One man’s prophet is another man’s raging a**hole

Michael Lewis' long article in Portfolio provides one of the more accessible explanations for how and why Wall Street investors managed to act so recklessly with regard to the subprime mortgage market. Lewis also makes clear why none of the Cassandras were heard by the rest of the market.  Lewis' hero is Steve Eisman, who predicted the collapse of the housing market to anyone who asked.  The problem was, Eisman could be really, really annoying in doing so. Consider this anecdote from Lewis' story:  By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged. Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”  “Would you say that 5 percent is a probability or a possibility?” Eisman asked. A probability, said the C.E.O., and he continued his speech. Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.  “Yes?” the C.E.O. said, obviously irritated. “Is that another question?” “No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out. Eisman was right, but his behavior here suggests why he was such a lonely prophet.  Furthermore, based on that kind of behavior, one could be orgiven for thinking that Eisman was merely the latest in a long line of obnoxious market analysts.  It's not enough to be right -- it's also important to have the emotional intelligence necessary to persuade others that you are right.