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Money Laundering American Style: "Know when to hold them and when to fold them...",
This review is from: The Big Short: Inside the Doomsday Machine (Paperback)
I don't normally review business literature but Michael Lewis' account of the 2008 Wall Street Collapse was so well rendered in his book, "The Big Short," that I felt compelled to review it for its succinct description of a complex phenomenon and because Lewis achieves a literary voice and psychological depth more akin to literary fiction than financial analysis. He is a smooth, clear, imaginative writer who conveys the facts as well as the psychological underpinnings of the banking system debacle. In doing so, he portrays several key figures whose personalities and grit drove the bust and profited from it, as well as others whose insights could provide fodder to statesmen initiating regulatory reform. If capitalism is to survive without continued erosion of the middle class, restrictions must be devised to protect investors, home purchasers, insurance companies and the stock market in general. Everything must be done to assure that there are no incentives to bet against what these institutions stand for. If shorting is widespread, the country suffers. With so much at stake in the world of economics and so many members of the workplace identifying with global institutions rather than America per se, policies must be put in place to assure sound business practices that benefit America rather than encourage fraud, manipulation and greed.
In identifying the fraud of sub-prime mortgages as a primary cause for the collapse, Lewis employs the metaphor of one lonely, somewhat anti-social neurologist interning at Stanford University Hospital. Dr. Michael Burry symbolizes the fallacies of the stock market in general as well as the housing bubble's destructive yet predictable course. In characterizing Burry, Lewis suggests the hubris necessary either to manipulate the market or to expect to profit from it. After all, Burry was a genius endowed with intellectual capabilities most of us do not have - an understanding that was clearly lacking in the major Wall Street firms. Burry realized early on that a housing crisis loomed due to the widespread practice of sub-prime loans and their shadowy, insubstantial backing by bonds that were equally complicated and flimsy. Assured that the housing market could not sustain itself, he sought a way to bet against the sub-prime mortgages. An intern with long hours, he was a busy man, but his obsession with the world of investing drove him to reading the legalese of sub-prime loan documents and thereby devising a plan to profit from the impending housing crisis.
By 2005 no one would sell loans on sub-prime mortgages because the interest rates would eventually climb as the number of bank defaults on sub-prime mortgages increased. So Burry convinced Morgan Stanley, Deutche Bank and Goldman-Sachs to sell him credit default swaps that would serve as insurance against losses resulting from the dubious practice of sub-prime mortgage lending. In the process, he lost several of his clients who feared his unorthodox practices. While his clients were unwilling to invest their money as a tool for Burry's betting short, it was Burry's grasp of the inevitability of the housing crisis that drove him to switch directions in his investing protocol. As it turned out, he made millions for his clients and himself by betting against Wall Street. The metaphor here, while it cannot be separated from the idea of American ego, clearly suggests that the typical speculative investor should heed the warning that not all of us are as intelligent and as driven as a Michael Burry. As Lewis so deftly points out, none of our financial institutions possessed his insight.
Lewis brilliantly juxtaposes Burry's monomaniacal search for the perfect investment opportunity with his gradual understanding of his own mysterious, complex personality. Burry had always assumed that his intellectual gifts were the result of his having lost an eye to a rare kind of cancer when he was a child. Due to his physical handicap, he did not look people in the eye, was regarded as different and found himself more interested in his own intellectual pursuits than cultivating associates. A loner, his obsessive interest with the financial world drove him to understand what Lewis admits, that he, a stockbroker, Princeton graduate, hedge fund operator himself, did not. In one of the most interesting passages in the book, Lewis describes how the intelligent, critical thinking graduates of Ivy League colleges secure employment in large investment firms, having never mastered the rudiments of accounting and thereby proceed to carry out their jobs without an understanding of the complex world of high finance they inhabit. Again and again, Lewis exposes the lack of knowledge those who run Wall Street epitomize, from the lenders, to the hedge fund managers, the analysts/appraisers at Moody's and Standard and Poors, to the heads of large investment firms such as Goldman-Sachs, Morgan Stanley, and Bear-Stearns. Burry understood the system's fallacies while they did not so he obsessively proceeded to grasp the paradoxes of the marketplace until he was ready to quit medicine and start up his own investment company, Scion.
Interestingly enough Michael Burry went to medical school because it was easy for him, not because he was dedicated to medicine. In fact, hospital life both bored him and disgusted him. Instead high finance had always been his interest, even though his own father discouraged involvement in the stock market. When his father died, he founded Scion and proceeded to do what he wanted with his life. Early on he realized that "no one could teach you how to invest." It was a talent he felt he had and so he pursued it. Thus, the metaphor of Burry as well as Lewis' tendency to portray characters in depth transforms what could be a dull read into a psychologically compelling experience.
