The FrontPoint Boys

Push Kim.

I'm Lydia Dean Cott and I'm Michael Lewis, and we're continuing our special series about The Big Short. In this episode, we're gonna hear from three guys who worked for Steve Eisman, a fund manager at front Point Partners who bet on the housing market crashing in the late two thousands and was right. In the movie version of The Big Short, Eisman is called Mark Baum, and I want to play you a clip that's narrated by Ryan Gosling in which we're introduced to the three guys who worked for him.

What if you just say, I just want to play you a clip and then I we'll explain after.

Okay, It starts with Steve Carrell playing Mark Baum.

Guys.

Cynthia wants me to quit and I'll put a B and B in for Mott.

So that's great. I'd love to see Mark Baum run a bed and breakfast.

Benny Daniel, you know how to make a muffin Mark's numbers.

Guy, no joke.

She could actually make a move to her mind.

I mean she made me start wearing a seat. Porter Collins, former Olympic rower who went to Brown.

Sorry, I think we're the front Point because there is another front Point in the same building, that is Bonds, and Danny moses the optimist of the bunch and a hell of a trader, which is the only reason they put up with his bullshit optimism. It was this guy from Deutsche who was talking about shorting housing bonds.

So that's the movie version of what the front Point partners were like. Based on minoractions with them. That sounds about right. What was it like for you when you first met them?

Oh, the movie completely nails their interactions. I think of Eisman as sort of the main character, and he was kind of the big picture person, and then these other three guys were doing various little picture things. The big picture thing they were doing for me was watching Eisman. But each played kind of a slightly different role and

This is the Big Short Companion podcast, and on today's episode, Michael Lewis talks with the three front Point employees, Porter, Danny, and Vinnie.

The first of the three front Point traders I spoke to was Porter Collins. I asked him about meeting the trader from Deutsche Bank who is going to let them in on the big short itself, the bet against subprime mortgage bonds. Greg Littman walks into your life. Describe Greg Littman to me.

He looked like a Wall Street salesman. Whoever walked in that door that was gonna sell us credit to false swaps on housing was gonna get beaten up. But he walked in the room and he was one hundred and twenty percent confident about everything, and so therefore it made it's so much easier for us to not like him and to be skeptical of him and to go after him. You know what, They have a scene in the movie

The first thing that pops up in our head was how intense yet entertained we were during the whole process.

That's Vincent Daniel, whose character would launch Jeremy Strong's acting career.

It was very intensive every day to be thinking about this investment that we were doing, this trade we were doing, and then, like everything associated with our office, we made it quite entertaining to make sure that we kept saying minds.

So let's start this way. If you're just explaining to your kids what the hell of financial crisis was without using financial jargons, so in a way they'd understand that what happened in two thousand and eight, it was such a big deal, and what role did you play in it?

Well, the housing market crashed, right, and no one really talks about the why it crashed or what happened. There was a lot of bad loans that were made to people who shouldn't have gotten those loans at housing prices that were way too high and unaffordable for them, and they had an inability to pay those loans. Without getting into the intricacies of how we got there in the first place.

I'm gonna play the role of your child, okay, dad, So if that happened, so everybody lost a lot of money because the housing prices collapsed. How did you make money?

Well, we were betting that.

The housing prices would collapse, and that was based upon information and research. To kids, this is why you spend a lot of time going to school and doing your homemann Is because what we were doing was our homework and realized that housing prices were too high and these loans were going bad. And then so we figured it out a way to make an investment. I'll use the word investment rather than a bet. I guess to the kids that it would all go bad and we would make money.

Who let you make this investment? I mean if you made money, somebody lost money.

Yes, there was a middleman, right like any gambling ring usually has. As there's a middleman who was a bookie, and he was taking both sides of the bets. So we didn't really know who was on the other side. For the most part up until the end, we just knew that we had the ability to do what we wanted to do, and these brokers, these middlemen, allowed us to do it.

Let me continue in this vein of childlike questions. Sure, why didn't everybody do their homework like what happened?

Imagine if you're in school, and you're getting away with getting good grades without doing your homework. So more and more people will just not do their homework and everything will work out well. But if you actually did your homework, you would realize that at some point not doing your homework was not going to work. In fact, it was going to be really bad. And if you did do your homework, you were going to be rewarded in some way, shape or form or fashion.

Yeah, how hard was it for you to get your mind around the idea that you all could be right and the whole world was wrong. You were making a bet against the supposedly smartest people on Wall Street, who were inside the biggest firms on Wall Street, and they were all wrong.

I'll tell you why, Mike.

It was the only place that I had a PhD in what was happening?

Right. I lived this.

In the late nineties because I was covering the subprime mortgage companies way back when, So this was this was secondhand knowledge to me. If the massive crisis of this country was happening in the healthcare industry, I would have been useless. I would have been just like every other schmuck Wall Street person opining. But this was the one

Right, people not paying back their loans.

