Weapons of Financial Destruction

I. House Of Cards

Steve Eisman sat frozen, his eyes locked on the flickering numbers on his Bloomberg terminal. The figures danced in a dizzying freefall, each tick lower sending shockwaves through his body. Lehman Brothers, the fourth-largest investment bank in the United States, was in the midst of a fatal nosedive. On that fateful September day in 2008, its stock price plummeted over 90%, hurtling towards the unthinkable — a value of zero.

But for Eisman, this moment was not a surprise. It was the inevitable cataclysm he had foreseen for years, the burst of a bubble that had swelled on a toxic fuel of greed, fraud, and willful ignorance. As a contrarian investor at FrontPoint Partners, Eisman had positioned himself for this very collapse, shorting the subprime mortgage market with a conviction that bordered on obsession.

Yet watching it actually unfold still hit him like a punch to the gut. It was one thing to intellectually dissect the systemic rot that had eaten away at the foundations of the financial world. It was another to witness the first domino fall in what he knew would become a devastating chain reaction.

Eisman’s mind raced back to the red flags that had first alerted him to the impending disaster. It started with an incredulous realization about the predatory underbelly of the subprime mortgage industry. Lenders were handing out loans to anyone with a pulse — no income, no job, no assets required. They called them NINJA loans, and they were the lifeblood of a booming housing market that defied all rationality.

Digging deeper, Eisman uncovered an even more disturbing truth. Wall Street was greedily repackaging these high-risk loans into complex financial instruments called CDOs. Rating agencies, blinded by conflicts of interest, slapped these toxic assets with AAA ratings — the gold standard of creditworthiness. It was a house of cards built on quicksand, a multibillion-dollar game of musical chairs that Eisman knew would eventually come to a bone-rattling halt.

Eisman and his team at FrontPoint went all-in on their conviction. They bought credit default swaps — essentially insurance policies on subprime bonds — wagering massive sums on the certainty that these assets would eventually implode. It was a trade that went against the grain of a market drunk on easy money and blind optimism.

Their own investors pushed back as the premiums piled up, questioning the wisdom of betting against a supposed golden goose. But Eisman had done the homework no one else bothered to do. He had seen the rot firsthand during a surreal field trip to the epicenter of the housing boom in Miami. Makeshift offices in shabby strip malls churning out loans to anyone who walked through the door. Sprawling subdivisions filled with empty, speculator-owned homes. Rampant fraud at every level of the mortgage machine. The evidence was overwhelming, and Eisman refused to look the other way.

Now, as Lehman teetered on the brink, the horrifying scope of the impending fallout crystallized in Eisman’s mind. This was not just the failure of a single bank. It was the first tremor of a financial earthquake that would rattle the entire global economy to its core.

Eisman knew the banks were interconnected hydras, their tentacles intertwined in a vast web of derivative bets and counterparty obligations. Lehman was just one head of the beast. Its collapse would send shockwaves through the system, triggering a domino effect as other overleveraged giants teetered and fell.

He thought of the millions of Americans who would become collateral damage, facing foreclosures, job losses, and the evaporation of their life savings. The bailouts and desperate government interventions that would inevitably follow, as policymakers scrambled to prevent a complete economic meltdown. The long, painful road to recovery that stretched ahead, paved with austerity, shattered trust, and seething populist anger.

Eisman felt an uneasy mix of emotions as he watched Lehman’s stock flatline. There was a grim sense of vindication, a recognition that his contrarian analysis had been dead-on. But there was no joy in being right, only disgust and anger at the rampant malfeasance that had brought the economy to its knees.

He knew this was just the beginning, the first act of a drama that would reshape the financial world and leave deep scars on the American psyche. The bubble had burst, and the fallout would be measured not just in trillions of dollars, but in human suffering on an immense scale.

As the reality sank in, Eisman felt a heaviness settle over him. He had won his bet, but it was a victory that rang hollow. The system was broken, and the reckoning had only just begun. The worst was yet to come, and all he could do was watch as the nightmare he had long predicted finally came to pass.

