Steve Eisman, the 'big short' investor who bet on the crash

New York

THE global financial crisis devastated American communities, wiped out savings and brought banking giants to their knees.

But it also enriched a handful of investors who had bet that the financial house of cards behind American real estate lending would collapse.

Steve Eisman is among this exclusive circle of Wall Street Cassandras, with a bank account and investment portfolio that grew as bankruptcies piled up among homeowners who had taken out adjustable-rate subprime mortgages.

His audacious gamble is recounted in the 2015 movie The Big Short, in which the actor Steve Carell plays Mark Baum, a fictionalised version of Mr Eisman. Between 2004 and 2007, Mr Eisman, who is married to an ex-banker, ran an investment portfolio at the hedge fund FrontPoint Partners.

His job was to invest wealthy clients' money in the banking sector, which was riding high on the success of lending to higher-risk, or "subprime", borrowers. The banks spread this risk across the world, selling pieces of it in the form of complex instruments known as collateralised debt obligations, or CDOs, and securities backed by residential mortgages.

But, even with a Harvard Law degree, Mr Eisman understood little about such exotic financial products with bewildering acronyms. And at a 2004 conference in Las Vegas, he learned he was not the only one. He soon learned, after travelling next to Florida, California, Nevada and Arizona, epicenters of the subprime crisis, about the loose lending standards applied by mortgage originators and banks.

With greying hair and a square, athletic build, the middle-aged financier's frank talk contrasts sharply with the typical Wall Street jargon.

"How could someone make a mortgage loan when the customer can only afford to pay for the first three years?" he asked during an interview at the Manhattan offices of Neuberger Berman, his new employer.

He reached out to the ratings agency Standard & Poor's, which had stamped its vaunted "AAA" rating, the highest possible, on CDO and RMBS (residential mortgage-backed securities) assets. They said their models did not include negative scenarios. But Mr Eisman identified a set of dubious loans and decided to bet they would fall, convincing Goldman Sachs and Deutsche Bank to issue Credit-Default Swaps, which are insurance policies against borrower defaults. "When you are short, the whole world is against you," he said.

Early in 2007, mortgage defaults began to pile up as investors who had been speculating that real estate prices would rise suddenly pulled out, causing prices to tumble.

In eight months, 84 real estate lenders in the United States went bankrupt. But the value of Mr Eisman's portfolio powered higher, rising from US$700 million to US$1.5 billion and higher. "I told someone I felt like Noah," he said, referring to the Biblical patriarch who foresaw the global flood. "Do you think Noah was happy?"

In Mr Eisman's view, the guilty ones are the bankers and traders convinced of their own omniscience. "It's very hard to argue with someone who thinks he is God because he makes a lot of money," said Mr Eisman.

Now one of the most influential voices on Wall Street, Mr Eisman is also a fierce critic of former Federal Reserve chairman Alan Greenspan, a longtime proponent of deregulation.

Prior to reforms enacted in 2010, regulators had two tasks: keeping the banking system sound and protecting consumers from bad actors in the financial sector, said Mr Eisman. "They did as bad a job as anybody could do anything in the history of planet earth," he said.

Others frequently ask what the next "big short" will be, Mr Eisman says, but "the truth is I simply do not have an answer and do not want to have an answer to this question".

"For the first time in my working life, which is more than 30 years, I would regard the financial system as safe," he said, adding that he had recently bought bank stocks. But he cannot say the same for banks across the Atlantic. "The European banking system remains undercapitalised," said Mr Eisman. AFP