The Big Short_ Inside the Doomsday Machine - Michael Lewis [84]
As an investor, Eisman was allowed to listen in on the quarterly conference calls held by Moody's, but not invited to pose questions. The people at Moody's were sympathetic to his need for more genuine interaction, however; and the CEO, Ray McDaniel, even invited Eisman and his team to his office for a visit, a gesture that forever endeared him to Eisman. "When are shorts welcome anywhere?" asked Eisman. "When you're short, the whole world is against you. The only time a company met me with complete knowledge that we were short was Moody's." After their trip to Las Vegas, Eisman and his team were so certain the world had been turned upside down that they just assumed Raymond McDaniel must know it, too. "But we're sitting there," recalls Vinny, "and he says to us, like he actually means it, 'I truly believe that our ratings will prove accurate.'" And Steve shoots up in his chair and asks, 'What did you just say?'--as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him. "With all due respect, sir," said Vinny deferentially, as they left, "you're delusional." This wasn't Fitch or even S&P. This was Moody's. The aristocrats of the rating business, 20 percent owned by Warren Buffett. And its CEO was being told he was either a fool or a crook, by Vincent Daniel, from Queens.
By early June the subprime mortgage bond market had resumed what would become an uninterrupted decline, and the FrontPoint positions began to move--first by thousands and then by millions of dollars a day. "I know I'm making money," Eisman would often ask. "So who is losing money?" They already were short the stocks of mortgage originators and the home builders. Now they added to their short positions in the stocks of the rating agencies. "They were making ten times more rating CDOs than they were rating GM bonds," said Eisman, "and it was all going to end."
Inevitably, their attention turned to the beating heart of capitalism, the big Wall Street investment banks. "Our original thesis was that the securitization machine was Wall Street's big profit center and it was going to die," said Eisman. "And when that happened, their revenues would dry up." One of the reasons Wall Street had cooked up this new industry called structured finance was that its old-fashioned business was every day less profitable. The profits in stockbroking, along with those in the more conventional sorts of bond broking, had been squashed by Internet competition. The minute the market stopped buying subprime mortgage bonds and CDOs backed by subprime mortgage bonds, the investment banks were in trouble. Right up until the middle of 2007, Eisman had not suspected that the firms were so foolish as to invest in their own creations. He could see that their leverage had increased dramatically, in just the past few years. He could of course see that they were holding more and more risky assets with borrowed money. What he could not see was the nature of their assets. Triple-A-rated corporate bonds, or triple-A-rated subprime CDOs? "You couldn't know for sure," he said. "There was no disclosure. You didn't know what they had on their balance sheet. You naturally assumed that they got rid of this shit as soon as they created it."
A combination of new facts, and actual human contact with the people who ran the big firms and the rating agencies, had stirred his suspicion. The first new fact had been HSBC's announcement, in February 2007, that it was losing a lot of money on its subprime loans, and a second announcement, in March, that it was dumping its subprime portfolio. "HSBC were supposed to be the good guys," said Vinny. "They were supposed to