New York: The loner, with a glass eye, a medical degree and Asperger’s, who makes millions betting against the subprime mortgage bond market is just one of the unlikely heroes in Michael Lewis’ The Big Short: Inside the Doomsday Machine.
Twenty years after Liar’s Poker, Lewis brings his flair for comedy and sense of wonder to the events leading up to 2008 when reality finally overwhelmed perceptions: a crowded theatre burnt down with a lot of people still in their seats. Every major firm on Wall Street was either bankrupt or fatally entwined with a bankrupt system. The problem wasn’t that Lehman Brothers Holdings Inc. had been allowed to fail. The problem was that Lehman Brothers had been allowed to succeed, he writes. Edited excerpts:
Reality bites: Two decades after leaving Wall Street, Lewis has returned to survey the scene of the latest crash. Jonathan Fickies / Bloomberg
You say Wall Street has done itself in. How will that play out?
There’s going to be pretty dramatic reform. It just takes a little while for it to happen.
What’s the most important change that has to happen?
There are two big ones: Everything that’s traded, every risk instrument that’s traded, has to be traded on an exchange, through a clearing house on screens so the counter party risk is not Lehman Brothers facing Goldman Sachs, but Lehman Brothers facing an exchange.
So, if Lehman Brothers goes down, it’s the exchange that will topple, not Goldman Sachs and every other firm on Wall Street.
And no inventing some new thing you can trade off the exchanges!
What’s the second?
I never understood why a firm is allowed to trade the (its own) book in securities it’s trying to sell to its customers. It creates an instant conflict of interest that poisons the relationship with the customer, leads to the giving of lots of bad financial advice and to the creation of instruments people shouldn’t buy just so the firm can sell them and then bet against them.
Richard Fuld’s lawyer just said he didn’t know what Repo 105s were. Are they kidding? Is dumb an excuse?
Clearly it was a central part of their strategy for years. So it’s bad either way. If he didn’t know, what the hell is he doing as CEO (chief executive officer)? How does a CEO not know about that? Why is he being paid all that money?
I understand why he’s saying it; maybe it’s true. But he’s saying it because he’d rather be a fool than a crook.
That seems to be the choice that Wall Street people are going to have to face when the reckoning comes: Do you advertise yourself as a fool or a crook because there is no other choice.
We still don’t know how much intertwined risk these companies have, do we?
That’s the proximate cause of the panic that followed after Lehman went down. It’s like living in a small town and being told that someone has bubonic plague, but you don’t know who. If you know who, you’re okay since you can quarantine that person.
There were actual losses, but no one knew who had them or how big they were. That’s because the whole financial system has been organized to serve the handful of people who work in it rather the economy it is meant to serve.
How different since you were at Salomon?
The Wall Street I walked into looked on the surface less socially concerned, more outrageous, bad behaviour, Animal House and all that stuff.
What’s creepy about the whole thing is that these firms have sanitized themselves in every way but one and that one was the money. They look like normal, respectable enterprises, but, in fact, their effect on the world is not so good, and they’re much more dangerous.
How do you think Tim Geithner is doing?
This is not a popular view, but I feel almost a little sorry for him. I think he got rolled. He was overmatched.
I would have thought most of these Wall Street guys would not be employable, yet there’s Thain landing at CIT.
There are important distinctions to be made. Stan O’Neal is disgraced and there’s no home for him, like Chuck Prince and Dick Fuld.
But John Thain came in after the mess at Merrill, and from the point of view of shareholders he’s a genius for unloading the company.
Remembered by the rest of us for his office decorating. Which brings us back to bonuses, which you call an elegant form of larceny.
The money is out of control. It’s insane. There’s no sense of proportion, at all, in any of it. You get paid if you succeed, you get paid if you fail, you get paid if you make a stupid bet, and you get paid if you make a smart bet. Take Howie Hubler of Morgan Stanley. He could walk away with tens of millions of dollars in deferred compensation having lost $9.4 billion (Rs42,770 crore). If that’s possible, the guy who actually made money for the firm should be paid a hundred million dollars.
How can that be fixed?
The firms have to be made less profitable. If the regulatory environment were smarter and if the rules of their business were changed in a way that made us all a little safer, they would be much less profitable and people would be paid far less. The problem would take care of itself.
One of the people in your narrative, Charlie Ledley, told you he got scared because what was going on had implications for democracy.
His interest is more in public policy than in money. He was coming at it with fresh, innocent eyes, trying to figure it out. He couldn’t believe the financial system wasn’t going to cause a revolt, it felt so rigged to him.
This sentiment is finding political expression right now. Actual, serious reform could happen—I’m bullish.
Why hasn’t it happened already?
The government severed dealing with the symptoms from dealing with the cause. They gave money with no strings attached. It was terrible negotiating. They should have said: You’re going under unless you sign on the dotted line. We’re getting these reforms through that will permanently change your business.
What would have happened if they’d been allowed to fail?
All the firms would have been instantly nationalized and Wall Street would be run out of the treasury right now. It may not have been as horrific as the defenders of the bailout paint it, but you’re playing with fire.
I don’t fault them for what they did in a moment of crisis. My question is why the hell you didn’t see it coming two years before. There’s a one-eyed man with Asperger’s who saw it coming, so why didn’t you?
In 2007, the bonus pools were the biggest in the history of Wall Street. Does a $100 million bonus bring joy and happiness to the recipient?
If you have none, getting the first 100 grand makes a difference. But all psychological research shows that after that it has no effect on people’s happiness.
If that’s true, what does it say about you that you’re devoting your whole life to making the amount go from $100 to $200 million?
What makes you happy?
My wife and kids give me enormous pleasure. I coach both my girls in softball right now, five days a week, three hours a pop and when I’m at those softball practices it’s pure joy.