@paddyb just tweeted an absolutely superb piece written by Michael Lewis about The End (of Wall Street’s Boom) that anyone with even the mildest curiosity about why the investment banking sector is imploding will enjoy, though maybe ‘enjoy’ isn’t the right word to use in this context given the consequences for us all.
Of course the investment bankers are primarily to blame but the rating agencies didn’t exactly cover themselves in glory in recent years. One particular paragraph from the article really sticks in my head:
But he couldnâ€™t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. â€œI didnâ€™t understand how they were turning all this garbage into gold,â€ he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. â€œWe always asked the same question,â€ says Eisman. â€œWhere are the rating agencies in all of this? And Iâ€™d always get the same reaction. It was a smirk.â€ He called Standard & Poorâ€™s and asked what would happen to default rates if real estate prices fell. The man at S&P couldnâ€™t say; its model for home prices had no ability to accept a negative number. â€œThey were just assuming home prices would keep going up,â€ Eisman says.
(That Steve Eisman guy seems like a legend, his career history in the article is class)
Michael Lewis is the author of Liars Poker, a book I first read many moons ago when I was working for Iona Technologies. The book is superb if even for only for bringing terms like Big Swinging Dick into the common vernacular. Funnily enough, I bought the book in Dublin airport back in ‘97 while on my way to Wall Street to train up a bunch of IT guys in a large investment bank (right across the road from the US Stock Exchange) on using Orbix and OrbixWeb as the middleware for some of some new internal systems. I had the book finished long before the week was out and it turned into a pretty lively topic of conversation when the guys on the course saw it on my desk one morning.
Ah, they were the good days, unfortunately the investment bank bull appears to be about to be slaughtered.
Anyway, what was the point of this post? Oh yeah, Irish default rates – does anyone truly believe that they will stay as low as the 1-1.5 point levels that the Irish bank management teams are publicly quoting?
I wish there was a ‘zero probability’ smiley I could tack onto the end of this post.