II. Boom and Bust

The 2008 financial crisis was a once-in-a-generation catastrophe, a slow-motion train wreck years in the making. From 2000 to 2007, the U.S. housing market was on a tear, with prices nearly doubling according to the Case-Shiller Home Price Index (1). It was an era of easy money, where banks, drunk on the profits from subprime lending, handed out mortgages like candy to anyone with a pulse. In 2006 alone, they originated a staggering $600 billion in subprime loans, accounting for a whopping 20% of total mortgage lending (2).

But beneath the surface of this booming market, a ticking time bomb was waiting to detonate. These subprime loans, given to borrowers with weak credit at high-interest rates, were a disaster waiting to happen. When housing prices inevitably stalled and began to drop, the default rate on these loans spiked to over 20% by 2008 (3). The complex financial instruments that Wall Street had created to package and sell these loans, once hailed as modern marvels of risk management, turned out to be nothing more than worthless paper.

As the crisis unfolded, the carnage was unlike anything seen since the Great Depression. The S&P 500 plummeted a staggering 57% from its peak in October 2007 to its trough in March 2009, wiping out $7 trillion in stock market wealth (4). The U.S. economy hemorrhaged 8.7 million jobs, sending the unemployment rate soaring to 10% (5). By 2010, one in every 45 homes was in foreclosure, and over 2.9 million homes had been repossessed since the start of the crisis (6).

The damage wasn’t confined to the housing market. The entire global financial system teetered on the brink of collapse, as the complex web of derivative bets and counterparty obligations threatened to unravel. The federal government had to take unprecedented actions, pumping $700 billion into the financial system through the Troubled Asset Relief Program (TARP) to prevent complete implosion (7).

Amid the wreckage, a select few contrarian investors emerged as the big winners. John Paulson’s hedge fund famously made $15 billion in 2007 by betting against subprime mortgages (8). Michael Burry’s Scion Capital returned an astonishing 489% from 2000 to 2008, largely driven by his prescient bets against housing (9).

But these were the rare exceptions. For the vast majority of Americans, the crisis was a financial horror show that exposed the rot at the heart of the system. Millions watched helplessly as their life savings, their homes, and their sense of financial security evaporated overnight.

The select few who saw the crisis coming had rare insight and conviction. They looked past the surface-level data that lulled so many into complacency — the ever-rising housing prices and the AAA ratings stamped on subprime-backed securities — and dug into the granular details that revealed the ugly truth. They analyzed individual loan files, uncovering rampant fraud and shoddy underwriting. They researched the actual default rates of subprime mortgages, not the rosy projections peddled by banks.

Crucially, these winners had the tools to act on their insights. Credit default swaps (CDS), once an obscure corner of the derivatives market, became their weapon of choice. By 2007, the CDS market had ballooned to a mind-boggling $60 trillion in notional value (10). It was a playground for the financial elite, a place where they could make asymmetric bets and amplify their returns to stratospheric heights.

For the average investor, this world was completely off-limits. They were left to watch in horror as their 401(k)s and home values evaporated, as the very foundations of middle-class wealth crumbled before their eyes. The crisis laid bare the stark divide between Wall Street and Main Street, between the financial giants armed with their exotic tools and insider knowledge, and everyone else left to pick up the pieces.

The 2008 crisis was a painful lesson in the dangers of a financial system built on greed, hubris, and the concentration of power in the hands of a few. It exposed the deep flaws in the “originate-to-distribute” model of mortgage lending, where banks had no skin in the game and could offload the risks of bad loans onto unsuspecting investors. It revealed the complicity of rating agencies, the failures of regulators, and the perils of a shadow banking system untethered from oversight.

In the aftermath, policymakers promised reform and retribution. The Dodd-Frank Act was passed in 2010, aiming to rein in the excesses of Wall Street and prevent another meltdown. But more than a decade later, the fundamental imbalances remain. The game, in many ways, is still rigged in favor of the 1% of the 1%. The financial elite continue to wield outsized power and influence, armed with increasingly sophisticated tools and algorithms that give them an insurmountable edge.

