The Big Short_ Inside the Doomsday Machine Part 6

 

FrontPoint was positioned perfectly for exactly this moment. By agreement with their investors, their fund could be 25 percent net short or 50 percent net long the stock market, and the gross positions could never exceed 200 percent. For example, for every $100 million they had to invest, they could be net short $25 million, or net long $50 million--and all of their bets combined could never exceed $200 million. There was nothing in the agreement about credit default swaps, but that no longer mattered. ("We never figured out how to put it in," said Eisman.) They'd sold their last one back to Greg Lippmann two months earlier, in early July. They were now back to being, exclusively, stock market investors.

 

 

At that moment they were short nearly as much as they were allowed to be short, and all of their bets were against banks, the very companies collapsing the fastest: Minutes after the market opened they were up $10 million. The shorts were falling, the longs--mainly smaller banks removed from the subprime market--were falling less. Danny should have been elated: Everything they had thought might happen was now happening. He wasn't elated, however; he was anxious. At 10:30, an hour into trading, every financial stock went into a free fall, whether it deserved to or not. "All this information goes through me," he said. "I'm supposed to know how to transmit information. Prices were moving so quickly I couldn't get a fix. It felt like a black hole. The abyss."

 

 

It had been four days since Lehman Brothers had been allowed to fail, but the most powerful effects of the collapse were being felt right now. The stocks of Morgan Stanley and Goldman Sachs were tanking, and it was clear that nothing short of the U.S. government could save them. "It was the equivalent of the earthquake going off," he said, "and then, much later, the tsunami arrives." Danny's trading life was man versus man, but this felt more like man versus nature: The synthetic CDO had become a synthetic natural disaster. "Usually, you feel you have the ability to control your environment," said Danny. "You're good because you know what's going on. Now it didn't matter what I knew. Feel went out the window."

 

 

FrontPoint had maybe seventy different bets on, in various stock markets around the world. All of them were on financial inst.i.tutions. He scrambled to keep a handle on them all, but couldn't. They owned shares in KeyBank and were short the shares of Bank of America, both of which were doing things they'd never done before. "There were no bids in the market for anything," said Danny. "There was no market. It was really only then that I realized there was a bigger issue than just our portfolio. Fundamentals didn't matter. Stocks were going to move up or down on pure emotion and speculation of what the government would do." The most unsettling loose thought rattling around his mind was that Morgan Stanley was about to go under. Their fund was owned by Morgan Stanley. They had almost nothing to do with Morgan Stanley, and felt little kins.h.i.+p with the place. They did not act or feel like Morgan Stanley employees--Eisman often said how much he wished he was allowed to short Morgan Stanley stock. They acted and felt like the managers of their own fund. If Morgan Stanley failed, however, its share in their fund wound up as an a.s.set in a bankruptcy proceeding. "I'm thinking, We've got the world by the f.u.c.king b.a.l.l.s and the company we work for is going bankrupt? We've got the world by the f.u.c.king b.a.l.l.s and the company we work for is going bankrupt?"

 

 

Then Danny sensed something seriously wrong--with himself. Just before eleven in the morning, wavy black lines appeared in the s.p.a.ce between his eyes and his computer screen. The screen appeared to be fading in and out. "I felt this shooting pain in my head," he said. "I don't get headaches. I thought I was having an aneurysm." Now he became aware of his heart--he looked down and he could actually see it banging against his chest. "I spend my morning trying to control all this energy and all this information," he said, "and I lost control."

 

 

He'd had this experience only once before. On September 11, 2001, at 8:46 a.m., he'd been at his desk on the top floor of the World Financial Center. "You know when you're in the city and one of those garbage trucks pa.s.ses and you're like, 'What the f.u.c.k was that?'" Until someone told him it was a commuter plane hitting the North Tower, he a.s.sumed the first plane was one of those trucks. He walked to the window to look up at the building across the street. A small commuter plane wouldn't have been big or strong enough to do all that much damage, to his way of thinking, and he expected to see it poking out of the side of the building. All he could see was the black hole, and smoke. "My first thought was, That was not an accident. No f.u.c.king way That was not an accident. No f.u.c.king way." He was still working at Oppenheimer and Co.--Steve and Vinny had already left--and some authoritative-sounding voice came over the loudspeaker to announce that no one was to leave the building. Danny remained at the window. "That's when people started jumping," he said. "Bodies are falling." The rumble of another garbage truck. "When the second plane hit I was like, 'Bye, everybody.'" By the time he reached the elevator, he found himself escorting two pregnant women. He walked them uptown, left one at her apartment on Fourteenth Street and the other at the Plaza Hotel, and then walked home to his pregnant wife on Seventy-second Street.

 

 

Four days later he was leaving, or rather fleeing, New York City with his wife and small son. They were on the highway at night in the middle of a storm when he was overcome by the certainty that a tree would fall and crush the car. He began to shake and sweat with sheer terror. The trees were fifty yards away: They could never reach the car. "You need to see someone," his wife said, and he had. He had thought he might have something wrong with his heart, and had spent half a day hooked up to an EKG machine. The loss of self-control embarra.s.sed him--he preferred not to talk about it--and he was deeply relieved when the attacks became less frequent and less severe. Finally, a few months after the terrorist attack, they vanished completely.

 

 

On September 18, 2008, he failed to make the connection between how he'd felt then and how he felt now. He rose from his desk and looked for someone. Eisman normally sat across from him, but Eisman was out at some conference trying to raise money--which showed you how unprepared they all were at the arrival of the moment for which they thought themselves perfectly prepared. Danny turned to the colleague beside him. "Porter, I think I'm having a heart attack," he said.

 

 

Porter Collins laughed and said, "No, you're not." An Olympic rowing career had left Porter Collins a bit inured to the pain of others, as he a.s.sumed they usually didn't know what pain was.

 

 

"No," said Danny. "I need to go to the hospital." His face had gone pale but he was still able to stand on his own two feet. How bad could it be? Danny was always a little jumpy.

