The Big Short_ Inside the Doomsday Machine - Michael Lewis [55]
In early 2003 Cornwall Capital had just opened for business, which meant Jamie and Charlie spent even more hours of their day than before sitting in the Berkeley garage--Charlie's bedroom--shooting the shit about the market. Cornwall Capital, they decided, would not merely search for market inefficiency but search for it globally, in every market: stocks, bonds, currencies, commodities. To these two not so simple ambitions they soon added a third, even less simple, one, when they stumbled upon their first big opportunity, a credit card company called Capital One Financial.
Capital One was a rare example of a company that seemed to have found a smart way to lend money to Americans with weak credit scores. Its business was credit cards, not home loans, but it dealt with the same socioeconomic class of people whose home loan borrowing would end in catastrophe just a few years later. Through the 1990s and into the 2000s, the company claimed, and the market believed, that it possessed better tools than other companies for analyzing the creditworthiness of subprime credit card users and for pricing the risk of lending to them. It had weathered a bad stretch for its industry, in the late 1990s, during which several of its competitors collapsed. Then, in July 2002, its stock crashed--falling 60 percent in two days, after Capital One's management voluntarily disclosed that they were in a dispute about how much capital they needed to reserve against potential subprime losses with their two government regulators, the Office of Thrift Supervision and the Federal Reserve.
Suddenly the market feared that Capital One wasn't actually smarter than everyone else in their industry about making loans but simply better at hiding their losses. The regulators had discovered fraud, the market suspected, and were about to punish Capital One. Circumstantial evidence organized itself into what seemed like a damning case. For instance, the SEC announced that it was investigating the company's CFO, who had just resigned, for selling his shares in the company two months before the company announced its dispute with regulators and its share price collapsed.
Over the next six months, the company continued to make money at impressive rates. It claimed that it had done nothing wrong, that the regulators were being capricious, and announced no special losses on its $20 billion portfolio of subprime loans. Its stock price remained depressed. Charlie and Jamie studied the matter, which is to say they went to industry conferences, and called up all sorts of people they didn't know and bugged them for information: short sellers, former Capital One employees, management consultants who had advised the company, competitors, and even government regulators. "What became clear," said Charlie, "was that there was a limited amount of information out there and we had the same information as everyone else." They decided that Capital One probably did have better tools for making subprime loans. That left only one question: Was it run by crooks?
It wasn't a question two thirty-something would-be professional investors in Berkeley, California, with $110,000 in a Schwab account should feel it was their business to answer. But they did. They went hunting for people who had gone to college with Capital One's CEO, Richard Fairbank, and collected character references. Jamie paged through the Capital One 10-K filing in search of someone inside the company he might plausibly ask to meet. "If we had asked to meet with the CEO, we wouldn't have gotten to see him," explained