Michael Lewis has a really good portfolio piece outlining the financial crisis and specifically telling the story of Steve Eisman whose firm FrontPoint Partners put their money where their mouth was and shorted just about everything mortgage related.
Anyway, the article is a well written narrative through Eisman’s eyes as he uncovered just how bad each level of the mortgage crisis actually was. The kicker quote to me, though, came as part of a conversation with John Gutfreund, former boss of Solomon Brothers who brought the company public (also prominently featured in Lewis’s Liar’s Poker).
Anyway, here’s what Lewis wrote: “He thought the cause of the financial crisis was ‘simple. Greed on both sides—greed of investors and the greed of the bankers.’ I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.” This is actually something I’ve thought a great deal about as I’ve seen people blame greed for the crisis. Whoever sets regulations needs to understand that people will be greedy and deal with it accordingly. The fact that incentives for greed were put in place, which Lewis outlines, is the fault of the government. Or, as Eisman puts it in one of the turning points of the story when he realizes that the investment banks were actually creating more crappy bonds with his short money, “This is allowed?”