As we look to the future, the question is not if, but when, the next crisis will hit. Will we be better prepared, having learned the harsh lessons of 2008? Or will we once again be caught off guard, forced to watch as the dominoes fall and the wealth of a generation is wiped out?

III. David vs Goliath

The battle between the retail trader and the financial elite is a tale as old as the markets themselves. But don’t be fooled by the biblical analogy — this is no fair fight. In the world of Wall Street, David’s slingshot is made of rubber and Goliath wields a bazooka.

The stark reality is that individual investors are hopelessly outgunned. In the U.S. stock market, retail traders account for a mere 10% of trading volume (11). That means for every dollar that changes hands, only a dime comes from the little guy. The rest? It’s the domain of the financial juggernauts — the hedge funds, the investment banks, the titans of capital that can move markets with a single keystroke.

But the imbalance goes beyond just trading volume. It’s a canyon of resources and information that seems almost insurmountable. The global hedge fund industry boasts $4.3 trillion in assets under management, a war chest that dwarfs the lifetime savings of the typical American family (12). And with great capital comes great power — armies of analysts, cutting-edge technology, and exclusive data feeds that give them a crucial edge.

Meanwhile, retail traders are left to scrape by with outdated tools and information that’s stale by the time it hits the screen. They’re stuck with generic market reports and clunky discount brokerage platforms, while professional traders use AI-powered algorithms and lightning-fast direct market access. It’s like showing up to a gunfight with a butter knife.

The information gap is so severe that the Securities and Exchange Commission itself has acknowledged it. In a 2021 statement, the SEC concluded that individual investors face a “significant disadvantage” compared to professional investors (13). The game is fundamentally tilted against them.

But here’s the reality — Main Street never even had a chance to begin with. The elites have spent decades refining tactics to keep the little guy down while enriching themselves. They’re not just playing a different game — they’re playing by an entirely different set of rules.

Perhaps the most sinister of these tactics is the one hiding in plain sight: Payment for Order Flow (PFOF). This practice, where brokers route retail orders to market makers for execution, has become a multi-billion-dollar cash cow for the industry. In 2020 alone, Robinhood raked in $687 million from PFOF arrangements (14).

On the surface, it seems harmless enough. Retail traders get commission-free trades, and the brokers get a little kickback. Win-win, right? Wrong. Studies have shown that PFOF can lead to significantly worse execution prices for retail traders. Reports suggest that on average, PFOF trades are executed at a price 0.5% higher than the best available price in the market (15). It may not sound like much, but it adds up to billions siphoned from the pockets of everyday investors.

And then there are the more blatant abuses. Predatory practices like ‘A Book vs B Book’, where brokers route profitable trades to their own accounts while saddling retail investors with the losing ones. Or the infamous ‘Robinhood Infinite Leverage’ glitch, which allowed traders to borrow unlimited funds for free, only to be crushed when the music stopped. The list goes on.

The harsh truth is that Wall Street sees the retail trader as easy prey. They’re the mark in a rigged casino, the sucker at the poker table who doesn’t know he’s being played. The game is designed to funnel money from the many to the few, to concentrate wealth and power in the hands of the financial elite.

The consequences are devastating. When the subprime mortgage bubble burst in 2008, Main Street bore the brunt. By 2010, Americans’ 401(k)s and IRAs had lost a staggering $2.4 trillion in value (16). That’s the retirement dreams of millions up in smoke, the hopes and aspirations of a generation sacrificed on the altar of Wall Street greed.

But it didn’t end there. In the wake of the crisis, hedge funds and private equity firms swooped in to buy up foreclosed homes by the thousands. They’ve since turned them into rentals, squeezing every last dime out of working families. Today, institutional investors own a staggering 300,000 single-family homes in the U.S., driving prices to record highs and locking countless families out of the American Dream (17).

However, a new era of financial populism is emerging, fueled by the connective power of social media and the growing discontent with a system that benefits the few at the expense of the many. Retail traders, armed with knowledge and tools once reserved for the elite, are beginning to challenge the status quo.

This movement is exposing the dirty tricks and double standards that have long plagued the financial industry, shining a light on the rot at the core of a system that has failed to serve the interests of the average American. It’s a call to action, a demand for transparency, fairness, and accountability from our financial institutions and regulators.

