The Big Short Falls Short in Identifying the Cause of the Crisis

Let me get the easy part of this out of the way first. Michael Lewis is a remarkably gifted writer, and I have often found his books impossible to put down. When I first read his debut at book authorship, Liar’s Poker, I literally read it straight through. I was not alone in this, as Liar’s Poker rightfully made Michael a very well-respected author and a very wealthy man. Moneyball, The Blind Side, and numerous other best-sellers built on that reputation. The long-awaited newest contribution from Michael Lewis, The Big Short: Inside the Doomsday Machine, is 264 pages long, and I also read this in 24 hours. However, I doubt many others will feel the same. The book was compelling, I thoroughly enjoyed reading it, and nothing in the book modified my view that Michael Lewis is one of the most interesting writers of this era. I simply doubt that this book evoke the same response from the masses of people who will buy it. Perhaps I am wrong. So before I begin to disect the important parts of the book (its underlying messages, etc.), I will say that it was another hard-to-put-down book from Michael Lewis. Thumbs up, and all that stuff.

So what did I really think of the book? Well, Lewis should be commended for writing a book on the 2008 financial crisis from the most unique perspective thus far. Rather than focus on the major characters that a plethora of other books have focused on (Paulson, Bernanke, Geithner, etc.), Lewis tells his story using some extremely obscure characters as his lead actors: A handful of hedge fund managers who made massive bets against the subprime industry (and by hedge fund managers, I am not referring to high profile, well-known hedgies; I am talking about very, very minor players). Readers will feel connected to the characters when they are done with the book, and a less gifted writer could have never pulled this off. It was a difficult task for Lewis as well, but he skillfully made the points he wanted to make and simultaneously told a story, all through a narrative of four or five unconnected characters of whom the public has never heard.

What are these points Lewis wanted to make? I suppose the major tension of the book is the teeter-tottering between the greed/evil genius of the major Wall Street firms (on one hand), and then the utter stupidity and incompetence of Wall Street (on the other). It is a difficult balance to strike, and one reason it is difficult is because, well, one can not have it both ways. Lewis can not claim, as he astonishingly and explicitly does, that Goldman Sachs made AIG write credit default swaps on the subprime mortgage industry, guaranteeing AIG’s demise and Goldman Sachs flourishing, but then on the other hand claim that the firms had no idea what they were doing, and were completely shell-shocked by what happened to their CDO’s (the collateralized debt obligation instruments which served as the toxic assets you hear so much about). This inconsistency permeates the book, and tonight on 60 Minutes I heard Lewis repeat what his major thesis is: Wall Street did not know what they were doing. This is the correct thesis. But it is wholly imcompatible with the obscene Goldman Sachs conspiracy movement that has taken over the Oliver Stone mainframe of our society. Even a Michael Lewis fan like myself was taken aback by the audacity of this oft-repeated contradiction.

Perhaps the most disappointing message of the Lewis book is the conclusion he saved for the final chapter – the one I have heard him preaching for some time now on the media circuit. Lewis has been preaching since the days of Liar’s Poker that the great sin of Wall Street was when all of the major firms went public (i.e. rather than function as closely-held partnerships, they sold shares to the public in the IPO market and now have no reason to ever check their evil inhibitions at the door). It is a rhetorically effective charge, but one that is not up for the most routine of examinations. The individuals most responsible for the massive money-losing operations of 2005-2007 were the largest shareholders in the firms. Jimmy Cayne of Bear Stearns saw his stock holdings decline from $1 billion of value to $50 million of value, directly under his watch. Richard Fuld was thrown to the lions as Lehman Brothers burned to the ground, but it burned up his $550 million of Lehman stock as well. The gentlemen running these firms were wealthy, and they were driven by a desire to get even wealthier, but it is absurd to postulate that the performance of these companies in the public stock markets were not important to them. It was all that was important to them. Are we really to believe that Wall Street would not have found more creative ways to raise capital in the capital markets if they were partnerships? Whether the firms were partnerships or public corporations, they lived off of balance sheet capital that they mostly raised in the debt markets. It was the bondholders who were on the verge of utter collapse in September of 2008. Why would that be different if they were partnerships? The most obvious refutation of Lewis’s thesis is the question many are probably dying to point out to him after reading it: If being a public corporation corrupts the intentions of financial firms, why couldn’t the same broad brush be used for all public corporations of all industries? If the removal of the partner capital from the company capital is a self-corrupting event, why should any corporation ever be allowed to go public? What exactly is the difference? Do not huge retail businesses, manufacturing firms, and technology outfits also use shareholder money to grow and operate? Does Lewis really want to advocate the abolition of public equity markets in America? It is absurd to even carry that argument through to its logical conclusion.

I do not want readers to be confused. There are some stellar observations in Lewis’s newest book. He gets inside some of the most confused and ridiculous financial transactions ever conducted in the history of civilization, and he does it with the precision of a surgeon. But Lewis does not use his 264-page book to even apply one word – not one single utterance – against the malignant government policies behind much of this malaise. He could easily counter that his book was not meant to be a comprehensive introspection of the financial crisis, and that would be a fair response. But readers hoping for a biog-picture analysis of this crisis will not get it here. They will see the worst of a very small number of Wall Street traders, and they will see a system that was clueless to keep this process from ballooning out of control (his section on the high seven-figure bond traders being regulated by the high five-figure ratings agency analysts is choice). The risk management processes of Wall Street broke down. The hubris of a select number of people grew to a point of perversity. Contrary to Lewis’s assertion, the bulk of these CEO’s and executives did lose their jobs (Citi, Merrill Lynch, UBS, Lehman Brothers, Bear Stearns, etc.) all fired their Presidents and CEO’s as their houses burned to the ground. But overall, the book has a ton of good to say about the crisis. Most notably, he demonstrates how “in an old-fashioned panic, perception creates its own reality” (a concept that I want to explore much further in the future). He summarizes in a single sentence the most important thing that can be said about Lehman Brothers (“the problem wasn’t that Lehman had been allowed to fail; the problem was that Lehman had been allowed to succeed”).

I am truly glad that I read this book, and I do recommend it. However, as the pivotal work of evaluating the big picture of the crisis continues, the conclusion that Wall Street’s transition to a shareholder-owned entity was at the heart of the matter is quite lacking. Unfortunately, both evil and incompetence exist in all kinds of business structures.