Business Insight Zone

Let’s get this out of the way: I’m an unabashed, in-the-tank fan of Michael Lewis, and I have the track record to prove it.

This ultra-long Portfolio feature from Lewis takes us back to the environment of his debut book, Liar’s Poker, building on what Lewis learned as a young trader to show how Wall Street came be in its current sorry state.

The End
The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.

Lewis tells the story with his typical blend of clarity, wit, self-deprecation, and unblinking attention to absurdity. He employs his standard narrative M.O., taking the stories of individuals — in this case, hedge-fund operator Steve Eisman especially — and using them to explain a set of wider phenomena.

By this device, Lewis discovers what Eisman discovered before it was chic to say so: that Wall Street was badly deluding itself (and misleading investors) about the nature of the bets it was making tied to the U.S. housing market.

Here are some choice quotes:

In the two decades since [writing Liar's Poker], I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility.

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From that moment, [Meredith] Whitney became E.F. Hutton: When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of ­borrowed money, and imagine what they’d fetch in a fire sale. . . . If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid.

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There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.

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Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a s**t what it sold.”

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Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism.

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“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic — the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

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“The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?”

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“That Wall Street has gone down because of this is justice,” he says. ” . . . They built a castle to rip people off. 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.”

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Greed on Wall Street was a given — almost an obligation. The problem was the system of incentives that channeled the greed.

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[John Gutfreund:] “It’s laissez-faire until you get in deep s**t.”

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My recommendation: print this one out, carve out some quiet time in the evening, and read the whole thing.

You can see more of my favorites on this subject on the (freshly updated!) Subprime Primer page.

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Photo by wwarby.

Category: Finance & Real Estate