Inside the Sausage Factory

"At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. 'All these people were saying it was nearly as high in some other countries,' Zelman says. 'But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.' Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. 'It wasn’t that hard in hindsight to see it,' she says. 'It was very hard to know when it would stop.' Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. 'You needed the occasional assurance that you weren’t nuts,' she says. She wasn’t nuts. The world was."

In Portfolio, Michael Lewis revisits Wall Street twenty years after he first exposed its ways.