The Big Short: Inside the Doomsday Machine
Welcome home, laddie.
Those of a certain age might remember that seemingly hot on the heels of Bonfire of the Vanities came Liar’s Poker, a first-hand view of life inside one of the then-dominant Wall Street firms, Salomon Brothers. That fly on the wall look at the shenanigans within the firm that invented mortgage-backed securities was penned by a 20-something Princeton grad turned bond salesman. And for those of us casting a jaundiced eye upon Yuppiedom it had particular resonance.
Michael Lewis went on to become a best-selling author tilling the fields of narrative journalism. Among other subjects he has, over the years, covered politics and sports. He may, in fact, be better known as a writer about sports since both Moneyball and The Blind Side were made into major motion pictures with A list stars.
The financial crisis seems to have reawakened Lewis’ interest in the industry in which he first worked and brought him home. In that first book, Lewis was both witness and reporter. Here his role is the forensic journalist. He sets out to identify some of the relatively few people who benefited from (which is a nice way of saying made a fortune on) the near-collapse of the financial system and tell the story of how they knew what was coming when almost no one else did.
Thankfully, the usual cast of characters–Mack, Geithner, Paulson, Bernancke, Fuld, Blankfein, O’Neill and the rest–are mostly absent here. When they do pop up it’s to illustrate how no one in the management of these firms had a clue as to the risks they were taking. The focus, rather, is on a handful of folks who are not household names. We see the crisis build and crest through the eyes of an equity strategist and his team, a bond salesman and a one-eyed hedge fund manager who has Aspereger’s.
One of the only good things about Wall Street is that the contrarian point of view is valued–as long as it makes money. Each of the players in this tale saw looming catastrophe long before the Street did. And while they made money–scads of it– in the end along the way they were pilloried and vilified. That’s too often what happens to prophets on or off the Street.
Lewis does a deft job with the story and does an excellent job describing the arcana of the instruments that lie at the center of the financial crisis. In part, this is a story of blind greed. As ever more questionable securities generated ever-larger and more welcome profits the Solons of finance forgot that the safe way to make money is to take a cut in the middle as other parties risk their capital.
Lewis is as entertaining as ever in describing the behaviors of financial types. I’ve had Wall Street clients but not for some time so I find it oddly reassuring to find that they still refer to each other in the most scatological terms and use language that would make a sailor blush. And then there’s the financial system’s pecking order. In a particularly telling moment, the equity strategist meets Ken Lewis, then CEO of Bank of America, and says to himself “He’s stupid.” That’s a nice real-world echo of a point Tom Wolfe made in A Man on Fire .
It wouldn’t be a proper homecoming without resolving the Oedipal drama and the book does that, concluding with a conversation over lunch between Lewis and John Gutfreund, the scapegrace of Liar’s Poker. Lewis sees Salomon as the original sinner–casting aside the venerable partnership model for the rewards of public ownership and the ability to tap sums deep enough to emperil the economy. Those sums enabled bankers to take risks no one, let alone the CEOs, actually understood.
Gutfreund all but ratifies the view of Lewis’s subjects by alleging a CEOs direct reports kiss up and then do what they want. Not exactly a smoking gun but as close as you’ll come to understanding what really goes on in big business as opposed to the sanitized, case studies versions taught in classrooms and reported in glossy magazines.
The 1983 comedy, Trading Places, was one of the first movies to skewer Wall Street mores. In a scene that Wall Street CEOs should have to commit to memory, the Duke brothers, Randolph and Mortimer (played respectively by Ralph Bellamy and Don Ameche) school street hustler Billy Ray Valentine (Edie Murphy) in how the business works.
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