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Speaker 1: Pushkin.

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Speaker 2: I'm Lydia Dean Cott, and I'm Michael Lewis.

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Speaker 1: So Michael.

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Speaker 3: Last week for the special series about The Big Short,

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Speaker 3: you spoke with Adam McKay, who directed The Big Short movie.

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Speaker 3: And today we're going to talk to some of the

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Speaker 3: real people who inspired the characters in the movie, the

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Speaker 3: people who were in your book. And I want to

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Speaker 3: start with a scene that's really early on in the movie.

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Speaker 3: It shows a meeting between the team at a small

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Speaker 3: investment firm called front Point Partners with the bond trader

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Speaker 3: from Deutsche Bank. And this bond trader had called them

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Speaker 3: up and he said he had this deal for them

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Speaker 3: that was too good to be true. And also he

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Speaker 3: called them by accident.

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Speaker 2: That's exactly right.

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Speaker 3: And in the movie, the bond trader's name is Jared

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Speaker 3: Vennette and he's played by Ryan Gosling.

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Speaker 1: Here's the clip you smell them?

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Speaker 4: What is the what?

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Speaker 1: What's that small cologne? No opportunity? No money? Okay, there's

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Speaker 1: no money, okay.

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Speaker 2: Ryan Gosling is playing Greg Littman. Even Greg Littman thinks

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Speaker 2: he's Greg Lipman when he's watching it. And Steve Carell

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Speaker 2: plays a character named Mark Boll because Steve Eisman said

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Speaker 2: he didn't want his name in the movie. So well

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Speaker 2: that Evan Eisman says, yeah, that's kind.

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Speaker 3: Of me, Like do people were lustress?

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Speaker 1: Do they actually talk like this like this?

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Speaker 2: Only Greg Lipman talks like this, he does. Oh my god. Yes,

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Speaker 2: I'm racking my brain thinking to take myself back to

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Speaker 2: why I was so excited when I was writing the book,

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Speaker 2: and one of the reasons was Greg Littman was the

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Speaker 2: only honest man on Wall Street at that moment. He

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Speaker 2: was he had figured out what was going on. He

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Speaker 2: was indeed selling the trade of the century. Everything he

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Speaker 2: said was true, but he seemed like use car salesman,

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Speaker 2: so nobody trusted him. Nobody believed him, but he was

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Speaker 2: the only person you should trust. And on the other

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Speaker 2: side of it, Steve Eisman was like the person on

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Speaker 2: Wall Street designed to mistrust Wall Street, like so deeply

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Speaker 2: cynical about Wall Street people, especially people involved in the

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Speaker 2: subprime mortgage market. So these two were meant to just

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Speaker 2: be at each other's throats, and yet it ends up

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Speaker 2: being a match made in heaven. I would go into

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Speaker 2: Eisman's office when I started working on the book, and

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Speaker 2: I would take off the other guys into rooms by

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Speaker 2: themselves to just hear the story of which important person

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Speaker 2: on Wall Street Eisman had insulted most recently. He just

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Speaker 2: did it over and over and over. I couldn't control himself.

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Speaker 2: And they assumed when when Greg Lippman wanders into their office,

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Speaker 2: then yeah, he's gonna end up being lunch, you know,

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Speaker 2: and instead they're made to be on this big screen together.

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Speaker 3: This is the Big Short Companion podcast. To the break

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Speaker 3: Michael Lewis's conversation with Greg Littman and a little later

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Speaker 3: on the real Steve Eisman.

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Speaker 2: Greg Littman is now the chief investment officer at the

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Speaker 2: asset management firm Libramax Capital. I noticed when I first

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Speaker 2: met him how good he was it breaking stuff down,

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Speaker 2: and that hasn't changed. How do you put it in

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Speaker 2: the simplest terms, like this financial crisis through your eyes

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Speaker 2: and what you experienced.

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Speaker 5: Human nature vacillates between fear and greed, and during long

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Speaker 5: periods where things are going well, people get greedier and greedier.

