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May 23, 2011

The Big Short

Inside the Doomsday Machine
Michael Lewis - ISBN-978-0383338829

Well, for those who haven't discovered yet, Lewis has done it again. He debuted on the scene ten years ago with Liars Poker, a sharp-edged tale of Wall Street greed and manipulation which he felt would pull back drapes and open windows for some fresh air and sunlight. It didn't work (though I strongly recommend the book, now re-issued in paperback.) Instead, according to the Wall Street tycoons, he became a pariah and a pusillanimous back-stabber. Not only did it not hurt them, it didn't even faze them. No one paid any attention save some of us flunkies.

In his new contribution, he delivers an astounding take on the 2007-08 credit crisis, and how a few fund managers masterfully discovered the mortgage bond bubble, and exploited it to the fullest, making themselves and their investors very rich. But he first exposes their incredulity that anyone in charge of this debacle could be that stupid; as well, he analyzes the mechanisms behind it. These are the same charges about which he wrote a decade ago: reckless greed, dishonesty, mindless ineptitude, and unquenchable hubris.

In simple terms he explores how the industry massaged and masked the credit risks by wrapping up low-quality subprime mortgages into complicated securities that could be manipulated to receive high credit ratings while burying the real risks involved.

As well, homeowners were encouraged with teaser rates to enter into mortgages far beyond their ability to repay. They were able, initially, to pay the 1-2% interest, and were later able to refinance before the larger interest rates kicked in. The brokers were able to sneak in another transaction or two and collect their commissions and/or refinance "costs and considerations." When someone defaulted, the built in property inflation permitted the home to be resold for what was owed. No one was hurt--well, at least not until it all came down like the house of cards that it always was. Some of the examples he gives are beyond comprehension: a Mexican lawn care guy with a push mower and a mortgage on a home bought for over a million dollars; then there was the nurse with four condo mortgages on properties "valued" in the millions.

"Short" is an mammoth don't say I didn't warn you, dealing with "the street" and exposing the fact that sleazy insiders knew damned well (or should have) what was going on with the mortgage markets and the inflation of real estate, and they knew (or should have) they would crash. Experience had taught them that Washington would bail them out. They were right. Now we see them profiting mightily as institutions and rewarding themselves with mammoth bonuses for their genius; back on top of the too big to fail game, when in fact anything too big to fail should be too big to exist! (And that, in my opinion, includes the government.) Frighteningly, the recent government bailouts simply made fewer of them bigger still (along with the government.)

He describes this alchemy as equivalent to turning lead into gold in the Middle Ages. (It didn't work then, either.) Incautious investors looked at little more than the ratings, which the authors of these scams controlled by "influencing" the bond raters. The whole scheme was "floated" on the backs of the rating agencies. S&P didn't complain to the bankers for fear that they would just take their business to Moody's. Lots of "Indians" didn't really understand the situation(s), but the chiefs really did; if they didn't, they shouldn't have been in charge. One presumes some only suspected, but didn't want to enquire, since they were profiting handsomely. Who wants to question the rewards when the dough is rolling in? (And of course one can rationalize that it is a consequence of one's brilliant money-managing talent on parade.)

When the scheme began to collapse, they all thought they'd get out before the structure burned down; only Goldman-Sachs made it, and "closed the door behind it." They, along with others, disdain regulation in good times, but demand to be rescued in bad ones. Thus, success is an individual achievement while failure is a social problem. Unfortunately, government agrees and acts accordingly. Goldman lies and cheats, along with others, and government bails them out. Worse, they were given money to buy up the cadaverized firms, and after resurrection was achieved they paid back the loans and came away bigger and more profitable than ever. Now, it seems, the few survivors are too-too big to fail. Bear-Sterns, Salomon Bros., Wachovia and Lehman Bros. are "all gone," but not really. They're just a part of Goldman and Wells-Fargo, courtesy of gummint loans. "Pretty much all the important people on both sides of the gamble left the table rich."

This is the stuff of viciously corrupt crony capitalism, and it has to stop. But it won't unless we demand that it stop. Somebody really oughta hang!

The people who could have prevented or cushioned these events were exactly the people who failed to see the train coming at them in the tunnel, conditioned as they were by hubris and prior successes; protected by Washington, which one could argue they own. (Virtually all of the big men in government funds advice and management are, and for years have been, Goldman graduates, or men swayed by Goldman.) They've proven themselves incapable of--or unwilling to--act upon the basic truths at the heart of the U.S. financial system. Lewis remarks that it is easy to understand why Goldman-Sachs would want to be included in the conversation about what to do about Wall Street, but it is impossible to get your mind around any reason anyone would want to listen to them.

In 2008 reality overwhelmed the perceptions (dreams? / hubris?) on Wall Street that everything was o.k. Every major firm was either bankrupted or fatally intertwined with the bankrupt system. Without government intervention every single one of the banks would have gone under; every single executive would have been discredited and lost his chair at the table, and probably a lot of their own money. Gordon Gekko famously announced that "greed is good." No one on Wall Street ought to have been trusted, nor should they be now--especially now. Had the problem been approached after the publication of Liar's Poker it likely would have been different. If it isn't approached now--and it probably will not be--we'll have the same thing again, and next time it'll be much worse. Even the 30s depression might look like a pauper's Christmas party!

Posted by Curmudgeon at May 23, 2011 12:06 PM