Michael Lewis and Roger Lowenstein are masters at decoding and interpreting. The two writers are without parallel when it comes to decoding the most arcane concepts of modern finance for the lay reader. Just ask any college student applying to investment banks what he’s reading.
Their signature works have also managed to best interpret the financial ethos—rather, the hubris—of two earlier Western eras. Liar’s Poker (1989), Lewis’ account of his time at Salomon Brothers (the Goldman Sachs of its day), pinpointed the vanities of the 1980s—large bonuses, wanton risk-taking—that, temporarily at least, went up in flames. Lowenstein, a former Wall Street Journal reporter, took a more academic approach to the excesses of the 1990s—faith in financial engineering, lax regulators—in his When Genius Failed (2000). In detailing the rise and fall of Long-Term Capital Management, a hedge fund that imperiled the entire financial system, he presciently noted the excesses that would come to haunt us in the 2000s.
Memory lane: The street outside the New York Stock Exchange, where investors lost trillions in 2008. Robert Caplin/Bloomberg
It’s this last decade’s excesses and the ethos behind them that both Lewis and Lowenstein now try to decode and interpret.
Lewis, the personal storyteller, narrates in The Big Short how, against the wisdom of the best and brightest on Wall Street, a few maintained a different world view. Nearly all of Wall Street bought mortgages and securities based upon these mortgages, investing in the conceit that US housing prices would keep rising. Not Lewis’ protagonists. Because they didn’t believe any part of this conceit, they decided to “short”, or bet against, mortgage securities whose market value was predicated on this conceit. Eccentric in degrees— one character can’t help but be rude and impulsive, another suddenly realizes he suffers from Asperger’s syndrome— they preferred to swim against the tide.
Lowenstein, the consummate reporter, writes The End of Wall Street as a history, a rise and fall, of this conceit. He methodically explains how many factors conspired to boost US housing prices: The central bank kept interest rates low, the US government subsidized home ownership and emerging markets pooled in their savings into the US. This confluence fed into Wall Street’s machine: Lenders extended loans without proper documentation, and bankers sliced and diced these loans and spread them across the system, credit rating agencies blessing every step of the way.
The End of Wall Street: By Roger Lowenstein, The Penguin Press, 368 pages, $27.95 (around Rs1,325).
Where Lewis’ tale is personality-driven, Lowenstein’s is anchored in detail. Yet, reading both works together helps get a better sense of the combination of characters and events that comprised last decade’s ethos. Particularly, in sections of their books that almost seem to build on one another, both writers lucidly decode one device at the heart of the hubris: a complex derivative called a collateralized debt obligation (CDO), a pool of bonds based on mortgages. Everyone loved this product, because they made billions off it.
Save for the few who saw it as a weapon of financial destruction. Lewis’ short sellers, for instance, realized that a loss in home value would multiply across the system to sink these CDOs, bleeding banks red. So they shorted these derivatives.
Both writers are partial to the few who saw through this conceit, because they too wish to expose it. No doubt, it took unusual clarity and courage in the mid-2000s to rebel against the accepted order. However, it becomes too simple to celebrate these rebels. Lewis, for instance, gives his protagonists a righteous halo: They feel “morbid” that their bets succeed, that they benefit, while the economy is in free fall.
Yes, the short sellers were right in their predictions, but not so righteous that Lewis ignore or stay unaware of their complicity in Wall Street’s racket. Consider that to short a security, you have to find someone to go “long”, or bet in its favour. So a bet on one side actually generated demand for the other side: More bets against CDOs meant more CDOs. But when one protagonist, Steve Eisman, realizes that “Wall Street needs his bets in order to synthesize more”, what does he do? He’s so angry he shorts more.
The Big Short: By Michael Lewis, Allen Lane, 288 pages, Rs599.
That Eisman doesn’t have the prudence to stop feeding the CDO machine suggests it’s either moral zeal or raw profiteering that guides this gang. If we believe Lewis, it’s the former: These characters have a heightened sense of good and evil; they only want to prove the other guy—meaning, the whole ethos—wrong. It’s difficult to assess the counterfactual, but if Eisman & co. hadn’t placed their bets—by 2006, big banks had started imitating their bets too— the system could have held fewer toxic assets. We may have had a more contained bloodbath.
But Lewis doesn’t care for such a counterfactual. His protagonists’ attitude resonates with his own rebellion against the 1980s zeitgeist: His personal experiences, in fact, frame the book. Perhaps he has his own moral crusade.
Lowenstein too appears to have some moral axe to grind. He is repulsed every time bankers get paid too much, every time there is a “moral disconnect” between Wall Street and Main Street. He can’t forgive one banker for ordering a $350 (around Rs16,590) bottle of wine just to sample one glass of it, not realizing that all kinds of rich people do so.
Lowenstein has so many axes to grind—a lot of his targets, such as rating agencies, deserve his criticism, of course—that, by the end of it, the book becomes a truncated composition of many different books. He wants to both explain the ethos of an entire decade and narrate the hour-by-hour drama of the few September 2008 days that shook the world, all within 368 pages.
This is where the worst financial crisis in 80 years proves too much for the writers. In the nearly two years since Lehman Brothers collapsed, robust press and academic coverage has enabled us to decode and interpret many different viewpoints for ourselves. So where Lewis and Lowenstein may have served brilliantly as decoders and interpreters for past financial mayhem, their tales now seem limited. This time, indeed, is different.