Michael Lewis Drops Some Wisdom on Wall Street

I haven’t read Michael Lewis’s sure-to-be blockbuster The Big Short yet, but everybody ought to watch his appearance on 60 Minutes last night.

The big news I guess would be that Lewis thinks Wall Street is “so disconnected from American life that it can’t be sustained,” in the words of Steve Kroft. “He thinks it may take a while, but he believes that Wall Street as we know it has done itself in.”

Barring a revolution, howzat?

But the guy has a way with words (if you hadn’t noticed) and I think he puts the situation we find ourselves as well as just about anyone I’ve seen. Here he is on why the billions in bonuses on Wall Street are unacceptable, calling them an “elegant form of theft” (emphasis mine):

Did they ever explain how they made all this money? If you look at their businesses right now, they’re heavily government dependent. If you were Goldman Sachs, Morgan Stanley, or JPMorgan, you have access to a 0 percent loan in virtually unlimited quantities from the Federal Reserve. You can take that money and re-invest it in Treasury bonds or in government agency securities and you will get a spread. And you can do it over and over. You’re essentially borrowing from the government, lending to the government, and taking a cut.

The government is still subsidizing these firms because their losses were sensational. i mean in the financial system there are now $1.75 trillion of losses from the subprime mortgage bonanza. And they’re firms… look, they really shouldn’t exist. if the market had been allowed to function, they would not exist. They’d be failed enterprises. I mean even now, if the governmentt said “we have nothing to do with these places anymore. We’re gonna let them fail if they fail. They no longer have this effective government guarantee, and by the way we’re gonna cut out these subsidies that we’re handing them under the table,” most of them would fail.

But still they insist on paying themselves billions of dollars in bonuses, rather than paying back their ill-gotten gains.

And here Lewis gets to the point we’ve been trying to make for a long while now—that Wall Street was the driver of the whole thing:

On Wall Street, the business has become very obviously divorced from productivity, from productive enterprise. So in that sense, no they don’t deserve it. They didn’t earn it. What they did was finagle it. They were very good at putting themselves in the middle of large financial transactions that probably shouldn’t have happened in the first place and taking out little pieces of it. They generated trillions of dollars in subprime mortage loans that should never have been made. But the world would be better of if that whole industry had never existed.

Talking about reform here, he gets to what we’ve called the inside-the-bubble mentality that afflicts not only Wall Street, but regulators and even journalists:

There are several things that obviously should be done that have not been done, and you can’t explain to my mother why they haven’t been done. Only a really smart person on Wall Street can explain why they haven’t been done.

Lewis is also admirably tough on the dangers of credit-default swaps, which were one of the essential causes of the crisis. He calls them:

… insurance contracts not classified as insurance. This market is the closest thing to sort of ground zero of the recent calamity, and yet nothing has been done to change the market. Nothing’s been done to make it more transparent. Nothing’s been done to make it more like what it is—an insurance market.

And finally:

From the time i was at Solomon Brothers, it was incredible to me that the firm could advise customers what to buy and sell at the same time they are betting on the things that they are trying to sell their customers.

It still is. And that’s a good interview.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.