Joel Greenblatt among others encouraged Burry and invested in his company. Others were to follow Burry's lead in purchasing credit default swaps to ameliorate the losses of sub-prime mortgages. Burry's M.O. was to pick the worst of the sub-prime mortgages and bet against them with the purchase of credit default swaps. Goldman-Sachs and other firms failed to understand why he continued to purchase swaps. And although housing delinquencies hit an all time high and thus Burry's protocol made sense monetarily, his own investors were fearful of his practice of betting against the housing market. Yet Wall Street was slowly waking up; by 2007 sub-prime mortgage defaults were at an all time high, with Bear-Stearns going under and Goldman-Sachs experiencing major losses. At this time Burry's own investors were making a profit of almost 500% but they still did not trust him. This fact illustrated the basic lack of confidence some people had in Burry. This lack of trust Burry attributed to his inability to look people in the eye. While Burry clearly understood the casino-like nature of investing in sub-prime mortgage bonds and derivatives, others, including the magnates on Wall Street, had no idea of the insubstantiality of their practices and proceeded to game the system, as did Burry, yet Burry and a few others understood the system while most major players did not.
At the height of the financial crisis, Burry realized that his son had Asperger's Syndrome. The more he thought about it, his son's diagnosis explained his own personality as well. When he acknowledged that, he began to understand the strange compulsions that had driven him to make sense of the financial world. In realizing his obsession, he is a metaphor for the individual whose visionary characteristics can be instrumental in drastic paradigm shifts. Thus is Michael Burry a hero to Lewis and others who study the market. Through understanding his actions and by interviewing him, Lewis and others acknowledged the genius of this lone wolf whose brain should be picked to seal off the holes in predatory lending and investing practices that if unchecked, could drive our nation to ruin.
By clarifying Wall Street practices and explaining such speculative ventures as "tranches," Lewis makes clear, not only the risks of investing for the ordinary man whose skills are not advanced and whose knowledge of the intricacies of finance is not honed, but also the greed and predatory systems that exist to maintain Wall Street dominance. In this regard, Wall Street institutions obscured what needed to be clarified in a self-serving attempt to preserve themselves at the cost of individual investors as well as the American people. As Burry observed, Wall Street standards had not just deteriorated but were non-existent. By amortizing sub-prime mortgages at adjustable rates, Wall Street had created a disastrous real estate bubble which the American tax payer would have to absorb if the financial system was to survive. Burry believed lending institutions should show restraint. Yet they clearly were not doing so, instead betting against their own loans to assure profits. In his view it was not only an immoral system but ultimately an unsustainable one. As Burry predicted, it resulted in the tanking of the American economy even as it solidified Goldman-Sachs and other questionable entities.
Lewis points out that in the middle of the crisis, most Wall Street firms were tottering on the brink of collapse. "The world's most powerful and highly paid financiers had been entirely discredited; without government intervention every single one of them would have lost his job, and yet those same financial advisers that had steered America to collapse were still using the government to enrich themselves," Lewis points out. He quotes Burry, "What I can't understand is why anyone would listen to them."
Steve Eisman, another interesting and prime player in the debacle, exposed the deceptions of dozens of companies, calling the Household Finance Corporation's practices "blatant fraud." Said Eisman, "Wall Street didn't give a s--- what it sold." Moreover, Eisman claimed "Greenspan will go down as the worst head of the Federal Reserve in history." By using quotes and taking the time to fully portray the characters in this dismal scenario, Lewis makes the book of complex financial practices clear and interesting because we see real people involved in the process. The Eisman Lewis depicts was a rude man, so people were reluctant to listen to him. But as Lewis makes clear it was Eisman's brilliance that permitted him to realize that "gambling and investing is artificial and thin." Driven by greed, claims Lewis, most players fail to understand the complexity of the practices they promote. It is not tenable for the less than brilliant to venture into such an arcane world as speculative investments -- sub-prime mortgage bonds, CDO's or credit default swaps. It takes a genius to know what you're doing in such a complicated situation. Most fall prey to Group Think, which is the pattern of Investment Banking in general. One has to watch out for the sharks, but also for the stupid or uninformed.
Thus is the significance of the message Lewis delivers to those who will listen. Let us hope Lewis is not the Cassandra of America, warning of economic destruction while no one listens. This is a book to take to heart, to insist your children and friends read and read again. It is intelligent, heartfelt, wise, and literary. Reading it will sober anyone as to the risks we so unwittingly take on as part of our cultural heritage. The obvious lesson of this book is to avoid wading into deep waters if your swimming expertise is marginal. There are some things most of us are not equipped to understand but our insufferable egos drive us on and on to failure and loss. Maybe unbridled Laissez- fairre simply doesn't work after all, at least not for the average guy. Wha'dya say, Michael?
Author of Bread of Shame