The mortgage bond market was born in the United States in the late
1980s. Wall Street began to get busy in a new sector, that of the debts
incurred by ordinary American citizens. Originally, these mortgage bonds
are quite safe, as they are backed by debts that affect the most
creditworthy 50% of the population. Subsequently, the mortgage market
expands and also takes ‘less-qualified’ citizens into consideration; so
the bonds begin to consist of “subprime mortgages”, i.e.: mortgages
granted to people with a high risk of insolvency. A mortgage bond
consists of thousands of private residential mortgages, grouped into a
single portfolio. The mortgage bond is used to grant loans that do not
have the necessary requirements to be guaranteed by the state, all with
the aim of extending credit to more and more people, and being able to
expand the market for derivative financial products.
Steve Eisman
works for Oppenheimer and soon establishes himself as one of the few
analysts able to stir the markets with his original way of looking at
things. He is not a very nice character; he defines himself as a
"genuinely rude" person and is a rather extravagant individual, who
enters the equally bizarre world of Wall Street. He enters the bond
market and immediately senses that something is wrong. With the help of
his assistant, who deals with the accounting, he undertakes to carry out
analyses with the aim of turning the whole mortgage sector upside down.
He closely studies the data on subprime mortgages and discovers that
these mortgages become securities that can be traded on the markets, or
bonds guaranteed by mortgages; the companies that manage them, declare
increasingly higher profits, but avoid declaring the high rate of
insolvency upstream. When Eisman asks for data on this, it is not
provided, as though it were irrelevant. What he eventually discovers is
alarming: companies specialising in subprime mortgages are growing very
rapidly, applying nonsense accounting rules, which not only cover up for
the fact that they have no profits, but show fictitious profits,
artfully made by means of "creative" accounting.
He wrote a report
that he published in 1997 in which he demolished subprime mortgage
companies, wreaking havoc in the midst of what appears to be the great
US economic boom. One would expect the market to understand the lesson
and therefore stop lending mortgages to those unable to repay them, but
the rest of the story shows that the lesson was not heeded in the
slightest.
