think like just the combination of the storytelling, the characters involved, I think it's got to be the goat. I think if not the one,

then in the conversation, because it was just, yeah, it was just so good. This is like his masterpiece, I think. Yep. So, all right, I think that about wraps it up. Are we good, Ben? Yep. Yeah. Send us, send us any ideas and thoughts if you reread it with us. And send us some thoughts on some other books. Well, I'm sure we'll probably read some other Michael Lewis ones in the future but we're going to want to get to some other ones first. Yeah, we're not exactly sure what the format of this is going to be going to be going forward if it's going to be one every three weeks, one a month. This is a lot more work than I anticipated.

Yes, it is. I think that Bennett, I originally thought we would do this once every two weeks. That's not going to be possible. No. But we'll let people know ahead of time what books we're going to read. So if you want to read along with us, but we'll give you some fair warning. So anyway, send us an email, Animal Spearspot,com. We'll talk to you later.

Thank you.