The Big Short: Inside the Doomsday Machine, by Michael Lewis

Lewis, who left Salomon Brothers to become a full-time writer, tells the story of the 2008 financial crisis. I'd forgotten, but I'd already read Liar's Poker, the book about his experience at Salomon. I think this was better - or at least, a bit easier to follow.

One thing he says about his previous book is that he hoped it would encourage people who'd been thinking about a career in banking to reconsider, and to do something more useful with their lives. So it was a disappointment to him that the effect seemed to be that people would contact him and ask for his help in getting into the financial industry, so they could make tons of money. He says that, after various crises, by the time of 2007, "the big Wall Street banks at the centre [of the financial system] just kept on growing, along with the sums of money that they doled out to twenty-six-year-olds to perform tasks of no obvious social utility". So you can sort of see where his sympathies lie.

When I was reading the book, I felt like I was almost understanding the details of what caused the crash. One thing Lewis says is that the banks deliberately made the products they were selling seem complicated because they thought they could make more money that way, by promoting products which sounded sophisticated and clever. And I think that partly makes it hard to follow the book, although it's central premise is fairly clear:

In the 2000's, lenders were selling mortgages that were cheaper and cheaper - including deals that offered zero or low interest teaser rates, or completely payment-free periods - which they would then sell these mortgages to Goldman Sachs etc., who in turn packaged them up into bonds, which they sold on. By the time the introductory teaser rates expired, and payments rose, and borrowers defaulted, the mortgages were owned by someone a long way from the original lender, as part of some bond that included loads of other loans, some of which might be good, but some of which might be bad.

When the crash happened, the problem was that these bonds were owned by just about everyone, but no-one knew (not even the banks who owned them) what was in them, and what proportion of the bonds were based on bad mortgages. So there was widespread suspicion and fear that any financial institution might fail, and no-one wanted to trust anyone.

Lewis says that mortgages were being made to people who had zero chance of being able to repay them (when the teaser rate expired) and so it was completely predictable that defaults would occur, even if the housing market had not fallen (which it did, which made things much worse). He gives an example that a "Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000".

He talks about Credit Default Swaps (CDS) which started out as an insurance policy that you could use against the chance of someone defaulting on paying out on bonds - for example, if you buy bonds in GE, you might take out CDS with Morgan Stanley to cover you in the case that GE defaults. However, "CDS quickly became tools for speculation" - you didn't need to HAVE any bonds with GE to take out a CDS against them defaulting. In effect, you could make bets that certain companies would fail, and get paid if they did. Some of these CDS sound pretty stupid, in that you can pay a "premium" that's laughably small which would guarantee you a huge payout if the company concerned failed any time in the next 30 years.

The book talks about some key individuals who realised that the mortgage market was destined to fail, and decided to take out CDS against the companies who depended on it. These are sort of the heroes of the book, in that they realised that the system was corrupt and exploited it, although they're not morally any better than the rest of the financial industry: gambling other people's money on movements in the markets.

Lewis also talks about the ratings agencies, and how they were a large part of the problem: they employed staff who were nowhere near as well paid or qualified as the people in the banks, which made the idea that they could police Wall Street, or call the hedge funds to account, risible. They simply did not understand the "products" that the banks were constructing, and have "AAA" ratings (means essentially risk-free) to bonds that were full of dodgy mortgages. In one case the story is told of an investor who employed a researcher to spend a month trying to work out exactly what was included in a particular product, but he was unable to. He conluded that if he couldn't understand it, then ordinary investors had no hope, and so must be buying things they didn't understand.

I liked this quote:

Hedge fund guys such as himself worked uptown and so exited Grand Central to the north, where taxis appeared haphazardly and out of nowhere to meet them, like farm trout rising to corn kernels.

In an epilogue, Lewis makes you extremely angry by describing how the banks essentially got away with it. Everyone in the financial industry who might have been at fault, or complicit, with the fraud that was going on, came out of it OK. The trader who lost more money than any other single trader in history ($9 billion) walked away with tens of millions. The CEOs of all the major Wall Street firms all, "without exception, either ran their public corporations into bankruptcy, or were saved from bankruptcy by the US government. they all got rich, too."

Lewis says that after the book came out, he spoke to various people in government, who were investiating what had happened. Subsequently, at the Financial Inquiry Commission, the man assigned to depose witnesses spoke to Lewis:

"So what did they tell you?" he asked. (Roughly, I'm doing this from memory.)
"What did they tell me?"
"Yes, any insights into what happened. Anything that we might pursue."
No, no, no," I said, "You don't understand: they called me to ask what happened."

So basically the corrupt and greedy and immoral behaviour of the banks has gone unpunished, and caused real misery for millions of people - if anything Lewis is even stronger in his denouncement of the financial industry than Faulks was at the end of A Week in December.

Quite a good read though.

Completed : 20-February-2016

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