Modern Financial Horrorshow, Part 1

The Evolution of Michael Lewis

Most people probably know the movie The Blind Side, which gripped audiences across the nation with a story about how a black kid from the bottom of the Memphis ghettos became a national football star through a stunning series of events. Perhaps as many people know Moneyball, where Brad Pitt plays Billy Beane, the general manager of the Oakland A’s who turned the nation’s poorest MLB team into a disproportionately winning team. These are the kinds of underdog stories we love to hear, which are all the more exciting because they are based on real things that happened to real people. More importantly, even if you don’t care one lick about football or baseball (which I don’t), these films (and the books that spawned them) are riveting.

Fewer people know that the author of these books is a financial journalist named Michael Lewis. After a start in Salomon Brothers in 1986, Lewis quit Wall Street and made serious waves with his first book, Liar’s Poker (1989), an exposé about the insanity of the bond market as it emerged in the 1980s. As Lewis describes it, he had hoped that some college student who read his book might glimpse the decadence and inherent instability of the financial system, and decide to pursue something more meaningful with his or her life. To his horror, though, young folks who picked up Liar’s Poker read it as a how-to book, and Lewis received a flood of letters asking for tips on how to make it on Wall Street.

From that 1989 on, Lewis largely avoided Wall Street super-greed pieces and lived quietly on the other side of country, in Berkeley, CA, watching and wondering just when Wall Street would finally implode. After the 2008 crash, he came out of hiding, and since then Lewis has penned three books on Wall Street and its discontents. (Moneyball and The Blind Side were written in 2003 and 2006, respectively.) You can glean a lot from their titles: The Big Short: Inside the Doomsday Machine (2010); Boomerang: Travels in the New Third World (2011); and Flash Boys: A Wall Street Revolt, (2014). They are all scary, riveting, and often hilarious glimpses of the apocalyptic financial world in which we live.

Tales of Greed and Exploitation

The Big Short

The Big Short (now also a movie with Brad Pitt) follows three unique stories of investors who not only anticipated the housing collapse of 2008, but also put their money where their mouth was in a big way. One (played by Christian Bale) was a small-time hedge fund manager out of CA who bet heavily against the housing market when he realized that the loans which were being handed out like candy were ticking time bombs. In another story, a guy from Deutsche Bank (played by Ryan Gosling) sees the coming crunch and manages to convince an impulsive hedge fund manager (played by Steve Carell) to bet against bonds issued by his own bank and many others. Finally, the managers of a “garage band hedge fund” turn $100,000 into $100,000,000 through a strategy of apocalyptic investing. At the center of it all is a bunch of junk housing loans, which were being repackaged by the big banks into bonds, and then bonds of bonds, and all stamped with AAA ratings from agencies that were clueless to the fact that they were enablers of a gigantic ponzi scheme constructed by Wall Street.

Boomerang

Boomerang (2011) tells the disturbing and often hilarious travel story of Michael Lewis’s tour of the European fallout after the American crash. He first visits Iceland, Greece, and Ireland, and muses upon the unique cultures of each country that led them all down different paths into financial ruin in the wake of 2008. In Iceland, risky fishermen invented fake money and tried to buy the rest of the world. In Greece, entitled tax-cheaters falsified a balanced budget for years and turned the Southern Eurozone into a giant crater of debt. The Irish turned their Celtic tiger winnings from the late 1990s-early 2000s into a project to build new houses and buildings for far more people than could ever live in them. Finally, Lewis stops by Germany to discover the amazing work ethic and naïveté of the German bankers who ultimately ate Europe's debt crisis, and then flies back home to CA to observe the entitlement of the worst-run cities in America. The result is a fun, but somewhat thin account of Europe’s participation in and reaction to the 2008 crash.

Flash Boys

In Flash Boys (2014), Lewis heads back to Wall Street to uncover yet another innovation devised by banks to steal money from their own clients. This time, it’s something called High Frequency Trading (HFT), which is responsible for much of the growth in the DJIA over the last years. HFT is predicated on the fact that in the age of fiber optics, the person who gets the best stock price is the one who has the fastest and closest connection to the server that makes the trades for the stock exchange. Here’s how the HFT scheme works: when a mutual fund wants to purchase shares of a stock traded on the NYSE, it sends the request to the central server (which lives in NJ). In the nano-seconds between the request and the purchase, an HFT firm, all of which have their own servers located as close to the NJ server as humanly possible, sees the request coming, temporarily "buys" the stock itself, and then sells it to the fund for a fractionally higher price.

An analogy would be if you went to a market to buy a cucumber, found the one you wanted at $.50, and as you were about to hand the money to the salesman, someone else came by, bought your cucumber at $.50, and then turned around and sold it to you for $.51.  Not a huge deal, because the intermediary guy only robbed you $.01, right? But when it happens millions of times a day, and the intermediary’s purchase is entirely provisional to the point where he has absolutely no skin in the game, it becomes a little more outrageous. What’s worse is that the big Wall Street banks sell access to their own internal trades to HFT firms, thereby selling out their own investment clients. As of 2014, when the book was written, there were no regulations on HFT firms, none forthcoming, and only one main guy, a Canadian named Brad Katsuyama, who even viewed the system as a problem and was working to stop it. Katsuyama is naturally the book’s hero.

Wall Street's Dark Side

I first started reading Lewis because Malcolm Gladwell said in an interview that he thought Lewis was the best writer of his generation. Not having read all writers of that generation, I can only say that I find Lewis’ books phenomenally interesting (and better written than Gladwell’s).

Money Burning

The problem with Lewis’ stuff is that it has taken a dark turn since 2008. What is unique about his corpus of writing (or at least what I have read of it) is that he tends to identify some genius, and then explain everything about why this person is a genius in a way that is comprehensible and interesting to a person who is otherwise completely ignorant about that field of knowledge. For example, in Moneyball it requires an incredible amount of background information to even begin to understand why Billy Beane of the Oakland A’s made such great decisions about baseball players, when absolutely no one else in baseball (circa 2003) saw any value in them. Lewis delivers this and other complex bodies of knowledge in a way that is simple enough to understand, and somehow fascinating enough to read like candy most of the time.

Since 2008, though, Lewis’ geniuses are people who see through the Wall Street financial game. (The exception is Boomerang, where the “geniuses” are people with a knack for audacious financial stupidity.) The problem, for me at least, is the underlying dread that courses through these books, precisely because they are not describing faraway problems in a distant land, but problems that have a real impact on my life and future.

If Lewis is right, then the people who have been heading the financial world for the past thirty year or more have done so with an unswerving commitment to squeeze every last penny out of the system and the people they are supposed to be working for, not against. Moreover, when said financial heads run the nation into the ground (e.g. 2008), they are rewarded, not with prison sentences, but with fat payouts directly from tax dollars lent them by a federal government too weak to enforce anything remotely resembling justice. Call me hysterical, but that thought doesn’t help me sleep at night.

Strangely enough, though, Lewis seems to be an optimist. I think he genuinely believes that by writing about these things, he can help people steer the world toward a better place than 2008. I pray to God that it is so.