The path forward lies in education and empowerment. By arming retail traders with the knowledge and tools they need to compete on a level playing field, we can begin to shift the balance of power. It means harnessing the collective might of millions of individuals to force change on a system that has resisted it for too long.

The road ahead is long and the odds are daunting. But the retail trader has something that Wall Street can never take away — the power of numbers and the passion of the underdog. In a rigged game, sometimes that’s all you need to turn the tables.

IV. The Rise of Digital Gold

In the early days of 2009, as the world reeled from the most devastating financial crisis since the Great Depression, an anonymous figure known only as Satoshi Nakamoto quietly unleashed an idea that would change everything. With the creation of Bitcoin, Nakamoto didn’t just invent a new form of money — he fired the first shot in a revolution that would reshape the very concept of the American Dream.

For generations, the American Dream was inextricably linked to physical land. The idea of owning a home, a plot of earth to call one’s own, was the ultimate symbol of making it in America. But in the wake of the 2008 housing crash, as millions watched their homes slip away to foreclosure, the dream lay in tatters.

The statistics were staggering. From 2006 to 2014, over 9.3 million homeowners lost their properties. That’s 1 in every 10 homes in America. The homeownership rate, which had peaked at 69.2% in 2004, plummeted to a 50-year low of 62.9% by 2016 (18). The very foundation of middle-class wealth had crumbled.

But as the old dream died, a new one was being born. Far from the wreckage of the housing market, a different kind of property was taking hold — one built on code rather than concrete.

At first, few took notice of Bitcoin. It was an obscure experiment, a plaything for cryptographers and computer geeks. But as the years passed and its price climbed ever higher, the world began to take notice. By 2017, Bitcoin had become a global phenomenon, soaring to a peak of nearly $20,000 per coin and minting a new generation of millionaires overnight (19).

But Bitcoin was more than just a get-rich-quick scheme. It represented a seismic shift in the very concept of value. For the first time, people could store and transfer wealth without the need for banks, governments, or any other intermediary. It was a declaration of independence from the financial system that had failed so many.

As Bitcoin’s popularity grew, so too did the ecosystem around it. A new breed of investors emerged, pouring billions into a dizzying array of cryptocurrencies and blockchain projects. In 2021 alone, venture capital firms invested a staggering $33 billion into the crypto space (20). It was a digital gold rush, and everyone wanted a piece of the action.

But the true power of this new digital frontier was not just in its ability to create wealth, but to redistribute it. Nowhere was this more apparent than in the saga of WallStreetBets and GameStop.

In January 2021, a group of retail traders on the subreddit r/WallStreetBets noticed something peculiar. Hedge funds had taken a massive short position against GameStop, a struggling brick-and-mortar video game retailer. In fact, the short interest exceeded 140% of the company’s total shares (21). To the Redditors, it was a blatant attempt by Wall Street to profit from the destruction of a beloved American brand.

So they decided to fight back. Coordinating through the forum, they began buying GameStop shares en masse, driving the price from around $17 to a peak of $483. As the price soared, the hedge funds scrambled to cover their shorts, racking up billions in losses. Melvin Capital, one of the main antagonists in the GameStop saga, saw its assets under management plunge by 53% in January alone (22).

It was a stunning reversal, a true David vs Goliath moment. Suddenly, the power dynamics of the financial world seemed to shift. If a group of amateur traders could bring Wall Street to its knees, what else was possible?

The GameStop saga was just the beginning. As the year progressed, the pace of change only accelerated. In the world of finance, a new model was taking hold — one based on decentralization, transparency, and the wisdom of the crowd.

DeFi exploded. Platforms aimed to replicate traditional financial services in an open, permissionless, and accessible way. By May 2021, the total value locked in DeFi had surged past $80 billion (23). It was a staggering figure, one that hinted at the scale of the disruption to come.

As the old pillars of the American Dream crumble, a new vision is emerging. It’s a dream that’s not tied to any one place, but exists in the boundless expanse of cyberspace. It’s a dream where anyone with an internet connection has the power to participate, to create value, and to stake their claim in the digital world.

