Cashing in on catastrophe

Hey guys, remember when I acted like I was going to bust out my laptop on vacation  and write witty and insightful blog posts? Well, hahahahaha. That was rich.

So before I left for a week of basking in the partially cloudy New Jersey beach weather, I had a chat with a friend of mine about this Reuters video investigating the very important issue of our national obsession with Here Comes Honey Boo Boo. Said friend, a fellow news man (I am not a news man per se, but doesn’t that make our exchange sound extra intellectual?) noted that it’s far easier to get people engaged with a video about a redneck six-year-old than, say, one about the LIBOR scandal. “So true,” I responded, while remotely setting my DVR to record a marathon of old Gossip Girl episodes in my absence. “So very true.”

I have tried, through posts like this glowing review of Matt Taibbi’s Griftopia, to impress upon you people (and by proxy, people in general) the degree to which we as a culture should be engaged with financial news. Not simply because it matters, and is important, and determines the economic well-being of our entire planet, but because, well, it’s interesting! 

Which brings me to Michael Lewis’ The Big Short (sorry guys, my mom yoinked the free copy I had. In fairness, she is my most frequent reader.) I started this book last week because of this Q&A with Ira Glass, who said it was the last truly great book he read (though he also confessed he barely reads books, and only reads nonfiction. So…do with that what you will). From the Q&A:

“God knows [Michael Lewis] doesn’t need the press: heโ€™s the greatest living nonfiction writer; Brad Pitt stars in the movie adaptations of his books. But ‘The Big Short’ made me want to give up journalism itโ€™s so good. Scene after scene I felt like, how do you compete with this? Heโ€™s telling the story of the mortgage crisis, and his angle couldn’t be better: he follows the guys who knew it was coming and bet on it. This lets him explain how they knew and tell the story through these amazing contrarians and great funny scenes. Itโ€™s crazy how funny the book is. And as a story itโ€™s got everything going against it. His characters are rich know-it-alls, but somehow Lewis makes you love them because he loves them. You know how itโ€™s all going to end, but somehow he creates suspense. When the market doesnโ€™t collapse as quickly as his characters think it should, some of them start to wonder: ‘Am I wrong? Is the whole world right and Iโ€™m wrong?’ It all climaxes in this amazing, almost hallucinogenic set of scenes at this convention for the mortgage industry in Las Vegas, where our heroes have a series of encounters that make them all realize, no, no, no, theyโ€™re not wrong. Everythingโ€™s going to collapse. The economy will go to hell. And these people walking around are like zombies who just donโ€™t know theyโ€™re doomed.”

I couldn’t have put it better. Lewis, who most non-finance people know from Moneyball, and most finance people know from Liar’s Poker, goes back to the beginnings of the mortgage crisis, and through a series of characters whose livelihoods depended in one way or another on the housing boom’s outcome, takes readers through the ignorance, apathy, and utter negligence that led to The Great Recession, or at least the financial meltdown that preceded it. It’s a story that, frankly, everyone should feel compelled to read, and whose telling benefits from Lewis’ unique ability to put faces to otherwise dry topics, and to add humor to otherwise tragic events.

In telling the story of the mortgage mess, The Big Short addresses at least two key misconceptions about the financial crisis. The first is that no one saw it coming. On the contrary, the people profiled by Lewis are the very individuals who, as early as 2005, were betting against bonds created by big banks, bonds backed by subprime mortgages that everyone just assumed (or hoped) would never go bad in any significant way. People who discovered, through basic research, that the ratings agencies were giving shitty bonds triple-A ratings without even knowing what they contained (the fact that ratings agencies are paid to rate bonds by the banks that create them requires no research; that completely obvious conflict of interest is just part of how things work.) People who realized that leading investment banks’ models of how these crappy bonds would pan out were entirely contingent on fewer than 10% of the country’s least eligible homeowners defaulting on their loans. People who trotted out this theory time and again, in front of bankers, fellow investors, and their own clients, without prompting anyone to sound an alarm. Despite the complexity of the securities involved, the reality is that banks were making tons of money on something that clearly, clearly, couldn’t last.

The other misconception that Michael Lewis does a great job with is the notion that the housing crisis was simply a result of idiotic homeowners signing on to mortgages they couldn’t afford. Now, there is certainly some truth in that; Lewis writes of one baby nurse who took out five adjustable-rate mortgages at the same time. But while you can blame borrowers for the impact their poor decision-making may have had on their ability to own or maintain a home, you certainly can’t ignore the role played by the often fraudulent mortgage originators who peddled loans that required no down payment, proof of income or other documentation; liability goes both ways. Further, you can hardly expect individual defaulting homeowners to accept the blame for bringing the U.S. economy to its knees. I like chocolate cake; that doesn’t make me responsible for obesity.

The reality is that while homeowners were making stupid decisions, financial institutions were consciously pushing those decisions on them, and much more importantly for the champions of personal responsibility, piling those poor decisions on top of each other in wonky new markets. The banks were basically playing a massive game of Jengaโ€”creating instability and then tacking said instability onto itselfโ€”except they decided to collectively ignore the obvious fact that all Jenga games end in collapse.

The only critique I have of The Big Short is that it is dense. I live in business news five days a week and still found myself rereading paragraphs, although Lewis does occasionally put things in fantastic layman’s terms (example: “It was as if Wall Street had decided to allow everyone to gamble on the punctuality of commercials airlines.”)  At the end of the day, this stuff was intentionally complicated, because if no one could decipher it, then they couldn’t regulate it. But at least some of the financial maneuvering was also embarrassingly obvious to anyone who took the time to investigate it. After pages of explaining complex financial instruments, Lewis sums it up with this: “It all amounted to a bet that housing prices wouldn’t fall.” In other words, just because it was sophisticated didn’t mean it wasn’t too good to be true.

It is particularly interesting to read The Big Short now, in 2012, after the shit has already hit the fan, and subsequently flown off the fan and onto us, the taxpayers. It’s sort of like watching a horror movie unfold (“Behind you! BEHIND YOU!!”) The difference is that these victims should have known there was a killer in the house, and in fact may haveโ€”they just didn’t seem to care.


TITLE: The Big Short
AUTHOR: Michael Lewis
PAGES: 270 (in paperback)
ALSO WROTE: Liar’s Poker, Moneyball
SORTA LIKE: Griftopia meets Too Big to Fail
FIRST LINE: “The willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grown-ups remains a mystery to me to this day.”

One thought on “Cashing in on catastrophe”

  1. OK, as soon as I’m finished the first Odd Thomas book, then return to finish Dark Tower II, I’ll attempt something less intellectually embarrassing : )

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