The year was now 2002. There were no public subprime lending companies left in America. There was, however, an ancient consumer lending giant called Household Finance Corporation. Created in the 1870s, it had long been a leader in the field. Eisman understood the company well, he thought, until he realized that he didn’t. In early 2002 he got his hands on Household’s new sales document offering home equity loans. The company’s CEO, Bill Aldinger, had grown Household even as his competitors went bankrupt. Americans, digesting the Internet bust, seemed in no position to take on new debts, and yet Household was making loans at a faster pace than ever. A big source of its growth had been the second mortgage. The document offered a fifteen-year, fixed-rate loan, but it was bizarrely disguised as a thirty-year loan. It took the stream of payments the homeowner would make to Household over fifteen years, spread it hypothetically over thirty years, and asked: If you were making the same dollar payments over thirty years that you are in fact making over fifteen, what would your “effective rate” of interest be? It was a weird, dishonest sales pitch. The borrower was told he had an “effective interest rate of 7 percent” when he was in fact paying something like 12.5 percent. “It was blatant fraud,” said Eisman. “They were tricking their customers.”
And:
...[Eisman] attended a lunch organized by a big Wall Street firm. The guest speaker was Herb Sandler, the CEO of a giant savings and loan called Golden West Financial Corporation. “Someone asked him if he believed in the free checking model,” recalls Eisman. “And he said, ‘Turn off your tape recorders.’ Everyone turned off their tape recorders. And he explained that they avoided free checking because it was really a tax on poor people—in the form of fines for overdrawing their checking accounts. And that banks that used it were really just banking on being able to rip off poor people even more than they could if they charged them for their checks.”
Eisman asked, “Are any regulators interested in this?”
“No,” said Sandler.
“That’s when I decided the system was really, ‘Fuck the poor.’”
And:
Instead of money, Eisman attracted people, whose views of the world were as shaded as his own. Vinny, who had just coauthored a gloomy report called “A Home without Equity Is Just a Rental with Debt,” came right away. Porter Collins, a two-time Olympic oars-man who had worked with Eisman at Chilton Investment and never really understood why the guy with the bright ideas wasn’t given more authority, came along too. Danny Moses, who became Eisman’s head trader, came third. Danny had worked as a salesman at Oppenheimer and Co. and had pungent memories of Eisman doing and saying all sorts of things that sell-side analysts seldom did. In the middle of one trading day, for instance, Eisman had walked to the podium at the center of the Oppenheimer trading floor, called for everyone’s attention, announced that “the following eight stocks are going to zero,” and then listed eight companies that indeed went bankrupt. Raised in Georgia, the son of a finance professor, Danny was less openly fatalistic than Vinny or Steve, but he nevertheless shared a general sense that bad things can and do happen, especially on Wall Street. When a Wall Street firm helped him to get into a trade that seemed perfect in every way, he asked the salesman, “I appreciate this, but I just want to know one thing: How are you going to fuck me?”
Heh-heh-heh, c’mon, we’d never do that, the trader started to say, but Danny, though perfectly polite, was insistent.
We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to fuck me. And the salesman explained how he was going to fuck him. And Danny did the trade.
More (#2) from The Big Short:
And:
And: