We’re still trying to digest this long piece from Holman Jenkins at Hoover.org, which does an elegant job exploding some of the biggest myths about the financial crisis, and any hope we have to prevent something like it from happening again.
It’s so good, it deserves several of its own posts, but we particularly enjoyed this about superstar fund manager John Paulson, who many credit for having seen the crisis coming before everyone else:
But, you say, didn’t a handful of shrewd hedge fund managers detect a bubble and clean up from betting against it? Yes, fund managers like John Paulson and Kyle Bass made huge fortunes betting against subprime. This doesn’t prove that all the signs were there to be read and so others must have behaved irresponsibly. Think about this: Somebody is always short something, just as others are long the same thing. For every buyer, there is a seller. But those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes. Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less. The reason they didn’t, it’s reasonable to suppose, is because no more than anyone else did they foresee the catastrophic consequences we now suppose were destined to flow from excessive issuance of subprime mortgages.
In other words, Paulson and Bass — as demonstrated by their approach — were a lot like the writers and pundits early in the crisis. They knew subprime was going to be a mess, but obviously had no idea about the extent of the problems, and didn’t figure that what was ultimately a tiny slice of the mortgage market could really turn into that big of a deal.
The whole article is plum with great points like that, so it’s really worth a read, despite it’s length.