He may be the only writer able to ridicule how Wall Street operates and still be invited into its inner sanctum. Michael Lewis's 1990 account of his years as a bond salesman at Salomon Brothers, Liar's Poker, is a must-read for anyone who wants to understand how the financial world really works. Since then, Lewis has written on everything from Silicon Valley to baseball, but this month he returns to the world of high finance with The Big Short, a gripping narrative about the U.S. subprime-mortgage debacle. Derek DeCloet spoke with the author about what's changed on Wall Street-and what hasn't.
What inspired this book? I really did think after Liar's Poker that it was highly unlikely that I would ever go back to Wall Street for another book. I guess I didn't really believe the material would be so rich again. Then, oh, two, two and a half years ago...I started to get the sense that, oh my God, these places that were sort of the beating heart of capitalism somehow became the dumb money. The reason they got to that point could be traced back to my time in the eighties and the changes that were happening on Wall Street. All of a sudden I felt sort of connected to it.
Could you have written this book if you hadn't worked on Wall Street? No. For me, having a real understanding of how people behave on a trading floor and what they're willing to do was really useful. Many of those people [interviewed for this book]had read Liar's Poker and had read Moneyball and they didn't treat me like a journalist. They treated me like I was one of them. The level of access that I got because I had worked there was really, really important.
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How did the investment banks that created these toxic mortgage securities wind up owning so many of them? The answer was, in part, how [traders and bankers]were paid. If you are incentivized not to understand something, you will not understand something. Howie Hubler [a trader whose mortgage bets nearly sank Morgan Stanley]was, in his view, making huge sums of money for...owning this stuff, and as long as it didn't go bad before the end of the year, he was going to get a huge bonus. The fact that the business had got so complicated that, essentially, the people who were running it were unable to evaluate it is also a big contributing factor. I mean, [Morgan Stanley CEO]John Mack did not understand that Hubler had a position that if national house prices went down, Morgan Stanley was going to have a $12-billion hole in its side.
What mistakes led Wall Street to this state? The first and most obvious was the change in corporate structure for investment banks from partnerships to publicly owned corporations. No partnership would have ended up owning $75 billion of triple-A-rated collateralized debt obligations backed by subprime mortgages.
Do you think bankers learned a lesson from this? If the question is, did they learn not to buy $35 worth of subprime mortgage bonds with one dollar of capital, yeah, they learned that narrow lesson. But the big lesson, to me, hasn't even been broached with them. And the big lesson is, your business needs to be useful to the rest of the economy. The point of this business is to facilitate productive enterprise, not to have this giant casino on the side that actually destroys productive enterprise. I haven't seen any sign that anybody's sitting back and saying, "How do we make ourselves more socially useful?"
Has this financial crisis permanently changed American society? Yes. It's changing. A fine point has been put on a problem that has been growing for a long time, and it's a problem of the relationship of the haves and the have-nots... I think that you're going to see really radical changes in how Wall Street is governed, in the financial sector's influence and profitability. I think this is kind of a gut-check time for society. It's clearly been mismanaged.Report Typo/Error