It’s been 21 years since Michael Lewis first shone a light on Wall Street greed in Liar’s Poker. That book, about his stint as a junior bond salesman amid the excess of the 1980s, introduced Lewis as a keen raconteur of modern business. Now a contributing editor at Vanity Fair magazine, Lewis’s latest book, The Big Short: Inside the Doomsday Machine, explores the insanity of the American housing bubble and its subsequent collapse from the perspective of those who bet billions on the fallout — short sellers.
In the two years since the financial crisis began, many individuals have claimed they saw it coming. Yet few had the conviction to put their money — and their investors’ money — behind their beliefs. What the shorts saw, and what few others were willing to accept, was that the whole American financial system had gone bonkers. It was bad enough that sub-prime mortgages were given to people with no hope of ever paying for their homes, all based on the notion that house prices would always go up. But Wall Street then manufactured a trillion-dollar derivatives market, creating arcane securities like credit default swaps on mortgage bonds, out of thin air. For investors like hedge fund manager Steve Eisman, one of the eccentric short sellers profiled in Lewis’s book, it was like a doomsday machine had been placed at the centre of the American economy, and no one seemed to care. Until the machine exploded and brought the global economy to its knees.
Canadian Business: You’ve become one of the most prominent chroniclers of modern business. How do you feel about the responsibility that comes with being the guy people look to to explain this crazy, insane stuff to the masses?
Michael Lewis: Probably to the benefit of my writing and the detriment of my soul, I’ve never really felt that I had a responsibility. I think my responsibility is not to be boring. To the extent I have a responsibility, it’s to clarify my view of things in print as best I can and then let the chips fall where they may.
CB: There have been a lot of books on the crisis. Have people had their fill of information about it?
ML: This is the best-selling book I’ve had by a factor of three. It’s selling weekly three times the number of copies that Liar’s Poker, Moneyball or The Blind Side sold at their peak.
CB: Is it because more Americans have more of a stake in the system than they did before?
ML: I think that’s a very good point. People feel personally disrupted by this thing. Either their savings suffered in this really frightening plummet, or they lost jobs. Or they’re in the markets. A lot of people in finance think finance is crazily structured. The book appeals to them. But then there’s my mother. My mother is a curious citizen of the Republic, and she wants somebody to explain to her what happened, and she would prefer it to be in the form of a story.
CB: So how was it that so few people could see what was going on within sub-prime mortgages and the doomsday derivatives market?
ML: I think it’s a question of what you pay people to see. If the big Wall Street firms had not ended up losing hundreds of billions of dollars collectively, I would be more inclined to think it was outright fraud. But I think it was closer to delusion. People just got paid so much to arrange the facts as they wanted to see them.
CB: Do you think the banks have learned any lessons from this?
ML: There are probably some narrow lessons, like don’t buy sub-prime mortgage bonds with 35-to-1 leverage, but I don’t think system-wide the lessons have been absorbed. They haven’t been made to suffer the consequences of their actions. I’ve essentially told this story about a gigantic bet and about a handful of people who were on the right side of the bet, but the strange thing is, all the people on the wrong side of the bet got rich, too. If you look at the incentives in the financial system now, in some ways they’re worse. Before, what enabled it was that shareholders were clueless about what was going on inside their firms. Now, it’s not just shareholders, but taxpayer money too.
CB: Is it possible to prevent another crisis like this from happening?
ML: The world is always going to have financial markets going up and down. But I do think there are some really obvious things you could do to the financial system that would make it saner. One, if you said it’s now against the rules to trade, for your own account, in securities that you’re peddling to customers, you would instantly eliminate a horrible incentive that’s at the heart of the system, which is to create securities that you can bet against. Two, the people who are taking these sorts of risks should have to do it in a partnership structure, which they used to have to until rule changes enabled them to go public. The risk would be much more closely monitored if the people who were taking the risks were personally liable for the losses. Third is just totally obvious — you can’t trade anything that’s not traded through a clearing house or on an exchange. You would instantly eliminate the Morgan Stanley trader calling up the Merrill Lynch trader and making a $5-billion side bet.
CB: Are there any lessons the U.S. can learn from Canada when it comes to the banks?
ML: Howabout modesty? How about a sense of proportion and a sense of humility? If you look at the credit crisis globally, the worst decisions were made in places where the risk taking was done by manly men. Iceland is the extreme example, but Wall Street’s got this problem too. It’s my impression, perhaps I am wrong, that women have an easier go of it in the Canadian financial industry than they do in the American one. It’s just not as aggressively macho.
CB: I wonder what male bankers in Canada will think about that. Are they less manly men?
ML: (Laughs) You’re not going to get me to say that. No, I just think the manly men do other things in Canada. Banking isn’t as testosterone fuelled an enterprise, and the testosterone caused some of this problem. The same impulse that causes a husband to tell the wife, “No, we’re not going to stop and ask for directions because I know where I’m going” is the impulse that led to this crisis.
CB: Bankers are back to making obscene bonuses, Washington is doing everything it can to keep people in houses they can’t afford, and anybody who suggests reform seems to get labelled as a socialist. I’m just wondering, has the window on serious reform closed?