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Speaker 5: And so what happened during a great financial crisis was

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Speaker 5: that institutions were taking on greater and greater risks in

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Speaker 5: order to generate the same returns as instrates kept going

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Speaker 5: lower and credit spreads kept tightening. So if you're a

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Speaker 5: banker an insurance company you need to generate a certain return,

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Speaker 5: you accepted a greater amount of risk for the same

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Speaker 5: reward because in a competitive process, everybody else was doing

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Speaker 5: the same. And so that was the setup for the

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Speaker 5: Great Financial Crisis. And then the match that lit it

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Speaker 5: was the aggressive lending to homeowners in America. And as

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Speaker 5: home prices went up faster than incomes went up, the

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Speaker 5: mortgage payments had to adjust to enable people to afford

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Speaker 5: a house that they previously would have been unable to

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Speaker 5: afford that price, and so the mortgages became more and

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Speaker 5: more back ended. There was a saying, a rolling loan

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Speaker 5: gathers no loss. As long as we make new loans

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Speaker 5: to pay off the old loans, they'll never be a problem.

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Speaker 5: So I had a view that someday there would be

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Speaker 5: an issue where you couldn't pay off the old loan

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Speaker 5: with a new loan, and therefore the payments were going

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Speaker 5: to go up so high that they would default.

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Speaker 2: So it's so interesting the social role you played in

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Speaker 2: the market, seeing the world as it is and much

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Speaker 2: of the financial system is not. Most of the people

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Speaker 2: in the big banks are not seeing what you're seeing.

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Speaker 2: You're running around the world with the truth, and only

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Speaker 2: a handful of people basically believe the truth.

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Speaker 5: I pitched two hundred and fifty hedge funds roughly, and

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Speaker 5: I got about seventy five to do it. So, so

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Speaker 5: first of all, you're not going to have seventy five

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Speaker 5: people that are the same. And it's more than seventy

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Speaker 5: five people, because you know, there were more than one

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Speaker 5: person in most of these places, so call it you know,

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Speaker 5: three hundred people, right, So you're not going to have

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Speaker 5: three hundred people that are the same in the same

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Speaker 5: way the one hundred and seventy five firms that met

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Speaker 5: me and didn't do it, they're not all the same either, right.

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Speaker 5: But certainly, I think it's reasonable to say that that

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Speaker 5: people that were very establishment people, people that you know,

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Speaker 5: were the prompting of they're high school. Those were people

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Speaker 5: who generally didn't see it, didn't want to see it,

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Speaker 5: and people who felt a little bit more like outsiders

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Speaker 5: were either more more willing or more able, or in

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Speaker 5: some cases, I think you know, some of your characters

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Speaker 5: even were hoping to see it, you know, more than others.

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Speaker 5: I put the trade on in the fall of five.

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Speaker 5: That's when I start the trade, and I'd explain to

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Speaker 5: my bosses, I run a business make two hunred million

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Speaker 5: dollars a year for you, I want to put this

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Speaker 5: trade on. I'm going to spend twenty million dollars a

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Speaker 5: year until I win. The fixed income globally makes sixteen billion.

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Speaker 5: So if everything continues the way it's been going and

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Speaker 5: I put this trade on, y'all are going to make

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Speaker 5: fifteen point nine to eight billion.

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Speaker 1: You're not even going to notice my thing.

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Speaker 5: And if my thing blows up, I think it's going

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Speaker 5: to affect your sixteen billion, So you're.

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Speaker 1: Going to need my money. So that's the thesis.

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Speaker 5: So about six months later they were like, well it

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Speaker 5: didn't work yet, and I was like, so, m I

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Speaker 5: told you the thesis was this two to four years,

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Speaker 5: and like leave me alone. Well, we don't like that.

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Speaker 5: You need to find people that believe in this besides yourself.

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Speaker 5: So if you can't find anybody else, we're going to

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Speaker 5: close you down. And we really don't like losing, you know,

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Speaker 5: two million a month until we make a billion. We

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Speaker 5: don't like that because they lived for this month's earnings report, right.

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Speaker 5: So I went on a mission to find people to

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Speaker 5: allow me to stay in the game. That's I looked

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Speaker 5: at these people and said, hey, like, I'm going to

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Speaker 5: give them something that I think is great for them,

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Speaker 5: and what they're going to give me an exchange for

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Speaker 5: that is enable me to stay in the game. I

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Speaker 5: viewed this meeting them as much better for them than

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Speaker 5: for me, very good for me. I was giving people

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Speaker 5: an amazing thing and just they weren't going to make

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Speaker 5: all the money, but they were going to make tons

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Speaker 5: of money. So I was on a mission where I

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Speaker 5: had to find people to cover this week's bill. What

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Speaker 5: is true is it was sort of a wrong number

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Speaker 5: in the sense that I was trying to reach the

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Speaker 5: front point that was long one of these subprime originators.

