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Michael Lewis found him too normal
The Bear Stearns standoff
In 2007 a hedge fund inside Bear Stearns was going under, and 22 investors found themselves on the other side of it, short. They believed Bear Stearns was going to screw them. Seth Klarman phoned Todd Combs, whom he did not know well, to ask whether he was in the conversation.
The group organized a call with the SEC to say that what Bear Stearns was trying to do was absolutely illegal. If the SEC allowed it, they would take it to the Supreme Court if they had to, since it set an extremely bad precedent.
Michael Lewis calls
Somehow Lewis got the list of who had been on that call. He phoned the investor one day, a man he had never spoken to, and said he was writing a book. They talked off the record for about 45 minutes.
The investor said he did not want to be in the book or get any attention. Lewis told him not to worry, because he seemed too normal, a really nice guy. He ended up as one small piece of the backstory.
How did Bear Stearns' hedge funds collapse in 2007?
Two Bear Stearns hedge funds had invested heavily in securities backed by subprime mortgages, using borrowed money to magnify returns. As those securities fell in value in 2007, lenders demanded more collateral. Both funds collapsed that summer, and investors lost nearly all of their money. Bear Stearns itself was sold to JPMorgan Chase in March 2008 with the backing of the Federal Reserve.
Why did some investors bet against subprime mortgages?
Many mortgage bonds carried top credit ratings even though the loans inside them went to borrowers with weak credit. Investors who read the loan documents saw that defaults would run higher than the ratings implied. According to the S&P/Case-Shiller index, US home prices peaked in 2006 and then fell for years, which pushed defaults higher. Credit default swaps let investors bet against these bonds without owning them.
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