ML: No, no, no. There’s this level of anger about the unfairness of what just happened on Wall Street. The behaviour on Wall Street has just made people get angrier. You say people get labelled socialist, but my God, what do we have now? Essentially the losses are all socialized now. It couldn’t get more socialistic than it is now. So the votes and the public sentiment are all one way, and yes, there’s Wall Street money and influence the other way, but I just can’t believe that’s going to overwhelm the votes and the public sentiment.
CB: Do you see your book more as a retelling of what happened than an attempt to shape opinion?
ML: I think in this case, telling what happened shapes opinion. It would be disingenuous to suggest I’m a disinterested observer. It seems pretty clear to me when you describe the event, you come to certain conclusions. It’s a little different from Liar’s Poker, because with that I had a mental picture of what the reader would take away, and what the reader took away was a lot different from that mental picture. In this case, it’s quite close.
CB: Do you mean how when you wrote Liar’s Poker , you were warning students away from getting into finance, yet all these students wanted to know more about it?
ML: Yes, it ended up being an advertisement for Wall Street.
CB: With this book, are you getting people asking you for tips on being a better short seller?
ML: I have had letters from short sellers saying they’re sending the book out to all their clients. But it’s overwhelmed by the general shock at the behaviour of the Wall Street firms.
CB: You’ve taken some flack from financial bloggers for painting too rosy a picture of the motives behind the short sellers. Is there a danger in making these guys out to be modern-day Robin Hoods?
ML: I think this is kind of insane, this demonization of the short sellers. It seems to me that the distortive effects on the market can work both ways. You can be a buyer, and not a shorter, and go and lie about stocks and bonds to make them go up, and nobody says anything. But the minute a short seller gets publicly negative, he’s accused of distorting the market, even if what he’s saying is true. I would say this demonization of short sellers is exactly what you don’t want, because what was missing from the markets, if anything, was not an excess of positive feelings about things, it was skepticism and a publicizing of fraud. If people had listened to some of these short sellers, a lot of pain might have been avoided.
CB: But in the context of the derivatives market, it was their very participation that enabled many of the most excessive trades to take place. As one of the short sellers, Vincent Daniel, says in the book, “By shorting the market, we created the liquidity to keep it going.”
ML: This is another issue, much more complicated. In the first place, the characters in my book, when they were buying credit default swaps on sub-prime mortgage bonds, they didn’t have the first fucking clue that these things were being used to replicate the loans. But then they learned, so I guess you could say as a socially responsible citizen they should have refused to make their bets. But the real problem is not them. It’s that the Wall Street firms are allowed to synthesize sub-prime mortgages. I don’t want to be too defensive of them. I don’t think of them as saints but as people who were trying to manage money intelligently. They all had some misgiving about making their fortune off of the collapse of the financial system. There’s Eisman’s line in the book about when it all comes a cropper, you feel like Noah. How does Noah feel when the flood comes? Well, he has the ark, but it’s not a happy moment for Noah. There was an element of that in all of their experiences. There is something humanly difficult about doing well out of other people’s misfortunes. But the financial markets work better when people are allowed to do that, so you don’t want to stop them from doing it.
CB: How do you think the average American sees short sellers now?
ML: It depends on how you ask the question. If they read my story and they get to know these people and walk in their shoes, then fine, I don’t think they’d have any problem at all. If you call up people randomly from the phone book and say, “Do you think short sellers are good people or bad,” or to put it better, “How do you feel about people who profit from the misfortune of others,” they’d be universally opposed to it.
CB: You note in the book there’s been a pretty dramatic rewrite of the crisis since 2008 by bankers and politicians, to make it seem like this was more of a “crisis of confidence” than a period of insanity and stupidity on Wall Street. What’s the danger if that rewrite sticks?
ML: You don’t fix the system, and it’s designed to do this all over again. It’s a great squandering of social capital to have the financial sector have these moments of ridiculous upside. It’s not just if it doesn’t get fixed it’s going to happen all over again. The sad thing is, if it doesn’t get fixed, we’re going to be stuck with this really distortive force in the middle of the economy attracting too much talent and capital to the wrong thing.
CB: So do you see yourself having a role in keeping history honest about what happened?
ML: Yes. I mean, I don’t think of it in such grand terms. I really do think I’m just trying to write a story that doesn’t bore me or bore my reader. But it is a true story, and I really want people to understand what actually happened as an antidote to the noise and propaganda. It is a counterweight to [former U.S. Treasury secretary] Hank Paulson’s book.
CB: When you wrote your first book about Wall Street you thought you were chronicling a world that was ending, but as it turned out, it was just the beginning. Is there a chance we’re only part way through finance’s dominance of American politics and society?
ML: If we are, then we’re all doomed. This is really a corrosive force. The Wall Street firms are making America weaker. They’ve lost sight of the fact that they’re supposed to be handmaidens to productive enterprise. Instead they just assume it’s right and proper for them to be the stars, and absorb resources way out of proportion to what they contribute. I just find it shocking that they get a bonus pool in 2007 that’s the biggest bonus pool in the history of Wall Street, at the same time that Wall Street is orchestrating the destruction of trillions of dollars of wealth. People are being paid to do things that are against our interest, and that’s not healthy.