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Speaker 5: But what's also true is I was trying to find

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Speaker 5: anyone that was willing to listen to my idea and

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Speaker 5: pay this week's You know, bar tab, Had.

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Speaker 2: You ever met any of them?

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Speaker 1: No?

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Speaker 5: No, Now, they reminded me of people that I went

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Speaker 5: to summer camp with. I had gone to a summer

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Speaker 5: camp where it was run by a charity so people paid,

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Speaker 5: you know, differently based on their income. And there's a

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Speaker 5: lot of kids from Queens in the Bronx. And and

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Speaker 5: while I was sort of very solidly middle class for

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Speaker 5: that camp, it was like a lower class camp in

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Speaker 5: terms of income. I found them entertaining. I found Eisman

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Speaker 5: to be more difficult than the other guys.

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Speaker 2: And what was difficult about Heisman?

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Speaker 5: So look, there were people then, not not Eisman, but

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Speaker 5: there were people that whatever I said, you know, I

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Speaker 5: said black, they said white, and we're just like difficult

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Speaker 5: for the sake of being difficult. But I remember him

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Speaker 5: as being a little bit that way. Also, you know,

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Speaker 5: I don't I remember not thinking he was a nice

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Speaker 5: guy for sure. I would also say I met a

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Speaker 5: lot of people who were extraordinarily wealthy during this time,

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Speaker 5: and most of those people seemed unhappy, uh And which

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Speaker 5: is interesting, uh in and of itself. And and and

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Speaker 5: you know, much wealthier than than than Eisman was at

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Speaker 5: the time.

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Speaker 2: So that's Greg Lippman, the person who, in the run

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Speaker 2: up to the financial crisis sniffed out Wall Street's dark

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Speaker 2: secret long before most everybody else. I really appreciate him

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Speaker 2: talking with me again after all this time When we

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Speaker 2: come back from the break, I speak with the fellow.

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Speaker 2: We were just talking about Steve Eisman, the founder of

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Speaker 2: front Point Partners and at the time won very difficult customers.

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Speaker 4: How did the Volkswagen Beatle go from being Hitler's dream

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Speaker 4: car to a hippie icon. How did a disgruntled center

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Speaker 4: fielder change the business of sports? I'm Jacob Goldstein and

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Speaker 4: on Business History my co host Robert Smith, and I

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Speaker 4: dig into the people and companies who created the modern world.

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Speaker 4: Business History is full of innovations and failures and insights

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Speaker 4: into how business works today. At the end of today's

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Speaker 4: episode of Against the Rules, we're going to play a

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Speaker 4: clip from our episode about Jim Simon's decades ago. Simon's

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Speaker 4: basically invented modern algorithmic trading. After a few early hiccups,

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Speaker 4: including buying up all the potatoes in Maine, Simon's built

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Speaker 4: a machine that generated incredible returns for decades. The show

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Speaker 4: is called Business History and the previous coming up at

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Speaker 4: the end of today's episode of Against the Rules, and.

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Speaker 2: We're back in the Big Short. One of my main

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Speaker 2: characters was a guy named Steve Eisman, who managed an

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Speaker 2: investment fund under Morgan Stanley called front Point Partners. He

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Speaker 2: had a long history with subprime mortgages, and he said

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Speaker 2: something was wrong with the mortgage backed securities market long

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Speaker 2: before many other people did. In the movie version of

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Speaker 2: the book, his character was called Mark Baum, played by

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Speaker 2: the actor Steve Carell. To a t hold on, So,

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Speaker 2: mortgage bonds are dogshit.

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Speaker 6: CDOs are dogshit wrapped in catshit.

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Speaker 1: Yeah, that's right.

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Speaker 2: Institutions treat the CDOs like they're as solid as treasury bonds,

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Speaker 2: and they're going to zero now, it can't be right there.

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Speaker 2: Five hundred billion and housing bus so last year alone,

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Speaker 2: the ratings agencies, the banks, the fucking government, they're saying,

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Speaker 2: they're all asleep at the wheel.

