In a "60 Minutes" interview Michael Lewis explained to journalist Steve Kroft that the downfall of AIG was was seen by Michael Burry, MD. Lewis, an award winning author writes about it in his best selling book, The Big Short. He says that Burry foresaw hundreds of millions of dollars in loans made to unqualified buyers, and that Burry concluded the subprime market would collapse in 2007.
Lewis said, Burry noticed mortgage bonds were supported by pools of loans that were mostly negative amortizing interest only loans. This type of loan meant that the borrower didn't have to pay back the principle portion of the loan, and that if the borrower couldn't pay the interest back either, then the interest would be added back into the loan. Lewis states, that Burry thought the lending business had gone insane! Burry had figured out that a small percentage of the mortgage backed securities would be worthless if those loans failed, and he wanted to bet against them!
He decided that the best way to bet against them was for Wall Street to sell him inexpensive insurance contracts on the mortgage backed securities that would have a big pay out if they failed. The contracts were called credit default swaps. He invested in those and made millions.
Lewis explained that Goldman Sach's persuaded the financial products division of AIG to insure tens of billions of dollars in subprime mortgage loans, and that they never even looked at the piles of loans that they were insuring. Over a few months in 2005, Goldman Sach's got AIG to insure 20 billion dollars worth of subprime mortgage securities that had a AAA rating.
Lewis called the Goldman Sach's - AIG deal one of the "original sins of the looming financial business." AIG insured an additional 30 billion dollars of loans in worthless securities from other firms.
How many years will it take for the negative economic ripple effects from the subprime crisis to really be over? Shouldn't we still be asking questions about the details of the crisis?
Who are all of the irresponsible people that created the subprime mess? Let's name some names, and put their faces on milk cartons for everyone to see. To whom are the rating agencies accountable too, and why do Wall Street firms pay them? Why is it a good practice to allow firms that advise clients on what stocks to buy or sell, make bets against those same transactions?
We should be watching what the players are doing now. Those people who were highly paid during the dismantling of the subprime crisis. Lets look and see if the same players are now participating in the clean up of the mess too?
What is Michael Burry doing now? One article says that he has closed his hedge fund, and is bracing himself for the devaluation of the dollar.
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