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A Wall Street Trader Draws Some Subprime Lessons: Michael Lewis
By Michael Lewis


Sept. 5 (Bloomberg) -- So right after the Bear Stearns funds blew up, I had a thought: This is what happens when you lend money to poor people.

Don't get me wrong: I have nothing personally against the poor. To my knowledge, I have nothing personally to do with the poor at all. It's not personal when a guy cuts your grass: that's business. He does what you say, you pay him. But you don't pay him in advance: That would be finance. And finance is one thing you should never engage in with the poor. (By poor, I mean anyone who the SEC wouldn't allow to invest in my hedge fund.)

That's the biggest lesson I've learned from the subprime crisis. Along the way, as these people have torpedoed my portfolio, I had some other thoughts about the poor. I'll share them with you.

1) They're masters of public relations.

I had no idea how my open-handedness could be made to look, after the fact. At the time I bought the subprime portfolio I thought: This is sort of like my way of giving something back. I didn't expect a profile in Philanthropy Today or anything like that. I mean, I bought at a discount. But I thought people would admire the Wall Street big shot who found a way to help the little guy. Sort of like a money doctor helping a sick person. Then the little guy wheels around and gives me this financial enema. And I'm the one who gets crap in the papers! Everyone feels sorry for the poor, and no one feels sorry for me. Even though it's my money! No good deed goes unpunished.

2) Poor people don't respect other people's money in the way money deserves to be respected.

Call me a romantic: I want everyone to have a shot at the American dream. Even people who haven't earned it. I did everything I could so that these schlubs could at least own their own place. The media is now making my generosity out to be some kind of scandal. Teaser rates weren't a scandal. Teaser rates were a sign of misplaced trust: I trusted these people to get their teams of lawyers to vet anything before they signed it. Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default.

3) I've grown out of touch with ``poor culture.''

Hard to say when this happened; it might have been when I stopped flying commercial. Or maybe it was when I gave up the bleacher seats and got the suite. But the first rule in this business is to know the people you're in business with, and I broke it. People complain about the rich getting richer and the poor being left behind. Is it any wonder? Look at them! Did it ever occur to even one of them that they might pay me back by WORKING HARDER? I don't think so.

But as I say, it was my fault, for not studying the poor more closely before I lent them the money. When the only time you've ever seen a lion is in his cage in the zoo, you start thinking of him as a pet cat. You forget that he wants to eat you.

4) Our society is really, really hostile to success. At the same time it's shockingly indulgent of poor people.

A Republican president now wants to bail them out! I have a different solution. Debtors' prison is obviously a little too retro, and besides that it would just use more taxpayers' money. But the poor could work off their debts. All over Greenwich I see lawns to be mowed, houses to be painted, sports cars to be tuned up. Some of these poor people must have skills. The ones that don't could be trained to do some of the less skilled labor -- say, working as clowns at rich kids' birthday parties. They could even have an act: put them in clown suits and see how many can be stuffed into a Maybach. It'd be like the circus, only better.

Transporting entire neighborhoods of poor people to upper Manhattan and lower Connecticut might seem impractical. It's not: Mexico does this sort of thing routinely. And in the long run it might be for the good of poor people. If the consequences were more serious, maybe they wouldn't stay poor.

5) I think it's time we all become more realistic about letting the poor anywhere near Wall Street.

Lending money to poor countries was a bad idea: Does it make any more sense to lend money to poor people? They don't even have mineral rights!

There's a reason the rich aren't getting richer as fast as they should: they keep getting tangled up with the poor. It's unrealistic to say that Wall Street should cut itself off entirely from poor -- or, if you will, ``mainstream'' -- culture. As I say, I'll still do business with the masses. But I'll only engage in their finances if they can clump themselves together into a semblance of a rich person. I'll still accept pension fund money, for example. (Nothing under $50 million, please.) And I'm willing to finance the purchase of entire companies staffed basically with poor people. I did deals with Milken, before they broke him. I own some Blackstone. (Hang tough, Steve!)

But never again will I go one-on-one again with poor people. They're sharks.

lol

It is about time someone came out and said those things!

As a mail carrier, I am aware of the comings and goings in terms of home owners in the area. You would be shocked by the number of people moving into their new homes who are receiving unemployment insurance within six months, and then the obvious mailings from the bankruptcy court.

