Financier Michael Perry became a household name after the 2015 movie “The Big Short,” which depicted his bet on the mortgage meltdown that sparked the 2008 financial crisis.
What most people tend to forget is that, on the other side of Barry’s bet on CDOs, there was notably Goldman Sachs. (p) . Secured debt obligations are loans, mortgages, and other assets that investment banks provide to investment institutions
In “The Big Short: Inside the Doomsday Machine” by Michael Lewis, Burry is said to have decided to bet on the mortgage market crash after noticing that many people couldn’t pay their mortgages. But lenders were finding new financial tools to justify handing over new money.
“It was a clear sign that lenders were losing it, which continually deteriorated their standards for increasing loan volumes,” Puri said.
The lenders were selling these loans to Goldman Sachs, Morgan Stanley, Wells Fargo and other banks too big to fail, which they bundled into bonds and sold. These practices almost brought the financial system to its knees. They caused the worst financial crisis since 1929.
On the verge of bankruptcy in September 2008, the insurance company AIG received $182 billion from American taxpayers through the United States government. Then the insurance company paid a large part of this money to the major banks. Goldman Sachs received $12.9 billion in bailout money, according to the Financial Crisis Inquiry Committee (FCIC) report into the 2008 financial meltdown. The move drew criticism.
Goldman Sachs has a problem with borrowers
The federal government had argued that if AIG had fallen it would have had a domino effect, i.e. massive successive meltdowns. However, Lehman Brothers did not save.
For Barry, Wall Street banks should have learned lessons from this crisis seen as the most serious since the Great Depression.
That explains his surprise at reading an article on CNBC showing that Goldman Sachs’ consumer credit loss rate was the highest among US card issuers.
Official data at Goldman Sachs shows that the most vulnerable consumers are no longer able to meet payment deadlines. Quoting a recent research note from JPMorgan, the report said: “Goldman Sachs’ loss rate on credit card loans was 2.93% in the second quarter. This is the worst among major US card issuers and ‘significantly higher than that of sub-prime lenders’.”
Goldman Sachs has granted about 28.3% ($3.35 billion) of $11.84 billion in consumer card loans to individuals with a FICO credit score of less than 660, according to regulatory filings.
FICO stands for Fair Isaac Corporation that measures a borrower’s creditworthiness by considering factors such as repayment and credit history. People with a credit score of 660 or less may find it difficult to get approval for credit without fees and high interest rates, according to Credit Karma.
Thus, the profile of more than a quarter of Goldman Sachs cardholders resembles that of issuers known for their high-risk real estate offerings.
“Goldman continues to intervene. AIG bailed out to save Goldman from yet another ‘sub-prime’ issue that everyone swore wouldn’t be ‘contagious’,” Bury said on Twitter on September 12.
He added: “Goldman Card Apple? Over a quarter for mortgage borrowers. Loss rate of 3% on that business as of the second quarter.”
Goldman Sachs did not respond to a request for comment.
This isn’t the first time Barry has faced Goldman Sachs. He has been criticizing the bank for several years now.