"Heist of the century: Wall Street's role in the financial crisis"

[applegrove]

Heist of the century: Wall Street's role in the financial crisis

Charles Ferguson at The Guardian

http://www.guardian.co.uk/business/2012/may/20/wall-street-role-financial-crisis

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Here, I must briefly mention a problem with Michael Lewis's generally superb financial journalism. In his book The Big Short, Lewis leaves the impression that Wall Street was blindly running itself off a cliff, whereas a few wild and crazy, off-the-beaten-track, adorably weird loners figured out how to short the mortgage market and beat the system. With all due respect to Mr Lewis, it didn't happen like that. The Big Short was seriously big business, and much of Wall Street was ruthlessly good at it.

To begin with, a number of big hedge funds figured it out. Unlike investment banks, however, they couldn't make serious money by securitising loans and selling CDOs (collateralised debt obligations), so they had to wait until the bubble was about to burst and make their money from the collapse. And this they did. Major hedge funds including Magnetar, Tricadia, Harbinger Capital, George Soros, and John Paulson made billions of dollars each by betting against mortgage securities as the bubble ended, and all of them worked closely with Wall Street in order to do so.

In fairness to Mr Lewis, it is true that in several major cases – most notably Citigroup, Merrill Lynch, Lehman and Bear Stearns – senior management was indeed disconnected and thus clueless, allowed their employees to take advantage too long and therefore destroyed their own firms.

But cluelessness was most definitely not an issue with the senior management of Goldman Sachs, JPMorgan Chase and Morgan Stanley. As we saw, Morgan Stanley started betting against the bubble as early as 2004. Conversely, JPMorgan Chase mostly just remained prudently above the junk mortgage fray. Goldman Sachs, though, was in a class by itself. It made billions of dollars by betting against the very same stuff that it had been making billions selling only a year or two before.

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