While the author of the piece may have been investing in a speculative area, the lawyers that were running these funds should be strung up for ever making many of these loans to folks who would obviously be unable to maintain payments. It was not only disgusting to raise the hopes of these folks that were looking at having their first homes, but it was also a breech of trust with the investors who were funding these loans, because the money managers first responsibility was to look to make that invested money grow.

Tasking their cuts via commissions or whatever and leaving everyone else holding the bag has got to be a violation of some law or other. Fry the suckers!!!

I like the opinion piece tho'!

If you want to know something .... ask the postal guy :)

I always treat my mail carrier, UPS, DHL and others with a ton of respect.... they can screw my life up majorly if they wanted to :)

Oh man thats so true. I have 7 roomates, and since I run the business out of my own house I need to make sure I get all of my mailings and shit (and payments) pretty immediately. Too many times my neighbors were losing stuff so I made my own mailbox and my mailman pulls my stuff out and puts it aside for me - in exchange for water bottles (or popsicles on hot days) when I'm home and I once gave him a spoon when he forgot his for his yogurt.

But back on topic, I have 7 roomates. I gotta get the hell out of here, but properties in this area cost $300,000+ for a 2 bedroom condo. The past 5 years of the "bubble" you had to wonder HOW people were affording ridiculously priced things. Truth is, they weren't able to afford it. Some people made tons of money, other people are losing their homes.

The question is these people getting foreclosed on - do they even get their down payments back or any portion of the money they put into the mortgage? Or do they really "lose everything"?

They lose everything! Then, they are taxed by the IRS for what they borrowed for their home since it is an unpaid loan it is considered taxable income even though the lender gets to sell the home and keep ALL of the monies.

Actually one of the biggest problems was not so much the "teaser rates" but the last minute "oh the terms of your mortgage has changed" which left most people with no choice but to sign on the dotted line because they had no place to go as their apartment or house was now rented or sold and I truly believe the lenders knew what they were doing.

When I bought my house in 2005 the amount of my closing costs kept changing right up to the last minute and these were not "minor" fluctuations, but were $10000.00 to $20000.00 fluctuations with one being set and I drove to the bank (less than 5 minutes away) and Squish calls me at the bank as I'm getting the check to tell me I needed to increase the amount by $14000.00.

GI Home Loan saved me that headache; no closing costs, or anything. I actually left the closing with a check for my earnest money.


(And a p.s.: when you look at the name and address on a piece of mail to ensure you are delivering to the right home, it is almost impossible not to notice where it is coming from):o

Interesting piece.

The guy sounds like an ignorant, stuck up prick, but interesting nonetheless.

Generalizations are fun, I guess.

Interesting piece.

The guy sounds like an ignorant, stuck up prick, but interesting nonetheless.

Generalizations are fun, I guess.

I think it was meant to be funny, Halo.
But the lending practices of the past few years have been 1 of the main reasons the housing sector is dumping out now.
Remember when it was a "Seller's Market"? People were making hand over fist ammts of money selling crappy pieces of real estate.
Now you can hardly give a house away....

Houses in my neighborhood are still selling well, and without a noticable drop in pricing. We live in a neighborhood that's approximately 25 years old, so it's not all new builds. I think one of the biggest problem now in selling a house is the amount of new builds being foreclosed that look exactly like every other house in certain rapidly growing suburban neighborhoods. Why buy a house that looks exactly like your neighbors, when you can build one for the same price or a bit less and customize a bit? Otherwise buy in a slightly older neighborhood where the trees are mature and the houses vary a bit in appearance.

I am glad to see the houses in our neighborhood still selling as my wife wants to move back near her parents (Indianapolis, IN, the most economical major metropolitan housing market in the country) within the next 3-5 years.

Halo..

Look at the title of the thread...


Author = Swift poor = Irish

The home values are still inflated. Very few mortguages are actually negatively amortized at this point. When a bank forcloses, they sell the house for much less than market value but hopefully for more than the outstanding amount of the loan. The loan gets paid off and there may be some extra for the homeowner. If the sale price of a foreclosure is actually less than the loan amount, then the person is screwed, because the bank will probably put the screws to them.

