More (#1) from The Big Short:

[Meredith] Whitney was an obscure analyst of financial firms for an obscure financial firm, Oppenheimer and Co., who, on October 31, 2007, ceased to be obscure. On that day she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It's never entirely clear on any given day what causes what inside the stock market, but it was pretty clear that, on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of, and who could have been dismissed as a nobody, had shaved 8 percent off the shares of Citigroup and $390 billion off the value of the U.S. stock market. Four days later, Citigroup CEO Chuck Prince resigned. Two weeks later, Citigroup slashed its dividend.

From that moment, Meredith Whitney became E. F. Hutton: When she spoke, people listened. Her message was clear: If you want to know what these Wall Street firms are really worth, take a cold, hard look at these crappy assets they're holding with borrowed money, and imagine what they'd fetch in a fire sale. The vast assemblages of highly paid people inside them were worth, in her view, nothing. All through 2008, she followed the bankers' and brokers' claims that they had put their problems behind them with this write-down or that capital raise with her own claim: You're wrong. You're still not facing up to how badly you have mismanaged your business. You're still not acknowledging billions of dollars in losses on subprime mortgage bonds. The value of your securities is as illusory as the value of your people. Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it's true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms, or even the extent of their losses in the subprime mortgage market. The CEOs themselves didn't know. "Either that or they are all liars," she said, "but I assume they really just don't know."

Now, obviously, Meredith Whitney didn't sink Wall Street. She'd just expressed most clearly and most loudly a view that turned out to be far more seditious to the social order than, say, the many campaigns by various New York attorneys general against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they would have vanished long ago. This woman wasn't saying that Wall Street bankers were corrupt. She was saying that they were stupid. These people whose job it was to allocate capital apparently didn't even know how to manage their own.

And:

"Here's this database," Eisman said simply. "Go into that room. Don't come out until you've figured out what it means."...

What first caught Vinny's eye were the high prepayments coming in from a sector called "manufactured housing." ("It sounds better than 'mobile homes.'") Mobile homes were different from the wheel-less kind: Their value dropped, like cars', the moment they left the store. The mobile home buyer, unlike the ordinary home buyer, couldn't expect to refinance in two years and take money out. Why were they prepaying so fast? Vinny asked himself. "It made no sense to me. Then I saw that the reason the prepayments were so high is that they were involuntary." "Involuntary prepayment" sounds better than "default." Mobile home buyers were defaulting on their loans, their mobile homes were being repossessed, and the people who had lent them money were receiving fractions of the original loans. "Eventually I saw that all the subprime sectors were either being prepaid or going bad at an incredible rate," said Vinny. "I was just seeing stunningly high delinquency rates in these pools." The interest rate on the loans wasn't high enough to justify the risk of lending to this particular slice of the American population. It was as if the ordinary rules of finance had been suspended in response to a social problem. A thought crossed his mind: How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.

To sift every pool of subprime mortgage loans took him six months, but when he was done he came out of the room and gave Eisman the news. All these subprime lending companies were growing so rapidly, and using such goofy accounting, that they could mask the fact that they had no real earnings, just illusory, accounting-driven, ones. They had the essential feature of a Ponzi scheme: To maintain the fiction that they were profitable enterprises, they needed more and more capital to create more and more subprime loans. "I wasn't actually a hundred percent sure I was right," said Vinny, "but I go to Steve and say, 'This really doesn't look good.' That was all he needed to know. I think what he needed was evidence to downgrade the stock."

The report Eisman wrote trashed all of the subprime originators; one by one, he exposed the deceptions of a dozen companies. "Here is the difference," he said, "between the view of the world they are presenting to you and the actual numbers." The subprime companies did not appreciate his effort. "He created a shitstorm," said Vinny. "All these subprime companies were calling and hollering at him: You're wrong. Your data's wrong. And he just hollered back at them, 'It's YOUR fucking data!'" One of the reasons Eisman's report disturbed so many is that he'd failed to give the companies he'd insulted fair warning. He'd violated the Wall Street code. "Steve knew this was going to create a shitstorm," said Vinny. "And he wanted to create the shitstorm. And he didn't want to be talked out of it. And if he told them, he'd have had all these people trying to talk him out of it."

"We were never able to evaluate the loans before because we never had the data," said Eisman later. "My name was wedded to this industry. My entire reputation had been built on covering these stocks. If I was wrong, that would be the end of the career of Steve Eisman."

Eisman published his report in September 1997, in the middle of what appeared to be one of the greatest economic booms in U.S. history. Less than a year later, Russia defaulted and a hedge fund called Long-Term Capital Management went bankrupt. In the subsequent flight to safety, the early subprime lenders were denied capital and promptly went bankrupt en masse. Their failure was interpreted as an indictment of their accounting practices, which allowed them to record profits before they were realized. No one but Vinny, so far as Vinny could tell, ever really understood the crappiness of the loans they had made. "It made me feel good that there was such inefficiency to this market," he said. "Because if the market catches on to everything, I probably have the wrong job. You can't add anything by looking at this arcane stuff, so why bother? But I was the only guy I knew who was covering companies that were all going to go bust during the greatest economic boom we'll ever see in my lifetime. I saw how the sausage was made in the economy and it was really freaky."