Cholera and The Big Short

On 31 August 1854, in London’s Soho district, a 28-year-old Anglican clergyman named Henry Whitehead was visiting a widow.

They spoke cheerfully.

Less than twenty-four hours later, she was dying.

Elsewhere in the neighbourhood, four people who had gone to bed healthy were now close to death.

When Whitehead left their house, he found more people gravely ill and dying.

Within six days, more than three-quarters of the residents in the worst-affected streets had fled. Some left their furniture behind.

Within ten days, more than 500 people had suffered fatal attacks.

The cause was cholera.

But not everyone was afflicted.

Two workplaces, a factory and a brewery, offered a striking contrast.

At the factory, 18 of approximately 200 workers had died.

At the nearby brewery, none of its more than 70 workers had suffered a severe attack.

Something didn’t make sense.

Whitehead initially believed the outbreak might be an act of divine punishment.

There was another explanation, one that sounded considerably more scientific.

Miasma.

The prevailing theory was that diseases such as cholera spread through foul air.

And the evidence seemed overwhelming.

Sewage in the streets. Rotting refuse. Overcrowded homes.

The case seemed open and shut.

Except for the brewery.

Same area. Same air. Possibly even the same sewage.

No deaths.

It was a small contradiction.

But small contradictions have a habit of exposing very large mistakes.

Especially when everyone is convinced they already know the answer.

More than 150 years later, John Little encountered a rather different mystery.

A housing repairs service was reporting that 97% of its routine repairs were being completed.

An impressive figure.

Except when John and his colleagues followed a sample of 560 repairs from the moment a tenant reported a problem to the moment it was actually resolved, they discovered something extraordinary.

The average repair took 216 days.

Some took years.

How could a service be performing so well and taking so long to fix people’s homes?

Five years before the Soho outbreak, a London physician named John Snow had published a booklet on the spread of cholera.

Snow believed the disease travelled through contaminated water, not foul air.

It was an unpopular theory.

But Snow had a question he could investigate.

He began gathering information about the people who had died.

One piece of information stood out.

Their addresses.

Snow went into the neighbourhood. He followed the streets, examined where people had died and asked residents about their drinking water.

Where did they get it?

When did they drink it?

The evidence began pointing towards one local landmark.

A water pump in Broad Street.

Here, families filled buckets for drinking and cooking.

The pump stood near the centre of the outbreak.

But there were anomalies.

A woman living miles away in Hampstead had died of cholera.

Snow investigated.

He discovered that she liked the taste of Broad Street water so much that she had it brought to her home.

The pump still seemed the culprit.

But the brewery remained a conundrum.

Snow called on its proprietor.

What did the workers drink?

Where did they get their water?

The answer to the first question was simple.

Beer.

Problem solved?

Not quite.

Beer needed water.

Where did that come from?

The brewery had its own deep well, separate from the Broad Street pump.

And the workers generally drank malt liquor rather than water from the street.

Another piece of the puzzle had fallen into place.

Steve Eisman was a money manager in New York.

A big one. Hedge funds.

And he had a rather unfortunate trait.

He wasn’t scared to take on the rich and powerful.

Sometimes embarrassing them with his blunt remarks.

Eisman knew the American mortgage industry particularly well.

And he had begun to notice a pattern.

Mortgages were being handed out to people who might never be able to repay them.

But that wasn’t the worst of it.

These mortgages were being bundled together into financial products called securities and sold to investors.

Some of those securities carried AAA ratings.

The sort of rating associated with exceptionally safe investments.

Banks, insurers and investment funds were buying them.

But Eisman’s question wasn’t why everyone was investing in them.

It was why anyone was investing in them at all.

To him, much of the underlying lending looked like junk.

D− wasn’t an official credit rating.

But if Eisman had been handing out the grades, it might well have been his choice.

Junk.

And yet Wall Street was treating parts of this mountain of mortgages as though they were among the safest investments in the world.

Something didn’t make sense.

John Little was discovering something similar in housing repairs.

Not mortgages, obviously.

Leaking taps. Broken windows. Faulty boilers.

The sort of things that make life miserable when they aren’t fixed.

The performance reports recorded jobs completed.

But when John and his colleagues followed the work, they found a rather different picture.

Tradespeople were spending hours travelling to merchants for parts.

Repairs generated repeat visits.

Sometimes the same problem was attended to again and again.

In one extraordinary example, a leaking tap had attracted ten visits, costing roughly £700, when a replacement tap cost around £60.

The computer recorded completed jobs.

The tenant still had a leaking tap.

And that was the problem with the impressive performance figures.

They were telling leaders about the activities being recorded.

Not necessarily whether the tenant’s problem had been solved.

Back in Soho, Snow was building a giant jigsaw puzzle.

People living in the same streets were dying.

The evidence was mounting.

The pattern of deaths was becoming increasingly difficult to reconcile with the theory that foul air was responsible.

And the idea that this was the fury of God was becoming harder to sustain.

Snow now had good reason to believe the culprit was the water pump in Broad Street.

We might assume he’d be hailed a hero.

Except for one small detail.

Getting people to act was one thing.

Getting them to believe him was quite another.

On 7 September 1854, Snow took his findings to the local Board of Guardians.