 

 

"That's why he's good at his job," said Porter. "I kept saying, 'You're not having a heart attack.' Then he stopped talking. And I said, 'All right, maybe you are.'" This actually wasn't all that helpful. Unsteadily, Danny turned to Vinny, who had been watching everything from the far end of the long trading desk and was thinking about calling an ambulance.

 

 

"I got to get out of here. Now," he said.

 

 

Cornwall Capital's bet against subprime mortgage bonds had quadrupled its capital, from a bit more than $30 million to $135 million, but its three founders never had a Champagne moment. "We were focused on, Where do we put our money that's safe?" said Ben Hockett. Before, they had no money. Now, they were rich; but they feared they had no ability to preserve their wealth. By nature a bit tortured, they were now, by nurture, even more so. They actually spent time wondering how people who had been so sensationally right (i.e., they themselves) could preserve the capacity for diffidence and doubt and uncertainty that had enabled them to be right. The more sure you were of yourself and your judgment, the harder it was to find opportunities premised on the notion that you were, in the end, probably wrong. bet against subprime mortgage bonds had quadrupled its capital, from a bit more than $30 million to $135 million, but its three founders never had a Champagne moment. "We were focused on, Where do we put our money that's safe?" said Ben Hockett. Before, they had no money. Now, they were rich; but they feared they had no ability to preserve their wealth. By nature a bit tortured, they were now, by nurture, even more so. They actually spent time wondering how people who had been so sensationally right (i.e., they themselves) could preserve the capacity for diffidence and doubt and uncertainty that had enabled them to be right. The more sure you were of yourself and your judgment, the harder it was to find opportunities premised on the notion that you were, in the end, probably wrong.

 

 

The long-shot bet, in some strange way, was a young man's game. Charlie Ledley and Jamie Mai no longer felt, or acted, quite so young. Charlie now suffered from migraines, and was consumed with what might happen next. "I think there is something fundamentally scary about our democracy," said Charlie. "Because I think people have a sense that the system is rigged, and it's hard to argue that it isn't." He and Jamie spent a surprising amount of their time and energy thinking up ways to attack what they viewed as a deeply corrupt financial system. They cooked up a plan to seek revenge upon the rating agencies, for instance. They'd form a not-for-profit legal ent.i.ty whose sole purpose was to sue Moody's and S&P, and donate the proceeds to investors who lost money investing in triple-A-rated securities.

 

 

As Jamie put it, "Our plan was to go around to investors and say, 'You guys don't know how badly you got f.u.c.ked. You guys should really sue.'" They'd had so many bad experiences with big Wall Street firms, and the people who depended on them for their living, that they feared sharing the idea with New York lawyers. They drove up to Portland, Maine, and found a law firm who would listen to them. "They were just like, 'You guys are nuts,'" said Charlie. Suing the rating agencies for the inaccuracy of their ratings, the Maine lawyers told them, would be like suing Motor Trend Motor Trend magazine for plugging a car that wound up cras.h.i.+ng. magazine for plugging a car that wound up cras.h.i.+ng.

 

 

Charlie knew a prominent historian of financial crises, a former professor of his, and took to calling him. "These calls often came late at night," says the historian, who preferred to remain anonymous. "And they would go on for a pretty long time. I remember he started out by asking, 'Do you know what a mezzanine CDO is?' And he started to explain to me how it all worked": how Wall Street investment banks somehow had conned the rating agencies into blessing piles of c.r.a.ppy loans; how this had enabled the lending of trillions of dollars to ordinary Americans; how the ordinary Americans had happily complied and told the lies they needed to tell to obtain the loans; how the machinery that turned the loans into supposedly riskless securities was so complicated that investors had ceased to evaluate risks; how the problem had grown so big that the end was bound to be cataclysmic and have big social and political consequences. "He wanted to talk through his reasoning," said the historian, "and see if I thought he was nuts. He asked if the Fed would ever buy mortgages, and I said I thought that was pretty unlikely. It would have to be a calamity of colossal proportions for the Fed to ever consider doing something like that." What struck the distinguished financial historian, apart from the alarming facts of the case, was that...he was hearing them for the first time from Charlie Ledley. "Would I have ever predicted that Charlie Ledley would have antic.i.p.ated the greatest financial crisis since the Depression?" he said. "No." It wasn't that Charlie was stupid; far from it. It was that Charlie wasn't a money person. "He's not materialistic in any obvious way," said the professor. "He's not driven by money in any obvious way. He would get angry. He took it personally."

 

 

Even so, on the morning of September 18, 2008, Charlie Ledley was still capable of being surprised. He and Jamie did not normally sit in front of their Bloomberg screens and watch the news scroll by, but by Wednesday, the seventeenth, that's what they were doing. The losses announced by the big Wall Street firms on subprime mortgage bonds had started huge and kept growing. Merrill Lynch, which had begun by saying they had $7 billion in losses, now admitted the number was over $50 billion. Citigroup appeared to have about $60 billion. Morgan Stanley had its own $9-plus billion hit, and who knew what behind it. "We'd been wrong in our interpretation of what was going on," said Charlie. "We had always a.s.sumed that they sold the triple-A CDOs to, like, the Korean Farmers Corporation. The way they were all blowing up implied they hadn't. They'd kept it themselves."

 

 

The big Wall Street firms, seemingly so shrewd and self-interested, had somehow become the dumb money. The people who ran them did not understand their own businesses, and their regulators obviously knew even less. Charlie and Jamie had always sort of a.s.sumed that there was some grown-up in charge of the financial system whom they had never met; now, they saw there was not. "We were never inside the belly of the beast," said Charlie. "We saw the bodies being carried out. But we were never inside." A Bloomberg News headline that caught Jamie's eye, and stuck in his mind: "Senate Majority Leader on Crisis: No One Knows What to Do."