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Speaker 1: Lipman, God bless him, is actually an incredibly honest person,

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Speaker 1: incredibly honest. He was always honest with us. But he

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Speaker 1: comes across as a bit like a used car salesman,

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Speaker 1: and that's just who he is. Yeah, you know, But

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Speaker 1: but like I said, there is not one thing that

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Speaker 1: Lipman ever did that wasn't completely about board with me.

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Speaker 1: But after the meeting, like you know, the guys thought said,

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Speaker 1: what do you think? I said, what do I think?

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Speaker 1: Somebody just told me how to make a gazillion dollars.

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Speaker 1: I'm ready to go, and I said, wait a minute,

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Speaker 1: he's going to screw with somehow. And he actually told

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Speaker 1: you how he was going to screw you. He said

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Speaker 1: to us in the meeting, let's say the credit to

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Speaker 1: false swap goes down in price. Let's see why it

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Speaker 1: par And it goes down to thirty cents on the

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Speaker 1: dollars you made seventy cents. He says, when you want

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Speaker 1: to get out, I'll take you out at forty. And

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Speaker 1: guess what he was wrong, because by the time we

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Speaker 1: wanted to get out, everybody wanted our credit to fault swots.

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Speaker 1: That's how he thought he was going to screw you, right,

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Speaker 1: But he didn't.

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Speaker 2: When you think back on the financial crisis on that period,

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Speaker 2: what scenes pop into your head.

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Speaker 1: One scene that's not in the movie is so you

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Speaker 1: go back. So Lehman was on that Sunday in I

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Speaker 1: think September. I forget whatever day to like fourteenth or something.

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Speaker 1: So that was Sunday, and then Merrill Lynch got bought

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Speaker 1: out by Bank of America on the same day. I

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Speaker 1: remember sitting in a restaurant. I had a black bear

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Speaker 1: and I remember looking at my BlackBerry and it comes

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Speaker 1: across AI's fucked. It's basically what it said. I said,

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Speaker 1: Oh God, here we go. And then Friday. At the

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Speaker 1: end of that day, Friday, Paulson stopped short selling. But

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Speaker 1: in the morning it looked like planet Earth burning literally.

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Speaker 1: I mean, I remember We're sitting at the desk and

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Speaker 1: Danny was having like an anxiety attack, so with the

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Speaker 1: rest of us by the way, and I had to

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Speaker 1: go to a conference. And then I got a phone

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Speaker 1: call from Portera to say that because Danny was going

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Speaker 1: so nuts, they took him, walked him out of the office.

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Speaker 1: I'm coming, I said, meet me at the Saint Patrick's Cathedral,

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Speaker 1: which was a block from our office. And I remember,

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Speaker 1: so it's Friday now, like at around one thirty and

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Speaker 1: an hour, Paulson is about to come out with this news,

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Speaker 1: but we don't know that obviously.

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Speaker 2: And remind me of the news is that the news was.

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Speaker 1: That there's no short selling of financial companies, right, so.

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Speaker 2: You couldn't you couldn't you couldn't bet against Morgan Stanley

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Speaker 2: and Goldman Sachs in.

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Speaker 1: The stock market correct and cause an enormous rally in

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Speaker 1: the market. For two days.

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Speaker 6: That was it.

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Speaker 1: And we were sitting on the steps of Saint Patrick's

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Speaker 1: Cathedral and it was a gorgeous day, gorgeous day, and

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Speaker 1: I remember turning to one of the guys and I

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Speaker 1: said something like, these poor people, they have absolutely no

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Speaker 1: idea what's about to hit them? That I remember.

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Speaker 2: Did what you imagine what was about to hit them

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Speaker 2: hit them? Or did it play out differently than you imagined?

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Speaker 1: It mostly hit them. I mean the government stepped in

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Speaker 1: and prevent the worst, which it had to do. But look,

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Speaker 1: I don't remember unemployment levels got to like ten percent.

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Speaker 1: They would have gone to thirty. It would have been

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Speaker 1: a depression, there's no question.

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Speaker 5: Yeah.

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Speaker 1: So the government prevented the worst, and it was about

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Speaker 1: as good a job as they could do, with one

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Speaker 1: major mistake. I think the biggest mistake the Obama administration

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Speaker 1: made was and nobody went to jail. That was a terrible,

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Speaker 1: terrible policy error. And by the way, to this day,

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Speaker 1: no one knows how it happened, why that happened. The fraud,

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Speaker 1: and this is the biggest fraud in human history, was this.

