Michael Lewis is America’s money laureate. A former bond trader, Berkeley, Calif.–based Lewis made his name with Liar’s Poker, a chronicle of the birth of the mortgage-backed security and the junk bond era that defined 1980s capitalism. Published in 1989, it became one of the bestselling business books of all time. Lewis’s newest effort is Panic! The Story of Modern Financial Insanity, an anthology he edited and contributed to about market crashes, published by W. W. Norton & Co. in December. He spoke recently with Rachel Pulfer about his own market timing, what he thinks is going to happen to global markets next and how he reacted to Jon Stewart’s invitation to appear on The Daily Show.
You came out with Panic! during one of the biggest market crashes of all time. How did you manage that?
It started with a lunch in February 2007 with the writer Dave Eggers. He’d asked me to edit an anthology on market crashes for McSweeney’s, his publishing house. I said sure, but let’s take it to a publisher where we can make some real money. Of course, when the whole world blew up, we found ourselves making a lot more money than we expected. [Half the proceeds went to Eggers’ literacy charity, 826 Valencia.]
In one of the pieces in the anthology, “A Wall Street Trader Draws Some Subprime Lessons,” you satirize the tendency for Wall Street to claim it was somehow hustled by poor people. What was the funniest reaction?
A lot of people didn’t get the joke. But the funniest reaction was from Jon Stewart’s The Daily Show. The letter read, “Dear Mr. Lewis, Your article was refreshingly frank. Mr. Stewart likes people who are refreshingly frank. Please come on the show and talk about it.” I was like, Are you crazy? They clearly didn’t realize it was supposed to be a satire.
Liar’s Poker chronicles the rise of Salomon Bros.’ mortgage department and the birth of the mortgage-backed security. Did you have any idea how that financial instrument might end up being used?
None. I thought the mortgage-backed security was a great thing. I still think so. It’s lowered the cost of owning a home. I wouldn’t want to go back to a worldwhere we don’t have mortgage bonds. We should just have much better controls over how they are used.
What do you see as the most significant outcomes of this market catastrophe?
We’re still in this. If you took all the losses in the system and subtracted them from the equity of banks worldwide, you would get a dramatically negative number. What we are seeing is the global nationalization of the financial industry. The political implications are extraordinary. Take the European Union. Spain, Italy and Ireland are all a total mess. The German population is saying in polls that they would rather opt out of the European Union than have to cover these countries’ debts. Sovereign credit is going to come under attack. And the multi-trillion-dollar elephant in the room is: will the United States meet its obligations?
We are in for lots of turmoil. Interesting turmoil. For example, the president is capping pay so that banking should get back to being the boring thing it should be.
What are your thoughts on the salary cap?
If they cap the salaries of the executives, they should cap everybody’s salaries. They are saying the CEO can only make half-a-million dollars, but some bond trader can make US$20 million? That’s not going to work. Given these institutions are taking federal funds, it’s crazy they should be allowed to pay themselves whatever they want. And the argument that all the talent will run away is specious on several levels. One, these supposedly talented geniuses are the ones who created a trillion-dollar disaster. Two, we don’t want people around these places that don’t have some sense of institutional responsibility. Three, they don’t have any place to go. The world’s lousy with unemployed financial talent.
What do you make of the issue of moral hazard in the bailing out of these banks?
The problem with Lehman Bros. wasn’t that Lehman Bros. failed, it was the way it failed. There should be more Lehman Bros., but not as Lehman Bros. was done. Before the failure occurs, the feds need to know who is exposed to this institution. The shareholders will be wiped out, the management will be dismissed, but credit default swaps should be honoured. Effectively, that credit, when the failure happens, becomes not Citigroup’s but the U.S. Treasury’s. If you don’t let the market punish bad behaviour, what you’re going to end up with is a whole lot more bad behaviour.
What would help reintroduce risk into the system?
Greed will take care of that.