Just got a better map of the territory.
Remember the financial melt-down a few years ago? I was really confused, at first, about just what had happened. After reading about it a bit, I thought I had a fairly good grasp of the big picture, but The Big Short finally snapped all the pieces together for me.
What happened in US financial institutions a couple of years ago actually began in the 1980's, and Michael Lewis was there. His first book described a corrupt and corrupting culture, but the unexpected reaction to that first book, Liar's Poker, in part, explains just how we ended up with the astonishingly similar (but for being several orders of magnitude larger) situation that led to the recession-causing practices he describes in The Big Short.
I first read Michael Lewis’ Liar’s Poker a few years after he wrote it, either in the late 80’s or early 90’s. It’s a book that was as shocking as it was fun (as is Moneyball, one of a number of insightful and entertaining books he’s written since then, a great geekfest of a book about modern baseball). Lewis says about Liar’s Poker, the book that made his career, in the introductory chapter to The Big Short:
“I expected the reader of the future would be appalled that, back in 1986, the CEO of Salomon Brothers, John Gutfreund, was paid $3.1 million as he ran the business into the ground. I expected them to gape in wonder at the story of Howie Rubin, the Salomon mortgage bond trader, who had moved to Merrill Lynch and promptly lost $250 million. I expected them to be shocked that, once upon a time on Wall Street, the CEOs had only the vaguest idea of the complicated risks their bond traders were running.
…I never imagined [that] a future reader might look back on any of this, or on my own peculiar experience, and say ‘how quaint.’ How innocent.”
Innocent, is just what Liar’s Poker (which portrays the shockingly obscene corruption inside investment banks) seems in retrospect. The Big Short is about the corruption that grew, by orders of magnitude, from the its inception in the 80's to its present monstrous proportions. Liar’s Poker was about investment firm’s cheating it’s investors. This book describes how Goldman Sachs and other companies committed fraud on a scale that boggles the mind, cheating pretty much the entire population of the US.
The Big Short is necessarily a less wide-eyed, less personal (and therefore, alas, less hilarious) account of just what, exactly, happened that tanked the US economy in 2006 - 2007 - 2008, and how it changed the world. Lewis had seen the kinds of practices used by investment banks in the mid 2000’s before, just on a smaller scale; his experiences give him the perfect set-up to tell this story. His bright, amazingly uncynical and engaging tone makes his dissection of the byzantine practices in the financial markets readable. We see it through the eyes of a few very different and unusual investors who understood what was about to happen (and got rich as a result), which makes the many abstractions employed as financial instruments easier to grasp.
The book sharpened my understanding of what exactly was done with those credit default swaps, the CDOs they went into, and the synthetic CDO’s which were derived from them, and how manipulations of these derivatives led to the deep recession in which we now find ourselves.
Apparently I’d had no idea of the scale, depth, and breadth of the corruption of the individuals who control bond markets, and, by leveraging that market many times over, the economy. Now, too, I more thoroughly understand my husband’s utter horror at Obama’s appointments to Treasury, as well as his selection of the team to advise him on the economy. The book doesn’t discuss this at all (his restraint and neutrality on points like these amaze me), but understanding the history, background, and mindset of the people whom Obama chose to advise him gives context to his otherwise inexplicable decision to hand a colossal fortune to essentially corrupt Wall Street firms (Goldman Sachs and others) without demanding increased oversight or regulation reform, instead of using that fortune for sweeping public works projects. In his defense, there was no way to understand the profound culture of corruption and greed in which his advisors were steeped. But, now I think, it’s time for him to realize his mistake, and end his relationship with these investment banks and their henchmen.
I'm so glad he wrote this book. But it also deflates my hope, a little bit, that it isn't too late for our culture to change course. Just as what happened in the 80's seems trivial in retrospect, perhaps enough people will understand this book as another 'how-to" manual to complete the transfer of wealth to a few cunning individuals, leading to an equally devastating outcome. Without new regulations, this is not just possible, but I suspect also irresistably tempting.