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Speaker 1: When you're a Wall Street firm, you have a relationship

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Speaker 1: with subprime lenders from whom you're buying mortgages to create

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Speaker 1: a securitization. And basically what you do is you go

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Speaker 1: to the subprime firm and you say, I'll buy every

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Speaker 1: single loan that you make that has the following characteristics,

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Speaker 1: and you lay them out and call that like that's

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Speaker 1: your underwriting box. You go buy a billion dollars worth

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Speaker 1: of mortgages. On the day you buy them, you buy

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Speaker 1: them blind. You have absolutely no idea what's in the files.

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Speaker 1: So a billion dollars worth of mortgages. You can't securitize

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Speaker 1: a billion dollars worth of mortgages and say we have

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Speaker 1: no freaking idea what's in these files. Even Wall Street

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Speaker 1: won't do that, but it's expensive to go through five

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Speaker 1: thousand files. So literally every single Wall Street firm hired

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Speaker 1: a due diligence firm, and they hire the same due

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Speaker 1: diligence firm. It's called Clayton Mortgage. Yeah, so Clayton Mortgage

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Speaker 1: was hired by literally every single Wall Street firm, and

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Speaker 1: every single Wall Street firm gave Clayton Mortgage the same

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Speaker 1: marching orders, which is pull a statistically significant sample of

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Speaker 1: the files and tell us what's in them. So, starting

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Speaker 1: in six when the underwriting standard as we all know

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Speaker 1: now went completely to hell, the report start to come

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Speaker 1: back very bad, meaning anywhere from ten percent to forty

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Speaker 1: percent of the sample is no good, meaning there's not

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Speaker 1: enough employment history in here, the debt level is too high,

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Speaker 1: you know whatever. So you contractually, you the Wall Street firm,

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Speaker 1: contractually have the right to put back to the lender

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Speaker 1: any loan that you find upon due diligence does not

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Speaker 1: adhere to your underwriting standards. So here's my favorite question.

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Speaker 1: So let's say thirty percent of the ten percent is

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Speaker 1: no good? How many Wall Street firms then ordered Clayton

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Speaker 1: Mortgan to do due diligence that remaining ninety percent? Can

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Speaker 1: I answer that? Please do it? Zero? Thank you right? Zero?

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Speaker 1: And in the prospectus there would be a paragraph and

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Speaker 1: the paragraph would say risks, some of these loans might

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Speaker 1: not adhere to our ownderwriting stacks. Yes, So, by the way,

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Speaker 1: just to tell you how bad this is. So this

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Speaker 1: was discovered by the Financial Crisis Commission. They had it

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Speaker 1: hearing in Sacramento. This is Philangelies, and I remember listening

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Speaker 1: and the Clayton mortgage guy was testifying to this, and

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Speaker 1: when he was done, I turned to one a good

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Speaker 1: that people are going to chall I mean, this is unbelieved,

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Speaker 1: this is the biggest fraud new ministry. Then it's not complicated.

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Speaker 1: They're going to go to jail. So in the Angelides

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Speaker 1: did an actual referral of this very top there to

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Speaker 1: the Justice Department for criminal investigation. And then, as far

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Speaker 1: as we know, nothing happened. Nobody investigated. Now why I

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Speaker 1: don't know, and to this day I do not understand it.

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Speaker 2: If they investigate and people go to jail, who goes

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Speaker 2: to jail there?

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Speaker 1: Oh? Who goes to jail would be the people on

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Speaker 1: the securitization desk, their supervisors. Maybe you know, the such

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Speaker 1: a bad fraud, the heads of the firms should be

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Speaker 1: banned from running farms for the rest of their lives.

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Speaker 1: So what blank find should have been banned from being

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Speaker 1: the CEO of Golden Socks? I mean, you go right

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Speaker 1: up the line. This is a decision that was made

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Speaker 1: without footprints.

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Speaker 2: That's the first time I've heard that story. How does

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Speaker 2: it play out differently? If people go to jail.

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Speaker 1: The economy would have played any differently? Now few difference,

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Speaker 1: I mean, you know, prior to the crisis. Everybody's sitting

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Speaker 1: there that's suspecting that there's two systems of justice, one

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Speaker 1: for rich or one from poor. Now we know that

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Speaker 1: definitely is also.