In this new frontier, the rules are being rewritten in real-time. The gatekeepers of old — the banks, the media conglomerates, the political establishments — are losing their grip. Power is shifting to the edges, to the networked masses who are shaping the future one click at a time.

V. A New Unfair Advantage

For decades, Wall Street institutions have held an insurmountable edge over the average retail trader. Nowhere is this advantage more apparent than in high-frequency trading (HFT).

Big banks and hedge funds have long used HFT to push aside retail trades and exploit even the tiniest arbitrage opportunities. By leveraging powerful algorithms and lightning-fast execution speeds, these institutions can buy and sell securities in the blink of an eye, often before the retail trader even sees the price move.

The numbers are staggering. In the U.S. stock market, HFT firms account for around 50% of all trading volume. That means for every trade placed by a retail investor, there’s an institutional player on the other side, armed with a supercomputer and a Ph.D. in physics.

But HFT is just the tip of the iceberg. Behind the scenes, hedge funds and investment banks employ legions of quants and data scientists to develop proprietary models and algorithms that can identify profitable trading opportunities in real-time. These tools, often guarded as closely as state secrets, allow institutions to quickly adapt to changing market conditions and pounce on even the smallest price discrepancies.

For the retail trader, it’s an impossible game to win. They’re left to rely on outdated information, generic market reports, and the hope that their broker isn’t actively working against them. And even if they do manage to develop a profitable strategy, they’re often thwarted by the sheer scale and speed of the institutional players.

There’s a famous scene in Michael Lewis’s “Flash Boys” where the protagonist, Brad Katsuyama, has an epiphany. He realizes that the markets are rigged, that the little guy never had a chance. “It really pissed me off,” he says. “That people set out this way to make money from everyone else.”

It’s a sentiment that resonates with anyone who’s ever felt the sting of a bad trade or the frustration of a market that seems designed to benefit the few at the expense of the many. But what if there was another way? What if retail traders could access the same tools and strategies as the big players, without needing a Ph.D. or a billion-dollar balance sheet?

That’s what we’re working on at Level2, a platform to turn the trading world on its head. At Level2, our mission is to democratize access to advanced trading capabilities, giving retail traders the power to compete with even the most sophisticated institutional players.

At the heart of Level2 is a simple idea: that anyone with a strategy idea should be able to automate it, test it, and deploy it, regardless of their technical expertise or financial background. To make this a reality, we’ve developed a suite of tools that put the power of quant-style trading in the hands of the every day investor.

One of Level2’s key features is its intuitive drag-and-drop interface for strategy creation. Using a visual programming language, users can quickly translate their trading ideas into fully functional algorithms without writing a single line of code. It’s like having a team of quants at your fingertips, minus the six-figure salaries and attitude.

But Level2 goes beyond automation. The platform also offers advanced market monitoring capabilities, allowing users to track multiple assets and indicators, 24/7. No more staring at charts for hours on end, waiting for the perfect entry point. With Level2, you can set your parameters and let the platform do the heavy lifting.

For the first time, retail traders have access to the same tools and capabilities as the most advanced institutional players. They can automate their strategies, monitor the markets around the clock, and test their ideas with the rigor of a quant fund. It’s a level of sophistication that was once unthinkable for the average investor.

But Level2 is more than just a tool for individual traders. It’s a force for democratization in an industry that has long been dominated by a handful of powerful players. By giving everyone access to advanced trading capabilities, Level2 is helping to create a more level playing field, one where success is determined by the quality of your ideas, not the size of your balance sheet.