 

 

Early on, long before others came around to his view of the world, Michael Burry had noted how morbid it felt to turn his investment portfolio into what amounted to a bet on the collapse of the financial system. It wasn't until after he'd made a fortune from that collapse that he began to wonder about the social dimensions of his financial strategy--and wonder if other people's view of him might one day be as distorted as their view of the financial system had been. On June 19, 2008, three months after the death of Bear Stearns, Ralph Cioffi and Matthew Tannin, the two men who had run Bear Stearns's bankrupt subprime hedge funds, were arrested by the FBI, and led away in handcuffs from their own homes. long before others came around to his view of the world, Michael Burry had noted how morbid it felt to turn his investment portfolio into what amounted to a bet on the collapse of the financial system. It wasn't until after he'd made a fortune from that collapse that he began to wonder about the social dimensions of his financial strategy--and wonder if other people's view of him might one day be as distorted as their view of the financial system had been. On June 19, 2008, three months after the death of Bear Stearns, Ralph Cioffi and Matthew Tannin, the two men who had run Bear Stearns's bankrupt subprime hedge funds, were arrested by the FBI, and led away in handcuffs from their own homes.* Late that night, Burry dashed off an e-mail to his in-house lawyer, Steve Druskin. "Confidentially, this case is a pretty big stress for me. I'm worried that I'm volatile enough to send out e-mails that can be taken out of context in ways that could get me in trouble, even if my actions and my ultimate outcomes are entirely correct.... I can't imagine how I'd ever tolerate ending up in prison having done nothing wrong but be a bit careless with having no filter between my random thoughts during tough times and what I put in an e-mail. In fact I'm so over worried about this that tonight I started to think I should shut the funds down." Late that night, Burry dashed off an e-mail to his in-house lawyer, Steve Druskin. "Confidentially, this case is a pretty big stress for me. I'm worried that I'm volatile enough to send out e-mails that can be taken out of context in ways that could get me in trouble, even if my actions and my ultimate outcomes are entirely correct.... I can't imagine how I'd ever tolerate ending up in prison having done nothing wrong but be a bit careless with having no filter between my random thoughts during tough times and what I put in an e-mail. In fact I'm so over worried about this that tonight I started to think I should shut the funds down."

 

 

He was now looking for reasons to abandon money management. His investors were helping him to find them: He had made them a great deal of money, but they did not appear to feel compensated for the ride he had taken them on over the past three years. By June 30, 2008, any investor who had stuck with Scion Capital from its beginning, on November 1, 2000, had a gain, after fees and expenses, of 489.34 percent. (The gross gain of the fund had been 726 percent.) Over the same period, the S&P 500 returned just a bit more than 2 percent. In 2007 alone Burry had made his investors $750 million--and yet now he had only $600 million under management. His investors' requests for their money back came in hard and fast. No new investors called--not a single one. n.o.body called him to solicit his views of the world, or his predictions for the future, either. So far as he could see, no one even seemed to want to know how he had done what he had done. "We have not been terribly popular," he wrote.

 

 

It outraged him that the people who got credit for higher understanding were those who spent the most time currying favor with the media. No business could be more objective than money management, and yet even in this business, facts and logic were overwhelmed by the nebulous social dimension of things. "I must say that I have been astonished by how many people now say they saw the subprime meltdown, the commodities boom, and the fading economy coming," Burry wrote, in April 2008, to his remaining investors. "And if they don't always say it in so many words, they do it by appearing on TV or extending interviews to journalists, stridently projecting their own confidence in what will happen next. And surely, these people would never have the nerve to tell you what's happening next, if they were so horribly wrong on what happened last, right? Yet I simply don't recall too many people agreeing with me back then." It was almost as if it counted against him to have been exactly right--his presence made a lot of people uncomfortable. A trade magazine published the top seventy-five hedge funds of 2007, and Scion was nowhere on it--even though its returns put it at or near the very top. "It was as if they took one swimmer in the Olympics and made him swim in a separate pool," Burry said. "His time won the gold. But he got no medal. I honestly think that's what killed it for me. I was looking for some recognition. There was none. I trained for the Olympics, and then they told me to go and swim in the r.e.t.a.r.d pool." A few of his remaining investors asked why he hadn't been more aggressive on the public relations--as if that were a part of the business!

 

 

In early October 2008, after the U.S. government had stepped in to say it would, in effect, absorb all the losses in the financial system and prevent any big Wall Street firm from failing, Burry had started to buy stocks with enthusiasm, for the first time in years. The stimulus would lead inevitably to inflation, he thought, but also to a boom in stock prices. He might be early, of course, and stocks might fall some before they rose, but that didn't matter to him: The value was now there, and the bet would work out in the long run. Immediately, his biggest remaining investor, who had $150 million in the fund, questioned his judgment and threatened to pull his money out.

 

 

On October 27, Burry wrote to one of his two e-mail friends: "I'm selling off the positions tonight. I think I hit a breaking point. I haven't eaten today, I'm not sleeping, I'm not talking with my kids, not talking with my wife, I'm broken. Asperger's has given me some great gifts, but life's been too hard for too long because of it as well." On a Friday afternoon in early November, he felt chest pains and went to an emergency room. His blood pressure had spiked. "I felt like I am heading towards a short life," he wrote. A week later, on November 12, he sent his final letter to investors. "I have been pushed repeatedly to the brink by my own actions, the Fund's investors, business partners, and even former employees," he wrote. "I have always been able to pull back and carry on my often overly intense affair with this business. Now, however, I am facing personal matters that have carried me irrefutably over the threshold, and I have come to the sullen realization that I must close down the Fund." With that, he vanished, leaving a lot of people wondering what had happened.

 

 

What had happened was that he had been right, the world had been wrong, and the world hated him for it. And so Michael Burry ended where he began--alone, and comforted by his solitude. He remained inside his office in Cupertino, California, big enough for a staff of twenty-five people, but the fund was shuttered and the office was empty. The last man out was Steve Druskin, and among Druskin's last acts was to figure out what to do about Michael Burry's credit default swaps on subprime mortgage bonds. "Mike kept a couple of them, just for fun," he said. "Just a couple. To see if we could get paid off in full." And he had, though it wasn't for fun but vindication: to prove to the world that the investment-grade bonds he had bet against were indeed entirely without value. The two bets he had saved were against subprime bonds created back in 2005 by Lehman Brothers. They'd gone to zero at roughly the same time as their creator. Burry had wagered $100,000 or so on each, and made $5 million.