A 100,000 house in DC like 10 years ago is 2+ million now. If you want to make money invest in properties in Southeast around the new stadium and progressively further - the entire city is becoming gentrified at a very rapid pace.

Another thing to watch for are the interest only loans. Where people pay their mtg payments but aren't breaking into the principal. Those will generally get people into trouble. They don't realize that there are 2 sides to the equation. It may be worth $300k according to appraisals and tax assessments, but someone may only pay $250k for it, and if that is what you paid for it, or less 2-3 years ago you're screwed. So the only option is to let it go back and consider that monthly payment as your rent payment. This happens too because values get overinflated and when the market drops people take it in the shorts when they don't pay into principal.

Another thing to consider on this subject is that those things which are foreclosed on: How many people take care of their house or car for that matter when they know they are going to be losing it? That's right not many. I've been working in the financial industry for 14 years. There's only been one time where we got MORE than what the collateral was worth, and a check was cut back to the borrower for that. Oh and by the way, when something is foreclosed/repossessed, everyone loses. The borrower, the financial and ALL the people who do business with that financial. That's right the guy who wasn't even part of the foreclosure, just happened to do their business at a place that lends money. We pay it in higher costs, such as fees, lower CD/IRA rates, higher loan rates.

Just some food for thought. While this guys sarcasm and joking opinion kinda sucks there is some merit to it. Not that the rich need to get richer or that the poor need to stay poor, but the actions of others affect all of us in one way or another.

BTW as a consumer you always have the power. If someone is applying high pressure tactics or wants you to sign without reading stuff, walk away. I've have seen and talked with too many people who've been screwed, and all I can do is try and help them with better rates/terms/etc. But once they've signed alot of times they are married to it. :(

A 100,000 house in DC like 10 years ago is 2+ million now. If you want to make money invest in properties in Southeast around the new stadium and progressively further - the entire city is becoming gentrified at a very rapid pace.

No can do my friend. A 2 bedroom condo near the stadium is $350k+. They've jacked the prices really high expecting the neighborhood to turn. Actually our old coke lovin' mayor is starting to raise a stink about the lack of low cost housing over there.

What I'm gonna try to do is get my buddy to go in on a 3 or 4 bedroom place with me and just rent out 2 of the rooms to help cover the mortgage cost. Then when I am richer I can kick them out and have room for my kids and/or mistresses.

The scary part is that we're really only on the cusp of this thing. The largest chunk of sub-primes aren't up for refinance until Q3-4 2008.

Just some food for thought. While this guys sarcasm and joking opinion kinda sucks there is some merit to it. Not that the rich need to get richer or that the poor need to stay poor, but the actions of others affect all of us in one way or another.
No kidding. Those of us who live within our means are about to get massively screwed over by those morons that over-bought and lived relatively extravagantly for the past few years.

When I bought my house in 2005 the amount of my closing costs kept changing right up to the last minute and these were not "minor" fluctuations, but were $10000.00 to $20000.00 fluctuations with one being set and I drove to the bank (less than 5 minutes away) and Squish calls me at the bank as I'm getting the check to tell me I needed to increase the amount by $14000.00.

Closing costs that are 10-20k? WTH are you closing on! Thats rediculous or maybe I am missunderstanding something here but closing costs are generally under 5K.

'Halo..

Look at the title of the thread...


Author = Swift poor = Irish'


- Hmm. I r st00pid.

A lot of it was stupid predatory lending. If a company targets people with bad credit and gets them to over extend themselves, the company has to share part of the blame.

Nobody had a gun to these mortgage companies head telling them to lend to these high risk people, yet now there is absolute SHOCK that they are defaulting on these loans enmasse.

Corporate Greed as much as anything else strikes again.

Closing costs that are 10-20k? WTH are you closing on! Thats rediculous or maybe I am missunderstanding something here but closing costs are generally under 5K.

I bought my house from a guy who owned the biggest Dodge/Chrysler dealership in this part of PA he sold out, retired and moved to California. I should have been more specific it was the balance of my down payment and closing costs. What they were doing was playing with the down money mostly.

I'll dig my contract up and let you know what the monies were exactly for as I'm now curious and wondering myself.

VA Home loan FTW!