Hedge fund bosses were ‘heroes’, says Michael Lewis
3 February 2011
More than two years after the worst of the financial crisis, the analysis of what happened goes on. Much of it deals with the financial geeks who actually spotted the bust coming – the handful of hedge fund investors who realised the US subprime housing market was built on sand and about to collapse. They made serious money from betting that the market would fail.
The celebrated US author and journalist Michael Lewis has just written The Big Short, talking to those who saw the writing on the wall when no-one else did. For the BBC’s Business Daily, Lesley Curwen asked him whether he thought the characters in his book caused the crisis by igniting a flame which led to the market meltdown:
The full transcript is below:
Michael Lewis: I think if you were going to push that argument what you would say is what they did, did increase the losses inside the big Wall Street firms, essentially they are making these zero-sum bets. They were making bets that were not transparent to the public. They would call Goldman Sachs or they would call Merrill Lynch or they would call the Royal Bank of Scotland and say, “I want to bet that that subprime mortgage bond is going to collapse”, and the Wall Street firm would take the other side of the trade.
So in that sense, their activity contributed to the size of the problem because they contributed to the losses in the big firms. In another sense, they were not only not culpable, I think they were kind of heroic. Their job was to manage other people’s money. This was the smartest thing to do with other people’s money, and it was hard to see what was going on. And not only did they see what was going on, they hollered about it. They tried to get people to write stories about it. They went to regulators and said you should be following up on this. They tried to alert the world.
Lesley Curwen: But didn’t they do that because they wanted the bets to come to pass; they wanted it out?
Michael Lewis: Yes. In most cases that was a motive. In one case though, one of my main characters wandered into the subprime mortgage market in the US. He was so astonished by what he found, he thought it was fraud. The first thing he did was go to the SEC, and they didn’t want to hear about it. So he said, “Well you are not going to do anything about it, I am going to bet on it”, and made a fortune off it that way. So they were not entirely unsympathetic. And the fact is – that if the financial system had more people like them in it, especially at the centres of the big institutions, maybe this whole mess wouldn’t have happened.
Lesley Curwen: Hang on a minute. I mean you are using the word ‘heroic’ and saying that they are responsible and wise, but lots of people will still see them as the villains of the piece, that they actually started the earthquake that actually ended in the credit crisis, and the economic crisis has followed on from there.
Michael Lewis: Well that’s just wrong. They didn’t start it. That’s absurd. The people who started it were the people who disguised the risk that was being created in the financial system. The big Wall Street firms were right at the centre of it; the ratings agencies, they placed triple-A credit ratings on large junk; people who took out cynically loans they could never repay.
There were many more obvious villains in the piece than these characters. These characters were more in the role of Jeremiahs who weren’t listened to. I don’t begrudge them having made money off of having been right. I begrudge the system for having not been more like them, and not having seen that what it was doing was so destructive. This is the great mystery of our times in the financial world.
The incentives in the financial world are so out of line with the interests of the larger society that you can make huge sums of money, destroying capital. For 2007, Wall Street paid more bonus money than it had ever paid in its history and in 2007, Wall Street destroyed more wealth than it has ever had in its history. It created the biggest financial crisis as the chairman of our American Central Bank put it the other day, in the history of the world.
Lesley Curwen: Give us a sense of some of the characters that you are writing about here. What kind of people are they and are they people that you would like to meet for a beer?
Michael Lewis: They are all oddballs. They are all weirdos. They are all people who even their best friends think they are odd. Steve Eisman is one of the odd hedge fund managers who figures out what is going on, and Steve Eisman had a career essentially analyzing lending to middle and lower middle class Americans who perhaps shouldn’t be lent to.
There was a history to this market. And Eisman saw the market born in the late 1990s and he saw how sordid it was. And one of the things that happened across the planet is the interface between high finance, between these big financial institutions and the general public has grown. So all sorts of people who would not have dealings with Goldman Sachs or Merrill Lynch or RBS or Lloyds now do.
Eisman found that there was a very exploitative relationship, and he was outraged by it, morally outraged. He starts his life on Wall Street in his early 20s, a right-wing Republican, and by the time he is done, now, just because of what he is seeing, he becomes almost a Marxist. How many people drift left in their politics in a financial career?
Lesley Curwen: A Marxist, but how much money did he make out of the crash?
Michael Lewis: A Marxist with about $50 million in the bank. Yeah. So he is an unusual kind of Marxist. He is also, as a character, interesting because he is rude. He is the rudest person I think I have ever met, and he basically throughout the story runs around Wall Street insulting important people about what they are doing with money, and he is a kind of social outcast on Wall Street until he is proven right.
Lesley Curwen: The one thing that comes out really strongly from the book is just how excited these people are, about the idea of understanding what’s really going on and making money out of it.
Michael Lewis: There is something intoxicating as anyone who has had the experience knows of the feeling that you are right and the world is wrong, is not just you are right, but you are right and the whole world is wrong and you actually know it. And they had that experience, and it is terrifying too. They all experienced personal upheaval, emotional upheaval, realizing that what they were learning about what Wall Street was doing implied possibly the collapse of the financial system.
Lesley Curwen: Because you got to say the kind of systemic overview that they had, the insight that they had into what was going to happen, few people had. And you could argue that our regulators didn’t have it. They didn’t do that.
Michael Lewis: They didn’t, no, and in fact, it was admitted as much.
Lesley Curwen: So, do people like this, like your four or five main characters need to become regulators to protectors from the next time around?
Michael Lewis: Well, this is a very good question. It is perplexing to me that they aren’t already appointed regulators, because I think that some of them would do the job. We have the same old characters sitting in the regulatory jobs who have proved inept, and for that matter, the same old characters of the ratings agencies, and many of the same old characters running the big Wall Street firms. Why there has not been an upheaval in the status structure, I do not know.