 

 

The problem, from the point of view of a lawyer closing an investment fund, was that these strange contracts did not expire until 2035. The brokers had long since paid them in full: 100 cents on the dollar. No Wall Street firm even bothered to send them quotes on the things anymore. "I don't get a statement from a broker saying we have an open position with them," says Druskin. "But we do. It's like no one wants to talk about this anymore. It's like, 'All right, you've got your ten million dollars. Don't keep haranguing me about it.'"

 

 

On Wall Street, the lawyers play the same role as medics in war: They come in after the shooting is over to clean up the mess. Thirty-year contracts that had some remote technical risk of repayment--exactly what that risk was he was still trying to determine--was the last of Michael Burry's mess. "It's possible the brokers have thrown the contracts away," Druskin said. "No one three years ago expected this to happen on the brokerage side. So no one's been trained to deal with this. We've pretty much said, 'We're going out of business.' And they said, 'Okay.'"

 

 

By the time Eisman got the call from Danny Moses saying that he might be having a heart attack, and that he and Vinny and Porter were sitting on the steps of St. Patrick's Cathedral, he was in the midst of a slow, almost menopausal, change. He'd been unprepared for his first hot flash, in the late fall of 2007. By then it was clear to many that he had been right and they had been wrong and that he had gotten rich to boot. He'd gone to a conference put on by Merrill Lynch, right after they'd fired their CEO, Stan O'Neal, and disclosed $20 billion or so of their $52 billion in subprime-related losses. There he had sidled up to Merrill's chief financial officer, Jeff Edwards, the same Jeff Edwards Eisman had taunted, some months earlier, about Merrill Lynch's risk models. "You remember what I said about those risk models of yours?" Eisman now said. "I guess I was right, huh?" Instantly, and amazingly, he regretted having said it. "I felt bad about it," said Eisman. "It was obnoxious. He was a lovely guy. He was just wrong. I was no longer the underdog. And I had to conduct myself in a different way." time Eisman got the call from Danny Moses saying that he might be having a heart attack, and that he and Vinny and Porter were sitting on the steps of St. Patrick's Cathedral, he was in the midst of a slow, almost menopausal, change. He'd been unprepared for his first hot flash, in the late fall of 2007. By then it was clear to many that he had been right and they had been wrong and that he had gotten rich to boot. He'd gone to a conference put on by Merrill Lynch, right after they'd fired their CEO, Stan O'Neal, and disclosed $20 billion or so of their $52 billion in subprime-related losses. There he had sidled up to Merrill's chief financial officer, Jeff Edwards, the same Jeff Edwards Eisman had taunted, some months earlier, about Merrill Lynch's risk models. "You remember what I said about those risk models of yours?" Eisman now said. "I guess I was right, huh?" Instantly, and amazingly, he regretted having said it. "I felt bad about it," said Eisman. "It was obnoxious. He was a lovely guy. He was just wrong. I was no longer the underdog. And I had to conduct myself in a different way."

 

 

Valerie Feigen watched in near bewilderment as her husband acquired, haltingly, in fits and starts, a trait resembling tact. "There was a void after everything happened," she said. "Once he was proved right, all this anxiety and anger and energy went away. And it left this big void. He went on an ego thing for a while. He was really kind of full of himself." Eisman had been so vocal about the inevitable doom that all sorts of unlikely people wanted to hear what he now had to say. After the conference in Las Vegas, he had come down with a parasite. He'd told the doctor who treated him that the financial world as we knew it was about to end. A year later, he went back to the same doctor for a colonoscopy. Stretched out on the table, he hears the doctor say, "Here's the guy who predicted the crisis! Come on in and listen to this." And in the middle of Eisman's colonoscopy, a roomful of doctors and nurses retold the story of Eisman's genius.

 

 

The story of Eisman's genius quickly grew old to his wife. Long ago she had established a sort of Eisman social emergency task force with her husband's therapist. "We beat him up and said, 'You really just have to knock this s.h.i.+t off.' And he got it. And he started being nice. And he liked being nice! It was a new experience for him." All around, she and others found circ.u.mstantial evidence of a changed man. At the Christmas party at the building next door, for example. She wasn't planning to even let Eisman know about it, as she never knew what he might do or say. "I was just kind of trying to sneak out of our apartment," she said. "And he stops me and says, 'How will it look if I don't go?'" The sincerity of his concern shocked her into giving him a chance. "You can go, but you have to behave," she said. To which Eisman replied, "Well, I know how to behave now." And so she took him to the Christmas party, and he was as sweet as he could be. "He's become a pleasure," said Valerie. "Go figure."

 

 

That afternoon of September 18, 2008, the new and possibly improving Eisman ambled toward his partners on the steps of St. Patrick's Cathedral. Getting places on foot always took him too long. "Steve's such a f.u.c.king slow walker," said Danny. "He walks like an elephant would walk if an elephant could only take human-size steps." The weather was gorgeous--one of those rare days where the blue sky reaches down through the forest of tall buildings and warms the soul. "We just sat there," says Danny, "watching the people pa.s.s."

 

 

They sat together on the cathedral steps for an hour or so. "As we sat there we were weirdly calm," said Danny. "We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pa.s.s and talked about what might happen next. How many of these people were going to lose their jobs? Who was going to rent these buildings, after all the Wall Street firms had collapsed?"

 

 

Porter Collins thought that "it was like the world stopped. We're looking at all these people and saying, 'These people are either ruined or about to be ruined.'" Apart from that, there wasn't a whole lot of hand-wringing inside FrontPoint. This was what they had been waiting for: total collapse.