Right, correct, and you could comp them to the prior your vintages and the ones that we were short, the ones that we were betting against. The curves were horrifically bad. Like the delinquencies were well north of where they should be. The losses were starting to pile up and be well north of where they should be. So to us, to me, I'll speak for myself, it was simple math that we were going to be right. What I didn't realize was how far the FED would go to make sure that

How do you explain the ignorance of the most important people in the world. I mean, you would have thought that City Group and Merrill Lynch in the Federal Reserve would have people equally expert on this subject. Two were looking at all the data and all the curves, just like you in retrospect you look back on that. How do you explain it?

Of money?

That's the only way that in my head that rationalizes. I always assume that people saw what I saw, Particularly the people that were this close to the situation, that were analyzing these bonds and these these they knew, they had to know, but there was just too much money to be made on the incremental subprime loan. There was just too much money to be made, So they all turned the most intelligent ones turned the blind eye.

Yeah my opinion, Yeah.

That makes total sense that the only other people around who had access to the information were all being paid to misinterpret the information.

Correct.

We're going to take a quick break when we come back. I asked Vinnie and the other front Boy guys how being depicted in my book and in the movie affected their lives afterwards.

How did the Volkswagen Beetle go from being hitler dream car to a hippie icon? How did a disgruntled center fielder change the business of sports? I'm Jacob Goldstein and on Business History my co host Robert Smith, and I dig into the people and companies who created the modern world. Business History is full of innovations and failures and insights into how business works today. At the end of today's episode of Against the Rules, we're going to play a

Have the book in the movie sort of screwed up your memory of the experience in the way your you know, pictures from a family vacation screw up your family memory of the family vacation because all you end up remembering is the pictures. Or do you have scenes in your head that are just separate from that, that are vivid to you about the experience.

I'll give you a great personal business scene that really gets to I think what you're getting at. So I might get the dates slightly wrong. October two thousand and eight. Okay, my now deceased father in law takes the entire family on a Disney vacation and we were there during the time that the markets were blowing up. So while I'm

And I remember him going we're in the pool.

We're in the pool with all the kids, and I remember him going to, I guess, go to the bathroom, right, And I just sat there saying, he's going to come out check markets and he's going to have the face of the grim Reaper and look for me immediately and sure as shit. Every day that I was there, about four point thirty he comes out and I'm sitting there.

I probably have a cocktail in my hand.

I go here, it comes right, and he would just go, Vinny, what in the world is going on? And so that is kind of one of my memories of it gets back to, wow, we knew a lot back then, and I'm sitting in Disney World where everyone's playing around, no one's paying attention to anything. But come after four o'clock, my father in law started paying attention every day and I think the market was dound like ten percent that week.

And what do you say to him when he says, Vinnie, what the hell's going on?

It's like, well, I go, there's a problem with the housing market. And what you don't want to say is I've been trying to tell you this, but no one really listens to you until the markets actually go down.

Has anybody been angry at you for being right?

No?

No, You've got no anger.

No, no anger. Every once in a while you get well, why didn't you stop this?

Right?

Or I remember a few years ago I would get the like, how do you feel comfortable profiting from this?

And the way.

I explained our way around. It was like, look, we went down to Washington, DC many a time's pre crisis.

We are not silent wallflowers.

We went there and said, you guys are screwing up royally and I've come to learn and I have this line. I was like, unless you go to DC with a suitcase full of money on the accel express, no one's going to listen to And they didn't.

So it's not like we didn't try. We did.

And I know we didn't cause the crisis that I know, do we accelerate the crisis by increasing the amount of like synthetic stuff that was put on it? Maybe someone could maybe make that argument, But by the time we got involved, it was already gone.

So when you look back, looking back at the way you may have played a poker hand, is there any if you could replay it? Would you replay it any differently?

I would replay the after effects.

What I didn't realize was how they were going to quote remedy the issue, right, I wasn't of the belief that a lot of people were going to go to jail and like, but what I didn't realize to this day, I think that episode that incident. Recession was the last time material adverse price discovery can happen in markets.

Explain that, Explain that to a child what material adverse price selection is?

Okay? In markets, things go up, things go down. Right?

Would we have been taught by textbooks to believe that that's just how markets work, that's how capitalism works. Specifically, is that yes, you will have booms, but you will also have busts. The government said, we don't want busts anymore. We don't want prices to go back. Particularly, we don't want prices to go bad. And this probably where I don't think it's controversial at all.

We don't want.

Prices to go bad for the people who could actually afford for prices to go bad, meaning the wealthy people. You have your you're too influential, you're too powerful, you're too required to continue to spend the money that you do your wealth such that at the end of the day, we're going to bail you out, because if we don't bail you out, there are some major negative implications to

Give me an example of the fire hoses coming out.