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Speaker 2: Two systems of capitalism, once one for rid, which one

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Speaker 2: for poor.

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Speaker 1: Exactly, and so now we know, so that created the

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Speaker 1: tea party. I'm convinced that this whole, this, this created

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Speaker 1: the tea party. And then from and then from there

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Speaker 1: you could draw your own conclusions.

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Speaker 2: And the agger is still there.

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Speaker 1: It should be.

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Speaker 2: Yeah, how has it being the face of the Big

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Speaker 2: Short affected your life since the movie came out?

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Speaker 1: I mean, it doesn't affect it on a day to

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Speaker 1: day basis. I mean sometimes it's kind of funny if

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Speaker 1: they take the bus across town and somebody looks at

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Speaker 1: me and says, there, aren't you, Steve Wiseman.

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Speaker 2: Are you still running money?

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Speaker 1: No, not running any money, just my own, just your own. Yeah,

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Speaker 1: And I'm very long term invested. I don't trade.

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Speaker 2: Do you see anything going on in the banking system

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Speaker 2: that worries you.

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Speaker 1: The only thing that might worry me is, you know

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Speaker 1: the look the private equity world is multiples bigger than

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Speaker 1: it was, and nobody really knows what's going on there.

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Speaker 1: Prior equity world has not been stressed tested like the

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Speaker 1: banks at all. So if there's a problem that emerges,

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Speaker 1: I think it will emerge from there. But I don't

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Speaker 1: have any more data on this to add even a

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Speaker 1: single additional sentence. That's the problem.

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Speaker 2: How often do you find yourself pushed in the position

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Speaker 2: of trying to guess what's happening next, like you're nostro

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Speaker 2: damas well.

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Speaker 1: It's not so much that. So this is the funny thing.

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Speaker 1: These days on CNBC they call me Happy Steve because

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Speaker 1: I'm actually quite bullish on the mark. I've been bullish

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Speaker 1: for years, and they always bring up the deficit. I

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Speaker 1: call this the OI the deficit discussion. And the last

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Speaker 1: time I was on SO my theory, which is I've

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Speaker 1: said this like three thousand times because every time I'm

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Speaker 1: on TV day they basically want they're begging me to

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Speaker 1: predict the end of the world because of the data.

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Speaker 1: They said, look this, this this argument about the deficit,

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Speaker 1: it's forty years old. The last time on CNBCO was

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Speaker 1: on it was like this like the tenth time I'm

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Speaker 1: on the show, and they asked me the same question

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Speaker 1: and I go like this, you know, you know, the

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Speaker 1: problem is all these people want to be me. They

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Speaker 1: want to be the person who predicts the end of

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Speaker 1: the world, and I got news for all the position

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Speaker 1: of Steve Eisman is taken.

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Speaker 2: So when I met you, I met you because Meredith

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00:21:48,516 --> 00:21:51,436
Speaker 2: Whitney told me I should meet you, and I came

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Speaker 2: away from the first encounter thinking that was a born teacher.

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Speaker 2: So it's funny. It's generally two of the main characters

400
00:21:59,796 --> 00:22:03,476
Speaker 2: of my books. They're all really good teachers. Billy Bean

401
00:22:04,516 --> 00:22:07,916
Speaker 2: excellent teacher. I mean, just could really explain.

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Speaker 1: That's what I would have and another lifetime I would

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Speaker 1: have been a high school history teacher.

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Speaker 2: It was very useful that you were a character too,

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Speaker 2: that people saw you as a character. But you have

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Speaker 2: an unbelievable ability to clearly explain things, and it's refreshing

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00:22:24,756 --> 00:22:28,556
Speaker 2: to be back in its presence. Thank you so much

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00:22:28,596 --> 00:22:31,556
Speaker 2: to Steve Eisman, and to Greg Linman for talking with

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Speaker 2: me again. Next week I find out what's happened to

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Speaker 2: Steve Eisman's traders at front Point, Vinnie Daniel, Portercollins, and

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Speaker 2: Danny Moses.

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Speaker 1: See you then.

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Speaker 3: Against the Rules, the Big short Companion is hosted by

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Speaker 3: Michael Lewis. It's produced by me Luddy, Jean Kott, and

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00:22:52,396 --> 00:22:57,356
Speaker 3: Catherine Giroudeau. Our editor is Julia Barton. Our theme was

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Speaker 3: composed by Nick Burtel, and our engineer is Hans Dale.

