The key to the global crisis can be found by answering one question: how did a US$750,000 mortgage loan given to a Mexican strawberry farmer in California with an income of US$10 per hour become part of an AAA-rated investment bond purchased by an Icelandic pension fund?
Those who sensed the answer 12 months ago, and backed their hunch with a bet that the financial markets would crash, are now much wealthier. Steve Eisman is one, as are visionaries Jim Grant, Meredith Whitney, Nouriel Roubini and Nicolas Pictet. None of these people is well known outside the financial markets but each saw that the emperor, in this case the United States banking system, was naked - and infected with a deadly disease.
Eisman is a principal at FrontPoint Partners, an investment fund set up eight years ago. His investment strategy was based on the belief that the banking system was a house of cards rife with greed and corruption.
The Brooklyn-born fund manager got his start in the financial markets when his parents found him a job at the brokerage house where they worked. He had trained as a lawyer and during an internship worked on a case involving the Money Store, a US mortgage bank. On the strength of that he was given responsibility for a series of companies making subprime mortgage loans - in other words, loans to people who were not very credit worthy backed by assets that were, at best, fragile.
'I did subprime mortgages first,' Eisman said in a recent interview published by online business magazine Portfolio.com. 'I worked with the worst first. These guys lied to infinity. What I learned is that Wall Street didn't give a s**t what it did. They f**ked people. Not once in all these years have I met a person inside a Wall Street firm with a crisis of conscience.'
Eisman is a brash New York motor mouth. Grant is a Wall Street operator from a previous generation, when a man's word was his bond. He doesn't run an investment bank but a research organisation that publishes, among other things, Grant's Interest Rate Observer. Grant believes the woes of the world economy are part of a cultural crisis that has dimensions far beyond the financial.
'The American financial market in 2005 was an invitation to fraud,' says Grant. 'You almost had to apply to not get a loan. And nobody had to prove their income. You'd apply for a mortgage saying you earned US$400,000 a year and the loan officer would ask 'Is that true?' and you would say 'Yes' and that would be it. At every stage of the process somebody had their hand out and was getting paid. The mortgage broker got paid, the rating agencies got paid for passing judgment on the mortgages once they had been bundled into securities. To a shameful degree, this crisis was propagated by Wall Street's incompetence and greed.'