John D. Rockefeller famously sold out of the stock market just before the 1929 crash because of a shoeshine boy. At least according to legend, he knew that when shoeshine boys were giving out stock tips, it was time to sell.
In The Big Short: Inside the Doomsday Machine, by Michael Lewis, there are a couple of shoeshine boy moments. In this case, it was not wealthy industrialists or anyone at the heart of the financial world who figured out that there would be a collapse triggered by billion-dollar bets on the subprime mortgages and their derivative securities.
Lewis writes about four outsiders who saw what was coming and bet it would fail while the entire economy was betting the other way. Steve Eisman had a “light bulb” moment when he found out that his former baby nurse had six investment properties. Michael Burry asked if he could buy a security betting a group of the subprime mortgages would fail. He wanted to bet against a group made up entirely of no-doc loans (those where the applicants for the mortgages did not have to submit any documentation to demonstrate their ability to repay). He wanted it to be a group rated A by one of the ratings agencies, the same rating given to groups of mortgages where the applicants had to demonstrate that they could repay. And he got it.
Why were they the only ones who saw that as a problem? And how did that problem get created in the first place?
What went wrong?
In late 2007, the United States economy suffered its worst economic ...