New York — As Wall Street’s disastrous year draws to a close, contributing editor Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong (“The End,” p. 114). Lewis focuses on a tiny group of traders led by Steve Eisman, who determined long ago just how the bull would be killed—and who profited while the banks were imploding. Eisman started out as an analyst at Oppenheimer in 1991, where he covered subprime mortgage banks and presciently levied “sell” ratings on many companies involved in subprime lending. “I did subprime first. I lived with the worst first,” Eisman says. “These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.” Lewis discovers that Eisman—who now leads a small team of traders at FrontPoint Partners hedge fund—was mostly convinced by spring of 2005 that something was very screwed up, not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. “[Eisman] still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine,” Lewis writes. “He was at once opportunistic and outraged.” Lewis reports that Eisman, who was running a $60 million equity fund, was short around $600 million of various subprime-related securities by 2007. Eisman had already shorted the stocks of mortgage originators and homebuilders, but now he took short positions in the ratings agencies, arguing that “they were making 10 times more rating C.D.O.’s than they were rating G.M. bonds, and it was all going to end,” a situation that also applied to the biggest Wall Street firms because of their exposure to C.D.O.’s. Eisman tells Lewis that he had tried thousands of times in thousands of ways to explain how screwed up the business was, and that no one wanted to hear it. “That Wall Street has gone down because of this is justice,” Eisman says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”


Also in the December/January issue:


“Heartbreak Hotels” (p. 124) In the last big deal of the gilded buyout era, Blackstone paid $26 billion for the Hilton empire, making C.E.O. Stephen Schwarzman the world’s largest hotelier. Now, in a slumping hotel industry,  Joe Keohane reports that Schwarzman has checked in and may not be able to check out. Shortly after the Hilton deal, which includes the famed Waldorf Astoria hotel, was completed, the subprime crisis led to credit markets freezing up. Keohane reports that the $26 billion payment for Hilton—a 40 percent premium over its share price—floated on $20 billion of cheap and flexible debt that spurred the global liquidity crisis. “The market is so sluggish that the debt associated with the Hilton deal, which in better days would have been moved with relative ease, remains unsold,” Keohane writes. “J.P. Morgan inherited the debt from Bear Stearns, which helped finance the deal, and it still languishes on Morgan’s books.” But Blackstone and new Hilton C.E.O. Christopher Nassetta insist the transaction was a shrewd move. “Our competitors want to talk the deal down and say, ‘Oh my God, they gotta be hating life,’ but the fact is, we’re feeling great,” Nassetta says. But Keohane reports that hotel companies are uniquely vulnerable to changes in the economy; these days they are getting it from all sides, from frozen credit markets to rising airfares to cuts in airline service. Keohane maintains that the Hilton deal will be crucial in determining Schwarzman’s legacy, “whether he will be immortalized for his financial acumen or instead personify the excesses of a bloated, bygone era.”

“The Hedge Fund Collapse” (p. 142) Senior writer Jesse Eisinger predicts that in the next few months, hundreds of hedge funds will go out of business, and those that don’t may wish they had gone under as well. “In the past several years, our society’s best-paid people made money out of money,” Eisinger writes. “They weren’t cancer researchers or astrophysicists. They weren’t even the really important people, like N.B.A. players or movie stars. They were hedge fund managers.… So much for that. The hedge fund mystique died with the crash of 2008.” Eisinger maintains that what will emerge from the rubble is a smaller, more focused hedge fund industry that will be regulated by the federal government, with pay that better reflects long-term performance.

“Mayor Bloomberg’s Delicate Condition” (p. 130) The billionaire Mayor Michael Bloomberg is near the height of his popularity. And yet, as Sheelah Kolhatkar reports, on the eve of Bloomberg’s run for a third term in New York’s top job, the media company that bears his name is facing a class action lawsuit charging it with discriminating against pregnant workers. While Bloomberg no longer runs the day-to-day operations of the company, many of the allegations date back to when Bloomberg himself was still in charge—when his famous “bluntness and salty, sometimes downright crude, sense of humor typified the firm,” Kolhatkar writes. Tanys Lancaster, at one time among the company’s highest-ranking female executives and now one of the plaintiffs, speaks exclusively to Kolhatkar. Other lawsuits have alleged Bloomberg would regularly make offensive comments such as “I’d fuck that in a second,” “I’d like to do that,” and “That’s a great piece of ass.” According to one woman, who once sued Bloomberg L.P., Bloomberg’s reaction upon learning one of his workers was pregnant was to say, “For Christ’s sake! What the hell did you do a thing like that for?” In the current class action suit, there are now 72 plaintiffs, out of about 500 women who took maternity leave since 2002—a high percentage, according to the Equal Employment Opportunity Commission. Bloomberg has shown a much different side during his two terms as mayor; however, the question remains as to how these lawsuits will affect his bid for a third term.

