To put a finer point on my post below, the people profiled by Michael Lewis in his book The Big Short are a perfect example of what I’m saying. A handful of guys like Steve Eisman and Michael Burry both figured out what was happening even while Wall Street was bursting its seams with mortgage money, and they secured enough support to bet real money on their hunch. Here was a case where a small number of relatively minor players took on the giants of their field and more than won. They utterly humiliated the traders who took the other side of their bets.
The difference? These guys took the time to understand the real housing market and the actual positions of major firms while overcompensated con artists packaging loans depended on math whiz ‘quants’ who worked with simulated markets, outdated assumptions (e.g., mortgage default rates from the Eisenhower administration) and best-case economic models. The knowledge gap between Eisman and Burry and the MBS salesmen they preyed on was about as great as the gap between the salesmen and their average client.