The 2008 Crisis Was No 'Accident': The 'Four Inevitabilities' Exposed by Iceman
The 2008 financial crisis cannot be explained solely by the 'collapse of the U.S. housing bubble.' Steve Eisman (an investor known as one of the models for 'The Big Short') breaks down this crisis into four factors. The key lies not in individual bad assets, but in the 'structure where financial institutions were tied together by a single rope.' To borrow his words, the crisis did not happen by accident along the way; it was 'baked'—in other words, it was almost inevitable.
1. The 'Third Cause' that sealed the crisis—Subprime loans held by the institutions themselves
Following the 'excessive leverage' and the 'collapse of a massive asset class (subprime)' discussed in Part 1, Eisman identifies a third cause as fatal.
That is 'systemically important financial institutions holding large amounts of subprime securities on their own balance sheets.'
Why did this happen? The background is simple: compensation design. The securitization business became a 'gold mine' for fees and bonuses, and the front lines were optimized for volume. Eisman cuts through the industry atmosphere like this:
'Incentives trump ethics every time'
Furthermore, he introduces the following as a response received during interactions with the securitization department:
'Hey, it's legal.'
1-1. The moment they bought the 'unsold goods' themselves, the escape route vanished
Around 2006, subprime loans were being originated at a scale of $600 billion per year, and securitization (CDOs, etc.) was also being 'overproduced.' This was a phase where, ideally, volume should have been restricted and underwriting standards tightened. However, because compensation was tied to volume, no one stepped on the brakes.
And for the portion where 'there were not enough buyers,' the securitization department persuaded the firm tohold it themselves. The reason was a stock phrase:
'It's AAA. What's the problem? (Famous last words)'
In this way, Wall Street became 'buried in subprime.' Here, the crisis became unavoidable.
2. The only 'new' fourth cause—The chain created by derivatives (CDS)
Financial crises in history often feature the 'three-piece set' of 'excessive leverage,' 'collapse of a large asset class,' and 'major players holding them.' The only thing unique about 2008 was the fourth cause,Credit Default Swaps (CDS).
Eisman explains that while CDS were rational as insurance for individual investors, they became a self-destruct mechanism for the system as a whole. As an example, he cites a mechanism where one obtains principal protection in the event of a default for an insurance premium of about 0.5% against a 6% annual corporate bond. The problem starts here.
The counterparties to CDS trades were not just investors, but primarily financial institutions themselves
Trading volume ballooned from 'billions' to 'trillions'
As a result, the balance sheets of major financial institutions were connected like a spider web through CDS
His sense of crisis is straightforward:
'If one firm goes, they all go'
The complexity, where no one knew where it started or where it would end, amplified the fear.
3. 2007–2009: The collapse proceeded 'slowly,' and finally avalanched all at once
Eisman says, 'As of the summer of 2007, the crisis was already baked.' The reason is that by the time subprime quality deteriorated and investors stopped buying, the major players were already holding the inventory.
The flow is summarized as follows:
Autumn 2007: Losses in internal funds at major firms surface (the tip of the iceberg)
March 2008: Bear Stearns collapses due to funding issues, rescued by JP Morgan acquisition
September 7, 2008: Fannie Mae/Freddie Mac placed under government conservatorship
September 14, 2008: Lehman Brothers bankruptcy (bailout refused due to political backlash)
Around September 16, 2008: The AIG crisis, a de facto bailout out of fear of a CDS chain reaction
Spring 2009: Forcing capital increases through stress tests to restore confidence
'In terms of justice alone, they should have been allowed to fail. However, that would have triggered a global depression.'
This is the perspective that the dilemma of 'justice vs. system maintenance' constrained policy decisions.
4. 'The biggest failure is the lack of prosecution'—the collapse of trust changed politics
As a point of discussion after the crisis, Iceman strongly emphasizes the lack of prosecution for Wall Street executives.
He states that this was not merely an emotional issue, but one that created political and social costs. What people felt was the perception that
'the fix for rich people was in'
, which led to the expansion of anti-establishment energy.
4-1. The mechanism he identifies as 'the clearest fraud'
The story of due diligence is particularly vivid.
When purchasing large quantities of mortgages, Wall Street effectively 'bought them blind'
Then, they had an external company (e.g., Clayton) inspect only a sample (about 10%)
The report showed that 10-40% of that sample was outside of standards
Even so, they did not scrutinize the remaining 90%, returned only the problematic portion, and securitized and sold the rest
He goes so far as to call this 'the greatest fraud in history.' On the other hand, regarding why the judiciary did not act, he also states, 'There is a theory, but no definitive proof,' showing a stance of separating fact from speculation.
5. The world after Dodd-Frank and the 'loophole' revealed by SVB in 2023
The core assessment is that the 2010 reform (Dodd-Frank) was not perfect, but it was effective for large banks. In particular, stress tests and capital/liquidity regulations curbed the extreme leverage seen before the crisis.
However, Silicon Valley Bank (SVB) in 2023 exploited the fact that 'strict regulations were centered on large banks.'
They bought many long-term bonds during the zero-interest rate period, and unrealized losses ballooned as interest rates rose
Depositors were concentrated in VC-related sectors, and a simultaneous withdrawal caused a 'forced sale'
Unrealized losses turned into actual losses, and the capital could not withstand it, leading to collapse
The lesson he draws from this is that 'rules determine behavior.' It is a perspective that the strength of the constraints, rather than whether they were smart, influenced the risk.
6. Banks that are now safer, the expanded 'outside of banking,' and the next focus
About 17 years since the crisis, he states that while he is 'not as worried about the soundness of the U.S. financial system as before,' he points out two side effects.
Private credit is expanding into areas that banks will not underwrite (outside of regulation)
Regulatory costs and the burden of technology investment are making large firms even stronger, leading to a concentration of deposit share
As for the future, based on the outlook for the economy, interest rates, the regulatory environment, and M&A, he predicts that 'the earnings environment for banks is not bad.' A major point of discussion is whether bank mergers will increase. He raises the issue that there is a need to increase the number of banks with the scale to cover technology investments.
