Courtesy of Pam Martens
Steve Eisman is one of the central characters in the Michael Lewis bestselling book, The Big Short. In the movie of the same name, Steve Carell portrays Eisman’s role under the name Mark Baum. During the financial crisis of 2008, Eisman was working for FrontPoint Partners LLC, a hedge fund unit of Morgan Stanley which has been widely acknowledged to have made a boatload of money shorting subprime collateralized debt obligations (CDOs) filled with subprime residential mortgages. In other words, Eisman and FrontPoint were hoping to profit on American homeowners being unable to pay their tricked-up mortgages and being thrown out on the street.
But according to Lewis, Eisman was not just shorting subprime drek – he was also shorting the teetering Wall Street banks, which were, by the way, holding trillions of dollars in Federally insured deposits of Moms and Pops across America.
Lewis writes in his book that during the financial crisis Eisman, while at FrontPoint, “shorted Bank of America, along with UBS, Citigroup, Lehman Brothers, and a few others.” Lewis notes further that “They weren’t allowed to short Morgan Stanley because they were owned by Morgan Stanley, but if they could have, they would have.”
What is particularly nuts about this is that at the time Morgan Stanley was one of the most interconnected investment banks on Wall Street, holding $39 trillion notional in derivatives as of the end of the first quarter of 2009 according to the Office of the Comptroller of the Currency (OCC). Only JPMorgan Chase, Bank of America and Goldman Sachs had a bigger derivatives book at the time.
When you are sitting on that kind of a derivatives book you are also sitting on a viper’s nest of interconnectedness. If one of the banks you are shorting goes under and it is a major derivatives counterparty (which they all were) it will create a daisy chain of catastrophic losses across Wall Street.
What is also particularly inexplicable about this is that while Morgan Stanley’s own hedge fund was shorting the hell out of subprime and the Wall Street banks, the Federal Reserve was secretly infusing $16 trillion cumulatively in secret loans to shore up the Wall Street banks, including $2.04 trillion in revolving loans to Morgan Stanley. (See Table 8 of the GAO report here.) Only the teetering Citigroup received more aid from the Fed.
…