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00:23:01,196 --> 00:23:08,516
Speaker 3: She special thanks to Nicole Opton Bosch, Jasmine Faustino, Pamela

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00:23:08,596 --> 00:23:12,836
Speaker 3: Lawrence and the rest of the Pushkin Audiobooks team. Against

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Speaker 3: the Rules is a production of Pushkin Industries. To find

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00:23:16,556 --> 00:23:21,076
Speaker 3: more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts

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00:23:21,396 --> 00:23:24,196
Speaker 3: or wherever you listen to podcasts, and if you'd like

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00:23:24,236 --> 00:23:27,716
Speaker 3: to listen ad free and learn about other exclusive offerings,

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00:23:27,956 --> 00:23:30,436
Speaker 3: don't forget to sign up for a Pushkin Plus subscription

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00:23:30,956 --> 00:23:36,636
Speaker 3: at pushkin dot fm, Slash Plus or honor Apple show page.

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00:23:37,396 --> 00:23:39,836
Speaker 3: And you can get the big short now at pushkin

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00:23:40,036 --> 00:23:45,916
Speaker 3: dot fm, Slash Audiobooks, or wherever audiobooks are sold.

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00:23:50,556 --> 00:23:52,676
Speaker 4: It's Jacob Goldstein. I'm the co host of a new

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Speaker 4: show called Business History, and we're bringing you a clip

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Speaker 4: right now from an episode we did about a mathematician

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Speaker 4: named Jim Simon's. Simons wanted to take human emotions out

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Speaker 4: of investing, and after a few early hiccups, including buying

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Speaker 4: up all the potatoes in Maine. He created one of

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Speaker 4: the greatest money machines in history. I really hope you

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Speaker 4: like the clip, and if you want to hear more,

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Speaker 4: please check out the show. It's called Business History and

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Speaker 4: it's available wherever you're listening.

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Speaker 6: Right now, they were doing what we would call today

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Speaker 6: machine learning.

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Speaker 4: Machine learning is like, essentially, you build a system in

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Speaker 4: a computer. You feeded a bunch of data, and the

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Speaker 4: system sort of builds a map of the relationships in

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Speaker 4: that data, and then with new data it can kind

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Speaker 4: of interpolate or extrapolate and make guesses about what should

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Speaker 4: come next. And of course today we have an exciting,

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Speaker 4: maybe misleading, confounding term for machine learning. We call it AI.

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Speaker 6: Exactly right, right, this is still very basic machine learning,

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Speaker 6: and the computer at the time keeps making mistakes that

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Speaker 6: they didn't really understand. So, for instance, once the computer

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Speaker 6: developed a taste for potatoes, main potatoes, the system kept

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Speaker 6: buying main potato futures in the state of Maine.

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Speaker 4: Potato potatoes, big harvest year, next year or whatever.

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Speaker 6: Yes, okay, until two thirds of the company's money was

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Speaker 6: in potatoes. They were all in potatoes, and they got

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Speaker 6: a call from the regulators, the cft.

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Speaker 4: CFPP Commodity Futures Trading Commission.

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Speaker 6: Right saying, whoa, who are you guys, Like, what are

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Speaker 6: you doing over there? You have almost cornered the market

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Speaker 6: on potatoes. You have to sell And they ended up

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Speaker 6: losing money on the trade because blown out on potatoes,

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Speaker 6: they had stopped the computer. Whatever the computer's plan was,

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Speaker 6: but you know, this was just one small weird thing.

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Speaker 6: Simon and Baum were really kind of nervous about this

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Speaker 6: whole thing. They had taken investors money, they didn't really

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Speaker 6: know if their system worked, and as the story gets told,

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Speaker 6: they start to like second guess the computer and themselves,

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Speaker 6: and they start to think, well, I have this intuition

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Speaker 6: that gold's gonna go up because of the geopolitical situation,

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Speaker 6: and they'd make some money on that, and then they'd

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Speaker 6: lose some money on that, and so by doubting their

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Speaker 6: own system, it just wasn't really working. And at that

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Speaker 6: point they're just Wall Street investors, right when the big

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Speaker 6: computer trying to buy more potatoes and the man won't

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Speaker 6: let them buy potatoes