 

 

"The investment banking industry is f.u.c.ked," Eisman had said six weeks earlier. "These guys are only beginning to understand how f.u.c.ked they are. It's like being a scholastic, prior to Newton. Newton comes along and one morning you wake up: 'Holy s.h.i.+t, I'm wrong!'" Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. Investment bankers were not just f.u.c.ked: They were extinct. "That Wall Street has gone down because of this is justice justice," Eisman said. The only one among them who wrestled a bit with their role--as the guys who had made a fortune betting against their own society--was Vincent Daniel. "Vinny, being from Queens, needs to see the dark side of everything," said Eisman.

 

 

To which Vinny replied, "The way we thought about it, which we didn't like, was, 'By shorting this market we're creating the liquidity to keep the market going.'"

 

 

"It was like feeding the monster," said Eisman. "We fed the monster until it blew up."

 

 

The monster was exploding. Yet on the streets of Manhattan there was no sign anything important had just happened. The force that would affect all of their lives was hidden from their view. That was the problem with money: What people did with it had consequences, but they were so remote from the original action that the mind never connected the one with the other. The teaser-rate loans you make to people who will never be able to repay them will go bad not immediately but in two years, when their interest rates rise. The various bonds you make from those loans will go bad not as the loans go bad but months later, after a lot of tedious foreclosures and bankruptcies and forced sales. The various CDOs you make from the bonds will go bad not right then but after some trustee sorts out whether there will ever be enough cash to pay them off. Whereupon the end owner of the CDO receives a little note, Dear Sir, We regret to inform you that your bond no longer exists Dear Sir, We regret to inform you that your bond no longer exists...But the biggest lag of all was right here, on the streets. How long would it take before the people walking back and forth in front of St. Patrick's Cathedral figured out what had just happened to them?

 

 

EPILOGUE.

 

 

Everything Is Correlated Around the time Eisman and his partners sat on the steps of the midtown cathedral, I sat on a banquette on the east side, waiting for John Gutfreund, my old boss, to arrive for lunch, and wondering, among other things, why any restaurant would seat, side by side, two men without the slightest interest in touching each other. steps of the midtown cathedral, I sat on a banquette on the east side, waiting for John Gutfreund, my old boss, to arrive for lunch, and wondering, among other things, why any restaurant would seat, side by side, two men without the slightest interest in touching each other.

 

 

When I published my book about the financial 1980s, the financial 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings and loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State University read Liar's Poker Liar's Poker as a how-to manual, most TV and radio interviewers read me as a whistle-blower. (Geraldo Rivera was the big exception. He included me in a show, along with some child actors who'd gone on to become drug addicts, called "People Who Succeed Too Early in Life.") Anti-Wall Street feelings then ran high enough for Rudolph Giuliani to float a political career upon them, but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynching of Michael Milken, and then of Salomon Brothers CEO Gutfreund, were excuses for not dealing with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street trading culture. Wall Street firms would soon be frowning upon profanity, forcing their male employees to treat women almost as equals, and firing traders for so much as glancing at a lap dancer. Bear Stearns and Lehman Brothers in 2008 more closely resembled normal corporations with solid, Middle American values than did any Wall Street firm circa 1985. as a how-to manual, most TV and radio interviewers read me as a whistle-blower. (Geraldo Rivera was the big exception. He included me in a show, along with some child actors who'd gone on to become drug addicts, called "People Who Succeed Too Early in Life.") Anti-Wall Street feelings then ran high enough for Rudolph Giuliani to float a political career upon them, but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynching of Michael Milken, and then of Salomon Brothers CEO Gutfreund, were excuses for not dealing with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street trading culture. Wall Street firms would soon be frowning upon profanity, forcing their male employees to treat women almost as equals, and firing traders for so much as glancing at a lap dancer. Bear Stearns and Lehman Brothers in 2008 more closely resembled normal corporations with solid, Middle American values than did any Wall Street firm circa 1985.

 

 

The changes were camouflage. They helped to distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed.

 

 

The reason that American financial culture was so difficult to change--the reason the political process would prove so slow to force change upon it, even after the subprime mortgage catastrophe--was that it had taken so long to create, and its a.s.sumptions had become so deeply embedded. There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. The crisis of 2008 had its roots not just in the subprime loans made in 2005 but in ideas that had hatched in 1985. A friend of mine in my Salomon Brothers training program created the first mortgage derivative in 1986, the year after we left the program. ("Derivatives are like guns," he still likes to say. "The problem isn't the tools. It's who is using the tools.") The mezzanine CDO was invented by Michael Milken's junk bond department at Drexel Burnham in 1987. The first mortgage-backed CDO was created at Credit Suisse in 2000 by a trader who had spent his formative years, in the 1980s and early 1990s, in the Salomon Brothers mortgage department. His name was Andy Stone, and along with his intellectual connection to the subprime crisis came a personal one: He was Greg Lippmann's first boss on Wall Street.

 

 

I'd not seen Gutfreund since I quit Wall Street. I'd met him, nervously, a couple of times on the trading floor. A few months before I quit, my bosses asked me to explain to our CEO what at the time seemed like exotic trades in derivatives I'd done with a European hedge fund, and I'd tried. He claimed not to be smart enough to understand any of it, and I a.s.sumed that was how a Wall Street CEO showed he was the boss, by rising above the details. There was no reason for him to remember any of these encounters, and he didn't: When my book came out, and became a public relations nuisance to him, he'd told reporters we'd never met. Over the years, I'd heard bits and pieces about him. I knew that after he'd been forced to resign from Salomon Brothers, he'd fallen on harder times. I heard, later, that a few years before our lunch, he'd sat on a panel about Wall Street at the Columbia Business School. When his turn came to speak, he advised the students to find some more meaningful thing to do with their lives than go to work on Wall Street. As he began to describe his career, he'd broken down and wept.

 

 

When I e-mailed Gutfreund to invite him to lunch, he could not have been more polite, or more gracious. That att.i.tude persisted as he was escorted to the table, made chitchat with the owner, and ordered his food. He'd lost a half-step, and was more deliberate in his movements, but otherwise he was completely recognizable. The same veneer of courtliness masked the same animal impulse to see the world as it is, rather than as it should be.

 

 

We spent twenty minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered a mutual friend. We agreed that the Wall Street CEO had no real ability to keep track of the frantic innovation occurring inside his firm. ("I didn't understand all the product lines and they don't either.") We agreed, further, that the CEO of the Wall Street investment bank had shockingly little control over his subordinates. ("They're b.u.t.tering you up and then doing whatever the f.u.c.k they want to do.") He thought the cause of the financial crisis was "simple. Greed on both sides--greed of investors and the greed of the bankers." I thought it was more complicated. Greed on Wall Street was a given--almost an obligation. The problem was the system of incentives that channeled the greed.

 

 

The line between gambling and investing is artificial and thin. The soundest investment has the defining trait of a bet (you losing all of your money in hopes of making a bit more), and the wildest speculation has the salient characteristic of an investment (you might get your money back with interest). Maybe the best definition of "investing" is "gambling with the odds in your favor." The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side--the entire financial system, essentially--had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What's strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. Steve Eisman and Michael Burry and the young men at Cornwall Capital each made tens of millions of dollars for themselves, of course. Greg Lippmann was paid $47 million in 2007, although $24 million of it was in restricted stock that he could not collect unless he hung around Deutsche Bank for a few more years. But all of these people had been right; they'd been on the winning end of the bet. Wing Chau's CDO managing business went bust, but he, too, left with tens of millions of dollars--and had the nerve to attempt to create a business that would buy up, cheaply, the very same subprime mortgage bonds in which he had lost billions of dollars' worth of other people's money. Howie Hubler lost more money than any single trader in the history of Wall Street--and yet he was permitted to keep the tens of millions of dollars he had made. The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

 

 

What are the odds that people will make smart decisions about money if they don't need to make smart decisions--if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they're still all wrong. But I didn't argue with John Gutfreund. Just as you revert to being about nine years old when you go home to visit your parents, you revert to total subordination when you are in the presence of your former CEO. John Gutfreund was still the King of Wall Street and I was still a geek. He spoke in declarative statements, I spoke in questions. But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren't the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling--though it was less a smile than a placeholder expression. And he was saying, very deliberately, "Your...f.u.c.king...book."

 

 

I smiled back, though it wasn't quite a smile.

 

 

"Why did you ask me to lunch?" he asked, though pleasantly. He was genuinely curious.

 

 

You can't really tell someone that you asked him to lunch to let him know that you didn't think of him as evil. Nor can you tell him that you asked him to lunch because you thought you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund had done violence to the Wall Street social order--and got himself dubbed the King of Wall Street--when, in 1981, he'd turned Salomon Brothers from a private partners.h.i.+p into Wall Street's first public corporation. He'd ignored the outrage of Salomon's retired partners. ("I was disgusted by his materialism," William Salomon, the son of one of the firm's founders, who had made Gutfreund CEO only after he'd promised never to sell the firm, had told me.) He'd lifted a giant middle finger in the direction of the moral disapproval of his fellow Wall Street CEOs. And he'd seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn't, in the end, make a great deal of sense for the shareholders. (One share of Salomon Brothers, purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today, which, on the first day of trading in 2010, had a combined market value of $7.48.) But it made fantastic sense for the bond traders.

 

 

But from that moment, the Wall Street firm became a black box. The shareholders who financed the risk taking had no real understanding of what the risk takers were doing, and, as the risk taking grew ever more complex, their understanding diminished. All that was clear was that the profits to be had from smart people making complicated bets overwhelmed anything that could be had from servicing customers, or allocating capital to productive enterprise. The customers became, oddly, beside the point. (Is it any wonder that mistrust of the sellers by the buyers in the bond market had reached the point where the buyers could not see a get-rich-quick scheme when a seller, Greg Lippmann, offered it to them?) In the late 1980s and early 1990s Salomon Brothers had entire years--great years!--in which five proprietary traders, the intellectual forefathers of Howie Hubler, generated more than the firm's annual profits. Which is to say that the firm's ten thousand or so other employees, as a group, lost money.

 

 

The moment Salomon Brothers demonstrated the potential gains to be had from turning an investment bank into a public corporation and leveraging its balance sheet with exotic risks, the psychological foundations of Wall Street s.h.i.+fted, from trust to blind faith. No investment bank owned by its employees would have leveraged itself 35:1, or bought and held $50 billion in mezzanine CDOs. I doubt any partners.h.i.+p would have sought to game the rating agencies, or leapt into bed with loan sharks, or even allowed mezzanine CDOs to be sold to its customers. The short-term expected gain would not have justified the long-term expected loss.

 

 

No partners.h.i.+p, for that matter, would have hired me, or anyone remotely like me. Was there ever any correlation between an ability to get into, and out of, Princeton, and a talent for taking financial risk?

 

 

At the top of Charlie Ledley's list of concerns, after Cornwall Capital had laid its bets against subprime loans, was that the powers that be might step in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers. top of Charlie Ledley's list of concerns, after Cornwall Capital had laid its bets against subprime loans, was that the powers that be might step in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers.

 

 

After Bear Stearns failed, the government encouraged J.P. Morgan to buy it by offering a knockdown price and guaranteeing Bear Stearns's shakiest a.s.sets. Bear Stearns bondholders were made whole and its stockholders lost most of their money. Then came the collapse of the government-sponsored ent.i.ties, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, and creditors left intact but with some uncertainty. Next came Lehman Brothers, which was simply allowed to go bankrupt--whereupon things became even more complicated. At first, the Treasury and the Federal Reserve claimed they allowed Lehman to fail to send the signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when all h.e.l.l broke loose, and the market froze, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue Lehman. But then AIG failed a few days later, or tried to, before the Federal Reserve extended it a loan of $85 billion--soon increased to $180 billion--to cover the losses from its bets on subprime mortgage bonds. This time the Treasury charged a lot for the loans and took most of the equity. Was.h.i.+ngton Mutual followed, and was unceremoniously seized by the Treasury, wiping out both its creditors and its shareholders entirely. And then Wachovia failed, and the Treasury and FDIC encouraged Citigroup to buy it--again at a knockdown price and with a guarantee of the bad a.s.sets.

