The movie Big Short is based on actual events that happened during the 2008 crisis. All the characters in the movie are based on real people. Previously, we explained who the real-life Jared Vennett is? One of the central characters in the movie is Mark Baum. Mark Baum’s character was based on the real-life Steve Eisman.
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Mark Baum History
Before becoming a hedge fund manager, Steve Eisman initially worked as a corporate lawyer. His parents were working as brokers at Oppenheimer Securities, and they told Steve that if he wanted to learn about Wall Street, then the best way was to work as an equity analyst.
Eismann started to work as an equity analyst. As an equity analyst, it was his job to analyze stocks or securities, evaluate them, and provide insights on publicly traded companies and their stocks. So his primary role was to research, analyze, and make recommendations about stocks and investments to help investors, fund managers and financial institutions make informed decisions.
When Steve Eismann started working as an equity analyst, nobody on Wall Street cared about the opinions of the equity analysts, but Steve Eismann was different, and he was known to make noise.
While working as an analyst, he came across one company that used to give loans to people who were not financially stable. Basically, the company was in the business of subprime mortgage lending.
Eisman studied the company and gave it a sell, or you can say a negative rating. Everyone on the Wall Street did not believe him, but eventually that company went bankrupt. Since that point, Eisman has been very well known on Wall Street.
Mark’s Contrarian approach
Steve Eisman was not afraid of going against the crowd and public opinion since the start of his career. This same trait helped Steve Eisman foresee the issues in subprime mortgage lending that led to the 2008 financial crisis.
Since the beginning, Eismann knew that there was something wrong with the subprime housing market, but he wasn’t sure what exactly it was.
Hiring Vinny Daniels
When Eismann hired Vinny Daniels, he told Vinny to research the subprime market and figure out what exactly was wrong with it. Vinny did not understand the housing market at the beginning, so it took him six months to study the market. When he was done with his research, he found all these companies lending money to risky borrowers were growing super fast, but their earnings were mostly based on accounting tricks. They were like Ponzi schemes, needing more and more money to keep going.
In 1997, right in the middle of the economic boom in the US. Eisman wrote a report based on Vinny’s findings. In that report, he blasted all those companies. Nobody on Wall Street believed Eisman’s report, but many companies that Eisman bashed in his report went bankrupt in the next year, and Eisman again proved himself as someone who goes against public opinion.
After learning about the subprime housing market, Eisman decided to start his own fund, but initially, he couldn’t find anyone to invest with him. After lots of struggle, he found an insurance company that gave him $50 million. It was not great, but at least it was a start for Eisman. As Eisman had a different way of thinking than everybody else on Wall Street, he also attracted people in his team who shared his enthusiasm.
Subprime lending market problems
The subprime lending market was all about lending to people with lower credit scores. In 1990, this market was a $30 billion industry, but by 2005, it had become a $625 billion industry. This was alarming because it meant a massive amount of money was being lent to high-risk borrowers, and the terms of these loans were becoming even riskier as more of them had adjustable interest rates, making it unclear how much borrowers would owe in the future. This surge in subprime lending was happening even as interest rates were rising, which defied logic and raised concerns about the financial system’s stability.
When banks were offering these loans to high-risk borrowers and when these borrowers couldn’t repay these loans. Instead of learning from this and not giving out any more bad loans, the banks started giving more of these loans to such borrowers and then selling them to the big banks on Wall Street. Banks like Lehman Brothers, Morgan Stanley, Bear Stearns bought these loans. As Eisman understood the housing market and was also familiar with the Wall Street banks, he had a gut feeling that the subprime market industry was going to collapse.
Mark Baum meets Jared Vennett
When Jared Vennet, aka Greg Lippmann, met with Steve Eisman and his team, they didn’t trust Lippmann. Studying the bond market for a long time. Steve and his team realized that they could trust no one in the bond market. At the time, in the regular stock market, everything used to happen on computers, and people could easily trace the value of the stock from the charts and find out if anyone was betting against them.
The bond market used to run like the old days without computers, and there was always fear among the bond traders about whether they got the right price or paid more for certain bonds. It was very difficult to find the actual value of the bond, so Steve and his team were very suspicious of any offers from the bond markets.
When Steve Eisman first met Greg Lippmann, aka Jared Vennett, Eisman was already betting against the companies that originated subprime loans and the companies that constructed the houses. However, he was not completely satisfied with this method of betting against the housing market because it was expensive and much riskier for Eisman. Before meeting Greg Lippmann, Eisman did not know anything about credit default swaps, but Greg Lippmann, explained to him the significance of credit default swaps, which convinced Eismann and then he invested in those swaps.
CDO’s, a bigger problem
The bad loans given by the banks were just the tip of the iceberg of the 2008 crisis. The real problem was the CDOs. CDOs are collateralised debt obligations. In one of our articles, we explained CDOs in detail. When Eisman met up with the CDO manager, Wing Chau, he realised how dangerously these CDOs are arranged and how many investors across the world, such as German banks, Taiwanese insurance companies, and Japanese farmer’s unions, have invested in them.
These super-risky CDOs were given AAA ratings by the rating agencies. Even though many investors around the world had suspicions about the loans that were added to these CDOs, they primarily trusted the rating agency’s triple-A ratings. So they kept investing in these risky CDOs.
Housing crisis becoming global crisis
When Steve Eismann found out that investors across the world had invested in these super-risky CDOs, he knew that the whole world economy was going to collapse. As a CDO manager, it was Wing Chau’s job to create those CDOs. He knew the loans added to those CDOs were risky, and he also knew the rating agencies had given these CDOs fraud ratings. Knowing everything, he still sold these CDOs to investors as a safe investment.
Steve Eismann hated the CDO manager, Wing Chau. After that meeting, Eisman wanted him to suffer specifically. That’s why Steve Eismann says that he wanted to short everything that Wing Chau was selling. Basically, Eisman bet the money against whatever bonds or CDOs Wing Chau had created.
Big bank CEO’s were clueless
Before the crash, Eisman also tried to find out how much these big banks’ CEOs knew about how much their bank was in trouble. So whenever he met them, he would ask them simple questions about their bank’s balance sheets, and from that, he could figure out that these CEOs also had no idea what was coming for them. When Eisman met the CEO of Bank of America for lunch, he asked him similar questions, and he didn’t know anything. Eisman thought the CEO was dumb, and he shorted Bank of America, Lehman Brothers, Citibank, etc.
He also wanted to short the bonds of Morgan Stanley, but his firm, Front Point, was working under Morgan Stanley, so he couldn’t do it.
At the end, when the market crashed, Front Point made a huge profit. In the movie, you can see that Vinny is asking Mark Baum to sell their positions as soon as possible. Because the banks against which they made their bets were going to collapse, and if they went bankrupt, they wouldn’t pay them. So they wanted to cash out of their positions before the collapse of these banks. We explained this in detail in “The big short ending explained“, article.
In the end, the government bailed out these banks at the expense of taxpayers. Each and every character in the movie has a unique story of how they came together to invest in credit default swaps. To know the story of Jared Vennett and how much money he made during the 2008 crisis, we recommend watching this video.
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