Michael Lewis and This American Life on Financial Meltdown

For those of you who enjoyed Michael Lewis’s piece on “job vs. calling,” and my follow up post Why So Many Struggle to Find a Job or Calling, I must alert you to another recent Lewis piece, this time on the Wall Street melt down.

It’s titled The End of Wall Street’s Boom in Portfolio magazine and it’s absolutely essential reading for understanding the financial crisis. There’s so much to read about on this topic — one must be picky. I recommend reading Lewis’s long, helpful chronicle of how we got here and why.

Interestingly, he opens by wondering why Wall Street entrusts 24 year-olds with no experience to dispense investment advice to grown-ups. Though he doesn’t explore this particular angle too deeply, it is worth wondering how much responsibility a young, money-hungry, recent college grad should assume for understanding the work he is doing and how it fits in the total picture. Certainly, the willingness of young bankers to re-package and sell essentially fraudulent mortgage-based financial products up the food chain contributed to the overall systematic breakdown.

The other great piece of journalistic reporting on the financial crisis happened on This American Life radio program. Turn up the volume, kick back on a couch, and listen. Prepare to be deeply disturbed and dismayed, but also grateful for at least a few people’s ability to explain what is going on in plain English.

8 Responses to Michael Lewis and This American Life on Financial Meltdown

  1. Lisa L says:

    The first and third links in this post are also to your “Job vs. Calling” post, which is not how I think it’s supposed to be.

  2. Ben Casnocha says:

    Sorry! Fixed the link to Lewis’s piece.

  3. Thanks, Ben. I read every word of Lewis’s well-done faena (Spanish: job, the final act in a bullfight) and took notes.

    I was especially amused by the devilish way he administered the matador’s estocada, the final sword thrust to the bull, with the words: “Something for nothing. It never loses its charm.” Funny– I always thought that was Wall Street’s credo since the days of the House of Morgan. Lewis practically admitted as much when he said that greed on Wall Street was a given– almost an obligation.

    The thing that bothered me about this well-written takedown of the idiots and rogues in Scumbagville is the way Lewis tells us Steve Eisman kept insisting he just couldn’t fucking believe evil things like ripping off investors was allowed, and the credulous way Lewis swallows these assurances whole, like some kid gulping a deviled egg. As Eisman said, “Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

    Well, how many years do you have to feed the monster before you begin to wonder why it’s growing so large, Steve?

    And why the hell is it that the big shots ignored a savvy player like Eisman all those years when he was predicting the apocalypse, but the market in financial stocks crashes when an obscure analyst like Meredith Whitney cries out that Wall Street bankers are stupid?

    It doesn’t ring true.

    I think Michael Lewis is full of shit. This sorry spectacle had played out several times before, on a smaller scale. Let me paraphrase Matthew Sheppard:

    Over-the-counter derivatives played a central role in financial scandals and corporate failures, including the near collapse of Long Term Capital Management in 1998. The intervention of the Federal Reserve ensured that the costs of that episode will never show up in any account of the losses in OTC derivative markets. This didn’t negate the fact that the regulations that govern the trading of OTC derivatives provide fertile conditions for corporate scandals and failures.

    If you ask me, Michael Lewis is still ‘capitalizing’ on Liar’s Poker.

    On that note, all bets are off with my bookie.;-)

  4. Krishna says:

    Why do twenty somethings authorised to dish out investment advice to grown-ups –

    The real culprit is the introduction of financial engineering to the world of finance that relies way too much on probabilities than possibilities. (If the house prices keep going up, the loan stays good, so sell that bond forward! And what if it goes down? Shut up, you stupid!!)

    That’s right. B-schools push so much of calculus and algebra down the throats of young impressionable students and encourage them to apply its ill-suiting theorems to (mis)interpret complex financial models that are far removed from reality math that signifies old fashioned way of doing business – lend only what you have.

    Wall Street absorbs novices because they don’t ask too many inconvenient questions. For the kids, the fact that they are working for Lehman brothers is enough to puff up their resumes that position them for frequent job hops within the Wall Street precinct. B-Schools train them to build financial *models* (not realities) and they get campus hired with all their wetness behind the ears in tact. It is easier to deploy such greenhorns to fill up data fields of dubiously designed programs that mask the clumsy logic behind the code that safely lies embedded in the kernel. The blunder gets recycled in perpetuity until one day someone realizes the folly. By then it will be too late, the institution’s networth have been wiped out and the kid simply loses his job. But certainly not before the suits cashed out their stock options and enough fools have been left holding the junk.

  5. Vince, I’ll believe Michael Lewis is “full of shit” when other players start offering alternative theories. So far none has. And if you think he’s riding on the success of Liar’s Poker, what do you make of Moneyball, Next, the New New Thing etc?

  6. I was a bit bleary-eyed when I posted my comment last night. i meant to say also that
    this is the clearest, most informative report I’ve yet read on the role of Wall Street culture in the financial debacle. I just don’t think it’s the whole story.

    The key to how looting by the Wall Street pirates was enabled by the government can be found in the pronouncements of the President’s Working Group on Financial Markets, colloquially known as the “Plunge Protection Team”.

    From the Working Group’s report on Over-the-Counter Derivatives Markets and the Commodity Exchange Act, made to the Congress in November 1999:

    “The Working Group has concluded that under many circumstances, the trading of financial derivatives by eligible swap participants should be excluded from the CEA [the Commodity Exchange Act]. To do otherwise would perpetuate legal uncertainty or impose unnecessary regulatory burdens and constraints upon the development of these markets in the United States. The Working Group has also concluded that it is important to remove legal impediments to the development of electronic trading systems, which have the potential to increase market liquidity and transparency, and appropriately regulated clearing systems, which can reduce systemic risk by allowing for the mutualization of risks among market participants and by facilitating offset and netting of contractual obligations.”

    link to ustreas.gov

    There you have it.

    Alan Greenspan, of course, was chairman of the Federal Reserve in 1999.

    From All Academic Research:

    “In the Spring of 2003, Warren Buffett and Alan Greenspan engaged in a debate over the effects of derivatives on the global financial system. Some of the statements Buffett made in Berkshire Hathaway’s annual letter to its shareholders were carried widely by the press: derivatives were time bombs and financial weapons of mass destruction. Greenspan responded by arguing that derivatives helped major financial intermediaries to escape major damage from a number of large corporate and sovereign defaults, including WorldCom, Enron and Argentina. He said that the benefits of derivatives, in my judgment, have far exceeded their costs. The counting of costs turns out to be critical to the assessment of derivatives, and especially derivatives traded over the counter (OTC), as contributing or mitigating factors in global systemic risk.”

    link to allacademic.com

  7. Dan Erwin says:

    Ben: Thanks for the Michael Lewis article. Whether or not Lewis is full of shit, he’s always a great read–and especially for a holiday.

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