 

 

The people in a position to resolve the financial crisis were, of course, the very same people who had failed to foresee it: Treasury Secretary Henry Paulson, future Treasury Secretary Timothy Geithner, Fed Chairman Ben Bernanke, Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, and so on. A few Wall Street CEOs had been fired for their roles in the subprime mortgage catastrophe, but most remained in their jobs, and they, of all people, became important characters operating behind the closed doors, trying to figure out what to do next. With them were a handful of government officials--the same government officials who should have known a lot more about what Wall Street firms were doing, back when they were doing it. All shared a distinction: They had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger's syndrome.

 

 

By late September 2008 the nation's highest financial official, U.S. Treasury Secretary Henry Paulson, persuaded the U.S. Congress that he needed $700 billion to buy subprime mortgage a.s.sets from banks. Thus was born TARP, which stood for Troubled a.s.set Relief Program. Once handed the money, Paulson abandoned his promised strategy and instead essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs, and a few others unnaturally selected for survival. For instance, the $13 billion AIG owed to Goldman Sachs, as a result of its bet on subprime mortgage loans, was paid off in full by the U.S. government: 100 cents on the dollar. These fantastic handouts--plus the implicit government guarantee that came with them--not only prevented Wall Street firms from failing but spared them from recognizing the losses in their subprime mortgage portfolios. Even so, just weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that--lo!--the markets still didn't trust Citigroup to survive. In response, on November 24, the Treasury granted another $20 billion from TARP and simply guaranteed $306 billion of Citigroup's a.s.sets. Treasury didn't ask for a piece of the action, or management changes, or for that matter anything at all except for a teaspoon of out-of-the-money warrants and preferred stock. The $306 billion guarantee--nearly 2 percent of U.S. gross domestic product, and roughly the combined budgets of the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development, and Transportation--was presented undisguised, as a gift. The Treasury didn't ever actually get around to explaining what the crisis was, just that the action was taken in response to Citigroup's "declining stock price."

 

 

By then it was clear that $700 billion was a sum insufficient to grapple with the troubled a.s.sets acquired over the previous few years by Wall Street bond traders. That's when the U.S. Federal Reserve took the shocking and unprecedented step of buying bad subprime mortgage bonds directly from the banks. By early 2009 the risks and losses a.s.sociated with more than a trillion dollars' worth of bad investments were transferred from big Wall Street firms to the U.S. taxpayer. Henry Paulson and Timothy Geithner both claimed that the chaos and panic caused by the failure of Lehman Brothers proved to them that the system could not tolerate the chaotic failure of another big financial firm. They further claimed, albeit not until months after the fact, that they had lacked the legal authority to wind down giant financial firms in an orderly manner--that is, to put a bankrupt bank out of business. Yet even a year later they would have done very little to acquire that power. This was curious, as they obviously weren't shy about asking for power.

 

 

The events on Wall Street in 2008 were soon reframed, not just by Wall Street leaders but also by both the U.S. Treasury and the Federal Reserve, as a "crisis in confidence." A simple, old-fas.h.i.+oned financial panic, triggered by the failure of Lehman Brothers. By August 2009 the president of Goldman Sachs, Gary Cohn, even claimed, publicly, that Goldman Sachs had never actually needed government help, as Goldman had been strong enough to withstand any temporary panic. But there's a difference between an old-fas.h.i.+oned financial panic and what had happened on Wall Street in 2008. In an old-fas.h.i.+oned panic, perception creates its own reality: Someone shouts "Fire!" in a crowded theater and the audience crushes each other to death in its rush for the exits. On Wall Street in 2008 the reality finally overwhelmed perceptions: A crowded theater burned down with a lot of people still in their seats. Every major firm on Wall Street was either bankrupt or fatally intertwined with a bankrupt system. The problem wasn't that Lehman Brothers had been allowed to fail. The problem was that Lehman Brothers had been allowed to succeed.

 

 

This new regime--free money for capitalists, free markets for everyone else--plus the more or less instant rewriting of financial history vexed all sorts of people, but few were as enthusiastically vexed as Steve Eisman. The world's most powerful and most highly paid financiers had been entirely discredited; without government intervention every single one of them would have lost his job; and yet those same financiers were using the government to enrich themselves. "I can understand why Goldman Sachs would want to be included in the conversation about what to do about Wall Street," he said. "What I can't understand is why anyone would listen to them." In Eisman's view, the unwillingness of the U.S. government to allow the bankers to fail was less a solution than a symptom of a still deeply dysfunctional financial system. The problem wasn't that the banks were, in and of themselves, critical to the success of the U.S. economy. The problem, he felt certain, was that some gargantuan, unknown dollar amount of credit default swaps had been bought and sold on every one of them. "There's no limit to the risk in the market," he said. "A bank with a market capitalization of one billion dollars might have one trillion dollars' worth of credit default swaps outstanding. No one knows how many there are! And no one knows where they are!" The failure of, say, Citigroup might be economically tolerable. It would trigger losses to Citigroup's shareholders, bondholders, and employees--but the sums involved were known to all. Citigroup's failure, however, would also trigger the payoff of a ma.s.sive bet of unknown dimensions: from people who had sold credit default swaps on Citigroup to those who had bought them.

 

 

This was yet another consequence of turning Wall Street partners.h.i.+ps into public corporations: It turned them into objects of speculation. It was no longer the social and economic relevance of a bank that rendered it too big to fail, but the number of side bets that had been made upon it.

