Q: Your short selling maven activity has, on at least 3 occasions, made the front pages of the North American financial press. Twice to the front page of Barrons, the Wall Street Journal Company’s weekly. Do you expect to get any press now and how much of what is in the movie “The Big Short” can you verify from personal experience?’
A: After giving normal artistic license its due, all of it. Remember that it is entertainment, not a documentary. Getting press coverage is something I have been able to avoid now for the last 20 years. I think it is much safer to keep your trading activity private.
Q: Do traders really swear like that.
A: Some do especially when they want to get the point across to someone that is annoying them. I have done that on more than one occasion. You did not see any lady traders. It is a macho culture and military mindset. For the traders, it is a zero sum game. Only the strong survive.
Q: Are you planning on any activist short selling?
A: Like I said: I have been able to keep my trading activity private now for over 2 decades. I plan to keep it that way. No, I do not anticipate any activist short selling.
Q: Do you intend to continue updating your short lists?
A: Yes.
Q: Did your model for short selling pick up the opportunity to short sell the real estate and subprime mortgage bond market bubbles?
A: Yes, it did. I wrote a paper on it in 2003. I had been offered a lucrative arrangement to assist the process. I was able to sell into the strength of the bubble until 2007. Interestingly, I had read one of the 500 word prospectuses written by the Wall Street lawyers for the Wall Street bankers that overtly signaled the fix was in. They disclosed in paragraph 3 on page 410 that their standard for issuing an AAA credit rating was not following the historic understanding of a credit underwriter. It was instead was intended only to indicate that the trustee would indeed pay over the amount collected as provided in the trust agreement. It did not guarantee that the underlying mortgage debtors would pay the trustee any amount due. That is why no one went to jail for the phony credit ratings. They disclosed that they were phony.
Q: That was pretty slick. They substituted a fidelity standard for a credit standard. Why did not more people understand that?
A: Very few people read 500 page prospectuses and even fewer understand. A few that did, went short. Some were bought off to look the other way and keep quiet.
Q: So the lawyer knew what they were doing?
A: Absolutely! That is what they are paid to do: tell the truth in the prospectus and so keep their clients from doing time. They did their job.
Q: On a scale of 1 to 10, how do you rate the new movie: The Big Short?
A: I give it a 10. It is the best snapshot of a time in America since American Graffiti. It is one of the few movies I would watch more than once. It is not as upbeat as America Graffiti but more humorous for a sync.
Q: Does it accurately reflect the real world?
A: Yes, and that is what is so surprising. There is here a clear understanding of economics and an explanation of why in addition to what happened.
Q: Is there anything you would add to explain why the crash of 2008 happened?
A: As entertainment, I offer no suggestions. This film is already a classic. They have done a masterful job of presenting what happened in the context of both wall street and main street. They have done so in a manner that is both entertaining and educational.
Q: Could you elaborate on any points of economic law that might have been more fully presented?
A: If the movie were to be made into a longer documentary I would expand on two points:
- How, when you add bank deposit guarantees on top of fractional reserve banking, completion in the extension of credit is the only thing left for banks to compete in. This leads to the situation that the banks that make the least credit worthy loans become the biggest.
- The zero interest rate policy of the Fed over the last 7 years is a subsidy to the biggest banks: the too big to fail. The subsidy has permitted the banks to agree to settlements of legal claims for their misconduct leading up to the crisis, settlements now approximating 200B.
[box type=”alert” size=”large” style=”rounded” border=”full”]The Fed, from before its inception, was designed to serve the interests of the big banks in this and related ways. Essentially this is just privilege as normal. The average taxpayers and consumers pick up the tab through the perverse workings of inflation and the much higher interest rates they pay. The interest rate spread for the banks has never been larger.[/box]
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