What I Learned Calling the Greatest Financial Crisis of Our Time
People often ask how I ended up on Wall Street and how I became associated with the biggest financial crisis in modern history. It wasn’t planned. In fact, the whole thing started in a converted closet at Oppenheimer in 1991. I had gone to law school at Harvard, clerked for a federal judge, then joined a corporate law firm where I quickly discovered something important about myself. To be a great corporate lawyer, you need to be extremely detail oriented. I am the opposite of that. I was miserable.
So when the chance to escape came, I took it. An investment banker walked into my tiny office one day and asked if I knew anything about subprime mortgages. I told him I had worked on securitization documents for the Money Store. What I didn’t tell him was that all I ever did was proofread. He hired me anyway. That moment set the course for the next three decades of my life.
Learning the Game
I started out covering mortgage companies. Eventually I taught myself how to model, picked up the mutual fund industry because it was easy to understand, and over the years I expanded into subprime auto, Fannie, Freddie, Sallie Mae, asset managers, investment banks, credit cards, and whatever else I could get my hands on. I wanted to learn.
In 2000 I moved to the buy side. Three years later I was recruited by FrontPoint to run a financial services hedge fund. That’s where the financial crisis story really begins.
What Most People Missed About the Crisis
Everyone remembers the housing bubble. Fewer understand that the problems threatening to collapse the global financial system were not equity problems. They were fixed income problems. They were bond problems. This entire disaster existed in the plumbing of the debt markets.
Four things caused the crisis, and if you understand these four things, you pretty much understand everything.
Too much leverage
A massive asset class blows up
Systemically important institutions own that asset class
Derivatives tie everyone together in ways no one can unwind
The first three show up in almost every financial disaster throughout history. The fourth was new. Derivatives, especially credit default swaps, were the accelerant that turned a major fire into an inferno.
How Derivatives Tied the Planet Together
Credit default swaps sound technical, but the idea is simple. They are insurance on debt. When one institution buys a CDS from another, their balance sheets become tied together. Multiply this across the entire global financial system and you get a spiderweb of exposures so complex that no one could map it. This is why AIG was bailed out. If AIG failed, all of Wall Street failed with it.
The Fraud No One Went to Jail For
People often ask who was responsible. The answer is everyone had a hand in it.
Lenders abandoned underwriting standards.
Wall Street abandoned ethics.
Ratings agencies abandoned integrity.
But the biggest fraud happened inside the securitization machine itself.
Wall Street firms bought loans from subprime originators without reviewing the files. They hired Clayton Mortgage to review a small sample. Clayton often found that a huge percentage of sampled loans violated the firms' own underwriting standards. Instead of forcing a full review, the banks simply returned those specific sampled loans and securitized the remaining billions anyway. Nobody checked the rest. Investors were never told.
When the Financial Crisis Inquiry Commission exposed this, I was sure people would go to jail. No one did. Not a single CEO. Not a single executive. Nothing.
Why We Knew It Would Collapse
People thought my team and I were crazy for shorting subprime. What kept us grounded was the data. Every month the securitization market dumped enormous amounts of loan performance data. It was like receiving stone tablets from the mountain. We could literally see delinquencies accelerating in real time.
And we saw how the entire bond structure worked. Losses flowed upward through layers like water flooding the floors of a building. If the lower floors were underwater, the upper floors would follow. The math was obvious once you understood it.
I did have anxiety. A lot of it. I used to watch Star Trek Deep Space 9 every day at lunch just to keep from losing my mind. But the data told the truth, month after month.
What Vindication Felt Like
August 2007 was the moment. I was in Nantucket with my family. My wife looked around the island and said something feels strange. There were no men anywhere. They had all flown back to New York. They wanted to watch the end. That’s when I knew we were right.
Lessons for Today
People ask if I’m bullish or bearish on the US economy. I am bullish. Not because things are perfect but because the United States remains the most dynamic economy on earth. Nvidia just passed 5 trillion in market cap. Apple and Microsoft are past four. Europe’s largest company isn’t even at half a trillion.
We do have a K shaped economy. AI is driving unbelievable growth at the top while other parts of the country struggle. Capex spending from the major tech companies is the engine of this market. If that slows dramatically, the market will correct. Until then, the story continues.
What Young People Should Know
When I was lost as a young lawyer, my wife and I went to get tested for natural attributes. Not intelligence, but what we were wired for. I learned I generate ideas but I am not detail oriented. That insight changed my life.
So here’s my advice for anyone starting a career in finance.
Figure out your attributes.
Not what you wish you were.
What you actually are.
If you are a math person, go to fixed income.
If you are a story person, go to equities.
And don’t try to be a round peg in a square hole.
My Small Contribution to The Big Short
People ask whether I was involved in the movie. I wasn’t, except for one word. In an early scene, Steve Carell is about to get a cab and someone tries to cut him off. The original script had him saying “That’s my cab, asshole.” I walked over to Adam McKay and suggested the word schmuck. They kept it. And that is my only artistic influence in the film.
The rest is just the legend. And if you’ve seen The Man Who Shot Liberty Valance, you know what they say.
When the legend becomes fact, print the legend.
Until next time, this is Steve Eisman, and this has been The Real Eyesman Playbook. .
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This post is for informational purposes only and does not constitute investment advice. Please consult a licensed financial adviser before making investment decisions.