He had followed the deaths, visited the streets, spoken to residents and traced their water supplies.

The evidence pointed to the Broad Street pump.

He asked the board to remove its handle.

They agreed.

The following day, the handle was gone.

But agreeing to remove a pump handle was one thing.

Accepting that contaminated water, rather than foul air, was spreading cholera was quite another.

And by then, the outbreak was already subsiding.

Snow had persuaded the authorities to act.

He hadn’t yet persuaded the medical establishment that he was right.

But Snow had an unlikely advocate.

Henry Whitehead, the clergyman from our opening, had begun his own investigation.

Initially sceptical of Snow’s theory, Whitehead went into the neighbourhood and questioned the residents.

Where had they been?

Where had they collected their drinking water?

Who had become ill?

And who had escaped?

The more he investigated, the harder it became to dismiss the connection between cholera and the Broad Street pump.

Whitehead was beginning to see what Snow had seen.

But he didn’t stop there.

Months later, in 1855, Whitehead began following the chronology.

Who had fallen ill first?

His inquiries led him to a house at 40 Broad Street, where a five-month-old baby girl named Frances Lewis had become sick shortly before the outbreak.

Her mother had washed the child’s soiled nappies and emptied the dirty water into a cesspool near the house.

It was an ordinary domestic chore.

But there was something the mother couldn’t have known.

The cesspool was dangerously close to the well supplying the Broad Street pump.

A subsequent examination found decayed brickwork through which waste from the cesspool could reach the well.

The suspected source of a devastating epidemic lay just a few feet from the water supply.

As Eisman and his team examined the mortgages behind Wall Street’s supposedly safe securities, the picture became increasingly troubling.

They weren’t content to rely on the ratings.

They wanted to understand the loans themselves.

Two members of the team, Vinny Daniel and Danny Moses, travelled to Miami.

They walked through neighbourhoods built during the mortgage boom.

They saw empty houses.

The promised prosperity of the housing boom looked very different on the ground.

No one had died.

But people had left their homes.

More than 150 years earlier, residents of Soho had fled so hurriedly that some left their furniture behind.

In Miami, the houses stood empty for another reason.

The financial promises made against them were beginning to unravel.

The team returned with evidence that reinforced what the loan data had been telling them.

The mortgages were failing.

The bonds couldn’t remain untouched forever.

Back in housing repairs, John and his colleagues had reached a conclusion of their own.

The problem wasn’t simply how hard the tradespeople worked.

It was how the work had been organised.

A tradesperson could complete the job they’d been instructed to do without solving the problem the tenant had reported.

A repair could be closed while further work remained.

And a perfectly capable tradesperson could spend a substantial part of the day driving around looking for materials.

The system could be busy, the reports could look reassuring, and the tenant could still be waiting.

John and his colleagues began changing the way they thought about repairs.

Instead of treating each visit as the unit of success, they looked at the complete repair.

Instead of accepting repeated journeys to merchants as part of the job, they studied which parts tradespeople actually needed and how those parts could be available when required.

That work helped develop a different approach to van stock and replenishment.

The opportunity was substantial: more repairs completed with the workforce already available.

Not by asking tradespeople to work twice as hard.

By removing work that should never have been necessary in the first place.

By 2007, the American financial system was beginning to crack.

Homeowners were falling behind on their subprime mortgages.

Then the mortgage lenders began to fail.

New Century Financial, once one of America’s biggest subprime lenders, filed for bankruptcy.

By July, two Bear Stearns hedge funds heavily exposed to mortgage securities had collapsed.

The trouble was spreading.

From homeowners to lenders.

From lenders to investment funds.

Eisman and his team had positioned themselves to profit if the mortgage market deteriorated.

Their assessment was proving correct.

But the wider disaster was still unfolding.

On 15 September 2008, Lehman Brothers filed for bankruptcy.

One of Wall Street’s most powerful investment banks was gone.

The financial crisis had become a global catastrophe.

And ordinary people suffered too.

Millions of Americans lost their homes.

By October 2009, American unemployment had reached 10%.

Businesses, large and small, failed around the world.

Eisman and his team made money.

But the price paid by millions of other people was enormous.

There is something curious about these three investigations.

In Soho, the accepted explanation was that cholera travelled through foul air.

On Wall Street, the accepted explanation was that highly rated mortgage securities were safe.

And in housing repairs, impressive completion figures suggested that the service was performing well.

In each case, there was evidence to support the prevailing view.

The streets really were filthy.

The mortgage securities really did carry reassuring ratings.

And the repairs really were being recorded as completed.

But there was other evidence.

The brewery.

The empty houses.

The tenant still waiting for the leaking tap to be fixed.

Snow studied where people had died and what they drank.

Whitehead investigated when they became ill.

Eisman’s team examined the mortgages and walked the neighbourhoods.

John Little followed the repairs from beginning to end.

They didn’t reject evidence.

They went looking for evidence closer to reality.

Behind the prevailing explanation.

Behind the reassuring rating.

Behind the performance reports that everyone else had accepted.

And perhaps that’s the lesson worth taking from three investigations separated by more than 150 years.

We have further to go.

But not that far.

Maybe only a few feet, in fact.

From your office to where the work is done.