“Be a Trump!” (p. 146) In the shadow of his famous father, Donald Trump Jr. sits down for a candid interview with contributing editor Alexandra Wolfe to discuss his new business ventures, the global meltdown, and why some rich people can’t get mortgages. Talking about one of his recent business trips to India, Donald Jr. says that the last time he was there, “I got so sick I thought I was going to die. This time, I told them I wanted plain pasta in bottled water with no sauce. That’s all I ate, except a granola bar.” At the table with Donald Jr. was his publicist, who continually reminds him to “Be a Trump!” when discussing his deals. On the differences in the decoration of his and his father’s offices, Donald Jr. says, “If you see my dad’s office, it’s so ’80s you can pinpoint the month: September ’82. Our office is much more contemporary and elegant and more in the direction of where we’ll be taking the brand in the future.”

“Worst of Times” (p. 74) Despite many economists’ predictions of a recovery late next year, contributing editor John Cassidy says don’t bet on it. “Having buried their heads in the sand for much of the past year, most professional economic forecasters are now predicting a moderate recession that will last until the middle of 2009—a consensus that could well prove as overly optimistic as the previous one, in which the U.S. was expected to avoid a recession altogether,” Cassidy writes. All the signs of a market in turmoil—rising unemployment, declining housing starts, and a declining federal funds rate—only serve as further proof that our economy is in deep trouble, according to Cassidy.
 
“The Peterson Principle” (p. 82) Washington editor Matt Cooper sits down with Blackstone co-founder Pete Peterson, who is betting $1 billion that he can close the federal deficit. Cooper reports that Peterson promised $1 billion of his personal fortune to start a foundation, the main purpose of which is to get the American public to realize just how scary and corrosive deficit spending is. Peterson now believes this spending has gotten a lot worse and warns that if the U.S. doesn’t do something to restore long-term fiscal discipline, the country could turn into a “banana republic,” unable to afford such government-supported entities as the F.B.I. and Yellowstone National Park.

“ ‘Golden Boy’ Oscar De la Hoya vs. the Boxing Establishment” (p. 136) Contributing editor Franz Lidz profiles boxing champion Oscar De La Hoya and his multimillion dollar boxing business, Golden Boy Productions. Lidz reports that the middleweight fighter, while emerging as a heavyweight promoter with 50 boxers in his stable, still faces the challenge of trying to transform the dying sport of boxing into a legitimate business. According to Lidz, De La Hoya has taken an aggressive business approach to expand his company by courting the top fighters and promoting more of the fights, and currently has a stake in 95 percent of boxing’s “pay per view” volume in the U.S. One competitor tells Lidz, “Golden Boy Productions will be the death of the sport. Basically, it’s the Wal-Mart of boxing.” Whether De la Hoya will retire from the ring and focus solely on his business is up in the air, but Lidz maintains that De la Hoya’s success as a fighter has a huge impact on the success of his company. “He really wants to retire, but he realizes that he’s got to prolong his career to maintain his edge over other promoters,” Lidz writes.

“The Case for Chapter 11” (p. 65) Paul Ingrassia argues that bankruptcy might not be the worst option for General Motors. “A bankruptcy filing, if managed properly, might not be a death sentence for G.M. but instead a chance for it to streamline its operations,” Ingrassia writes. “The main advantage of Chapter 11 is that it would give G.M. a chance to wipe the slate clean and do what pretty much everyone agrees it needs to—reduce its number of brands and cut costs.”

“Scientology’s Money Trail” (p. 80) L. Christopher Smith calculates the estimated total revenue of the secretive Church of Scientology. Smith estimates that, including money from fundraising, consulting profits, and membership fees, the church’s total annual revenue is $500 to $550 million.

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