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Endnotes

1. “S&P/Case-Shiller U.S. National Home Price Index.” Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/CSUSHPINSA.
2. “Financial Crisis Inquiry Report.” GPO, 2011, p. 70, www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
3. Ibid
4. “S&P 500 Historical Prices by Year.” Macrotrends, https://www.macrotrends.net/2324/sp-500-historical-chart-data.
5. “Civilian Unemployment Rate.” Bureau of Labor Statistics, https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm.
6. Herron, Janna. “Banks repossessed 1 million homes last year — and 2011 will be worse.” NBC News, Associated Press, 13 Jan. 2011, www.nbcnews.com/id/wbna41051419.
7. “Troubled Asset Relief Program (TARP) Information.” U.S. Department of the Treasury, https://home.treasury.gov/data/troubled-assets-relief-program.
8. Zuckerman, Gregory. “Trader Made Billions on Subprime.” The Wall Street Journal, 15 Jan. 2008, www.wsj.com/articles/SB120036645057290423.
9. Burry, Michael J. “I Saw the Crisis Coming. Why Didn’t the Fed?” The New York Times, 3 Apr. 2010, www.nytimes.com/2010/04/04/opinion/04burry.html.
10. Baily, Martin Neil, et al. “The Origins of the Financial Crisis.” Brookings, Nov. 2008, www.brookings.edu/wp-content/uploads/2016/06/11_origins_crisis_baily_litan.pdf.
11. Adinarayan, Thyagaraju. “Retail Traders Account for 10% of U.S. Stock Trading Volume — Morgan Stanley.” Reuters, 30 June 2021, www.reuters.com/business/retail-traders-account-10-us-stock-trading-volume-morgan-stanley-2021-06-30/.
12. “Reuters.” “Hedge Fund Industry Reaches $4.3 Trillion Milestone in First Quarter.” Reuters, 22 Apr. 2024, www.reuters.com/markets/us/hedge-fund-assets-reach-43-trillion-q1-says-hfr-2024-04-22/.
13. Crenshaw, Caroline A. “Statement on DeFi Risks, Regulations, and Opportunities.” The International Journal of Blockchain Law, vol. 1, Nov. 2021, www.sec.gov/news/statement/crenshaw-defi-20211109.
14. Chaparro, Frank. “Robinhood Made More than $600 Million from Payment for Order Flow Revenue in 2020.” The Block, 1 Feb. 2021, www.theblock.co/post/93321/robinhood-payment-for-order-flow-2020.
15. “Vox Creative.” “Payment for Order Flow, Explained: How Brokerages Aren’t Always Incentivized to Help Their Customers.” Vox, 22 Mar. 2022, www.vox.com/ad/22960319/pfof-payment-for-order-flow-trading-commission-public.
16. Ghilarducci, Teresa. “The Recession Hurt Americans’ Retirement Accounts More Than Everyone Thought.” The Atlantic, 16 Oct. 2015, www.theatlantic.com/business/archive/2015/10/the-recession-hurt-americans-retirement-accounts-more-than-everyone-thought/410791/.
17. Thompson, Derek. “BlackRock Is Not Ruining the U.S. Housing Market.” The Atlantic, 17 June 2021, www.theatlantic.com/ideas/archive/2021/06/blackrock-ruining-us-housing-market/619224/.
18. Gopal, Prashant. “Homeownership Rate in the U.S. Drops to Lowest Since 1965.” Bloomberg, 28 July 2016, www.bloomberg.com/news/articles/2016-07-28/homeownership-rate-in-the-u-s-tumbles-to-the-lowest-since-1965
19. “Bitcoin Price Chart.” CoinDesk, www.coindesk.com/price/bitcoin/.
20. Melinek, Jacquelyn. “Report: VCs Invested $33B in Crypto and Blockchain Startups in 2021.” Blockworks, 5 Jan. 2022, www.blockworks.co/news/report-vcs-invested-33b-in-crypto-and-blockchain-startups-in-2021.
21. Ponciano, Jonathan. “Meme Stock Saga Officially Over: GameStop Short Interest Plunged 70% Amid $20 Billion Loss.” Forbes, 10 Feb. 2021, www.forbes.com/sites/jonathanponciano/2021/02/10/meme-stock-saga-officially-over-gamestop-short-interest-plunged-70-amid-20-billion-loss/
22. Ibid
23. Redman, Jamie. “DeFi’s Total Value Locked Hits $80 Billion in a Dramatic Turnaround Since 2022.” Bitcoin News, 25 Feb. 2024, www.news.bitcoin.com/defis-total-value-locked-hits-80-billion-in-a-dramatic-turnaround-since-2022/.