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.
I don't know. I think some of the traders fell into the hype of the credit default swap, believing that buying insurance for a lent principle allows one to offer riskier credit while being shielded from the risk for the price of a premium, and the collateralized debt obligation, allowing bad credit to be pooled with good credit preventing the failure of some debt from tanking the whole security - thus ameliorating the risk.
I believe some traders believed they were bullet proof because these tools prevented risk from affecting the risk taker, therefore freeing them to seek stupidity where stupid profits could be made. Some had that honest belief.
But there were definitely crooks who understood the game and warnings galore reaching back until 2005 ranging from the FBI's announcement of an "epidemic of fraud" to the postings of Tanta on the calculated risk blog to the frequent attempts by state governments and congress to deal with predatory loans and fraud. It wasn't that shallow a pool of people who knew the mortgage market was going to tank, heck Paul Krugman was writing about it in the pages of the NYtimes in 2005.
It just seems to me that by sampling the population of profiting investors from the crisis under estimates both the people who were savvy to the crisis and the knowledge that was available.
#1 Posted by Thimbles, CJR on Mon 15 Mar 2010 at 06:15 AM
I wrote to Michael Lewis last year at this time and asked him why no one had looked into the PEOPLE behind the scandal. Not the Burry's of the world, but the individual guys doing the research and packaging and selling of the products at the Investment Banking firms. While I have not read this book yet, it sounded from the WBUR (Boston) interview that individual bankers were not highlighted. I wish they were. I know one who should have been. Regardless, I am definitely going to buy the book....and maybe make one last request for an even MORE personal look at who did what and when.
#2 Posted by Redux2009, CJR on Tue 16 Mar 2010 at 02:13 PM