The Silicon Valley Bank, and they're making it as if Silicon Valley Bank was small. It wasn't that small, right, If a major bank of that kind went under in a market where a price discovery was allowed, you would probably see the markets go down a material amount. They

That's it.

There used to be a time when price discovery was allowed. It's not allowed anymore.

I get asked a bunch why I opened and closed the Big Short with these characters, these front point guys and particular Steve Eisman. Part of it was they had this really deep experience with the subprime lending market that went back to the early nineteen nineties. They had seen firsthand this ugly border between high finance and the American lower middle class. And so they were in a way there at the very beginning of the story. But I ended the book with him because they had just handed

Literally until the day that Lehman went down, and we'd never realized how big this thing was, and so that moment on Saint Patrick's Cathedral on those steps was real.

So I don't want you to describe the moment on Saint Patrick's Cathedral, and.

We realized that like this is this is bad, like this is going to be over, Like what how is this going to play out? And so literally left the trading desk, gave it to junior trader reporter Vinnie walked me out. You know, Saint Patri's Cathedral was about one avenue over, and Steve was at a conference down at Goldman Sachs that day, probably raising as much money as he wanted to at that point, and we were sitting up there on the steps and we just had a

When I talk to them about publishing their stories, all the characters in the book shared this one concern. They were all really worried how it would look to have made a fortune from the collapse of a system and the ruin of so many careers and lives. Porter Collins especially brought this up.

I was scared, you know. When the book came out. My grandfather read it and he didn't really approve. He was like, well, you made all this money and everyone lost their homes, Like how does that make you feel? And so like that was that other side of the coin, right.

And what did you say to What did you say to him?

I said, he was right, you know, and he had the memory going back to you know, the depression, right, he came from a different era people forget all this stuff, and so you know, I had a bit of that. Maybe it's the waspiness in me or whatever it is. I was scared.

If i'd asked you to predict, as you're saying, I think, on the steps of the Saint Patrick's Cathedral, what the world's going to look like in fifteen years, And I mean not just the financial markets, but also the political markets. How far off would you have been? What did you imagine what was going to happen and what did happen.

I would have imagined that we would have had I would have been wrong. Put it that way. I would have imagined that there would have been more justice, or if you looked at prior times in history, there would have been more time to remedy the situation through price discovery. We wouldn't have allowed the proliferation of some of the excess leverage that has happened.

But I was naive.

So the system is set up in a way to reward the risk and not really punish the people that make the wrong bets. And so, yeah, you can lose your job, but as we saw during the financial no one went to jail afterwards, and who bailed them out? The taxpayer and the shareholders. Over time, that was it. No one else did. Some people paid fines here and there, but that's pretty much all it was. So the moral hazard that was created as a result of this and the crisis stays with us today.

I want to thank Danny Moses, Vincent Daniel, and Porter Collins for talking with me once again starting next week, We're going to widen out our lens and look at all the ways the financial crisis changed our world, but also how maybe the system averted something even worse than what we got.

Against the Rules, The Big Short Companion is hosted by Michael Lewis. It's produced by Me Ludy, Jane Cott and Catherine Girodell. Our editor is Julia Barton. Our theme was composed by Nick Brittel, and our engineer is Hans Dale Sheeting special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela Lawrence and the rest of the Pushkin Audiobooks team. Against

It's Jacob Goldstein. I'm the co host of a new show called Business History, and we're bringing you a clip right now from an episode we did about a mathematician name Jim Simon's. Simons wanted to take human emotions out of investing, and after a few early hiccups, including buying up all the potatoes in Maine, he created one of the greatest money machines in history. I really hope you like the clip, and if you want to hear more, please check out the show. It's called Business History and

A machine learning is like essentially, you build a system in a computer, you feeded a bunch of data and the system sort of builds a map of the relationships in that data, and then with new data it can kind of interpolate or extrapolate and make guesses about.

What should come next.

And of course today we have an exciting, maybe misleading, confounding term for machine learning.

We call it AI.

Exactly right, right, this is still very basic machine learning, and the computer at the time keeps making mistakes that they didn't really understand. So, for instance, once the computer developed a taste for potatoes, main potatoes. The system kept buying main potato futures in the state of Maine, potato.

Potatoes, big harvest next year or whatever, Yes, okay.

Until two thirds of the company's money was in potatoes. They were all in potatoes. And they got a call from the regulators, the.

CFT CFPP Commodi Futures Trading Commission.

Right saying, whoa who are you guys, Like, what are you doing over there? You have almost cornered the market on potatoes. You have to sell. And they ended up losing money on the trade because blown out on potatoes, they had stopped the computer whatever the computer's plan was. But you know, this was just one small weird thing. Simon and Baum were really kind of nervous about this whole thing. They had taken investors money, they didn't really