 

 

At some point I could not help but ask John Gutfreund about his biggest and most fateful act: Combing through the rubble of the avalanche, the decision to turn the Wall Street partners.h.i.+p into a public corporation looked a lot like the first pebble kicked off the top of the hill. "Yes," he said. "They--the heads of the other Wall Street firms--all said what an awful thing it was to go public and how could you do such a thing. But when the temptation rose, they all gave in to it." He agreed, though: The main effect of turning a partners.h.i.+p into a corporation was to transfer the financial risk to the shareholders. "When things go wrong it's their problem," he said--and obviously not theirs alone. When the Wall Street investment bank screwed up badly enough, its risks became the problem of the United States government. "It's laissez-faire until you get in deep s.h.i.+t," he said, with a half chuckle. He was out of the game. It was now all someone else's fault. point I could not help but ask John Gutfreund about his biggest and most fateful act: Combing through the rubble of the avalanche, the decision to turn the Wall Street partners.h.i.+p into a public corporation looked a lot like the first pebble kicked off the top of the hill. "Yes," he said. "They--the heads of the other Wall Street firms--all said what an awful thing it was to go public and how could you do such a thing. But when the temptation rose, they all gave in to it." He agreed, though: The main effect of turning a partners.h.i.+p into a corporation was to transfer the financial risk to the shareholders. "When things go wrong it's their problem," he said--and obviously not theirs alone. When the Wall Street investment bank screwed up badly enough, its risks became the problem of the United States government. "It's laissez-faire until you get in deep s.h.i.+t," he said, with a half chuckle. He was out of the game. It was now all someone else's fault.

 

 

He watched me curiously as I scribbled down his words. "What's this for?" he asked.

 

 

I told him that I thought it might be worth revisiting the world I'd described in Liar's Poker Liar's Poker, now that it was finally dying. Maybe bring out a twentieth anniversary edition.

 

 

"That's nauseating," he said.

 

 

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his: He was still tough, straight, and blunt as a butcher. He'd helped to create a monster but he still had in him a lot of the old Wall Street, where people said things like "a man's word is his bond." On that Wall Street people didn't walk out of their firms and cause trouble for their former bosses by writing a book about them. "No," he said, "I think we can agree about this: Your f.u.c.king book destroyed my career and it made yours." With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked, sweetly, "Would you like a deviled egg?"

 

 

Until that moment I hadn't paid much attention to what he'd been eating. Now I saw he'd ordered the best thing in the house, this gorgeous, frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated, and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm.

 

 

Acknowledgments.

 

 

My editor at the now deceased Portfolio Portfolio, Kyle Pope, encouraged me at the start, as I set off to retrace my steps back to Wall Street. Brandon Adams generously offered his help digging out strange facts and figures and proved to be so smart about the subject that I half-wondered if perhaps he, instead of I, should be writing the book. Among other treasures he unearthed was A. K. Barnett-Hart, a Harvard undergraduate who had just written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject. Marc Rosenthal served as my jungle guide in the netherworld of subprime lending, and the inner workings of the rating agencies' models, and could not have been more generous with his time or his insight. Al Zuckerman, at Writers House, represented this book ably, as he has my others. Several people read all or part of this ma.n.u.script and offered useful advice: John Seo, Doug Stumpf, my father, Tom Lewis, and my wife, Tabitha Soren. Janet Byrne performed an almost startlingly thorough, energetic, and intelligent job copyediting the ma.n.u.script, and also proved to be an ideal reader. Starling Lawrence at W. W. Norton, who has edited all but one of my books, and who edited Liar's Poker Liar's Poker, was his usual wise and wonderful self.

 

 

I've found it impossible to write a decent nonfiction narrative without unusually deep cooperation from my subjects. Steve Eisman, Michael Burry, Charlie Ledley, Jamie Mai, Vincent Daniel, Danny Moses, Porter Collins, and Ben Hockett allowed me to enter their lives. At some unquantifiable risk to themselves, they shared with me their thoughts and feelings. For that I'm eternally grateful.

 

 

* United Jewish Appeal. United Jewish Appeal.

 

 

* ISDA had been created back in 1986, by my bosses at Salomon Brothers, to deal with the immediate problem of an innovation called an interest rate swap. What seemed like a simple trade to the people doing it--I pay you a fixed rate of interest in exchange for your paying me a floating rate--wound up needing a blizzard of rules to govern it. Beneath the rules was the simple fear that the party on the other side of a Wall Street firm's interest rate swap might go bust and fail to pay off its bets. The interest rate swap, like the credit default swap, exposed Wall Street firms to other people's credit, and other people to the credit of Wall Street firms, in new ways. ISDA had been created back in 1986, by my bosses at Salomon Brothers, to deal with the immediate problem of an innovation called an interest rate swap. What seemed like a simple trade to the people doing it--I pay you a fixed rate of interest in exchange for your paying me a floating rate--wound up needing a blizzard of rules to govern it. Beneath the rules was the simple fear that the party on the other side of a Wall Street firm's interest rate swap might go bust and fail to pay off its bets. The interest rate swap, like the credit default swap, exposed Wall Street firms to other people's credit, and other people to the credit of Wall Street firms, in new ways.

 

 

* The two major rating agencies employ slightly different terminology to convey the same idea. What Standard & Poor's denotes as AAA, for instance, Moody's denotes as Aaa, but both terms describe a bond judged to have the least risk of default. For simplicity's sake, the text will use only the S&P terms, and AAA will be called triple-A, and so forth. The two major rating agencies employ slightly different terminology to convey the same idea. What Standard & Poor's denotes as AAA, for instance, Moody's denotes as Aaa, but both terms describe a bond judged to have the least risk of default. For simplicity's sake, the text will use only the S&P terms, and AAA will be called triple-A, and so forth.

 

 

In 2008, when the ratings of a giant pile of subprime-related bonds proved meaningless, their intended meanings were hotly disputed. Wall Street investors had long interpreted them to mean the odds of default. For instance, a bond rated triple-A historically had less than a 1-in-10,000 chance of defaulting in its first year of existence. A bond