Top positive review
Really interesting compilation of essays on financial crises since 1987
on July 13, 2017
The book contains 56 different essays and articles on the main financial crises since 1987. Some of those pieces are just a couple of pages long; others are up to nearly 20 pages. They come from numerous well established sources such as Bloomberg, Businessweek, Forbes, Fortune, New York Times, New Yorker, The Economist, Wall Street Journal, and Washington Post among others. Some are extracts of books. Michael Lewis has written only a few of those 56 pieces.
The quality of those articles vary somewhat. For the most part they are very good. Very few are terrible. And, some are outstanding.
Just to name a couple of the terrible ones, there is one entitled “From the Brady Commission Report” that just narrates nearly hour-by-hour the level of the Dow during the stock market crash of October 1987. However, it provides no analytical insight whatsoever about what happened and why. Luckily, it is only 4 pages long. But, those 4 pages made for really miserable uninformative reading.
Another terrible one is the one by Lester Thurow who attempts to demonstrate that “portfolio insurance” had nothing to do with the crash of 1987. Within this same book, other articles provide an abundant body of evidence (both explanatory and quantitative) that portfolio insurance caused a huge automated pipeline of stock sell orders that overwhelmed the markets, and caused a vicious downward spiral in the stock market. Lester Thurow opinion that portfolio insurance trading did not contribute anything to the crash of October 1987 is nearly as absurd as if he advanced the same opinion regarding High Frequency Trading and the more recent flash crashes the markets experienced just a few years back. For more on this subject, I recommend Michael Lewis excellent “Flash Boys.”
Fortunately, the book is dominated by excellent articles that give you a contemporary analytical narrative covering the respective financial crises live in real time (at the time). And, it provides some very interesting insights. I’ll mention just a few of them below.
The Economist article on the dysfunctional implementation of markets circuit breakers in 1989 is very interesting. Without going into details, those circuit breakers were structured in a very inconsistent way across different markets triggering both liquidity and volatility events (just the type of events that they were supposed to prevent). I trust that since then (nearly two decades later) those known flaws have been fixed.
Robert Shiller writes an excellent piece in The Washington Post documenting how portfolio insurance did explicitly contribute to the crash of October 1987 and rebuts Lester Thurow’s position mentioned earlier. Portfolio insurance contributed an addition $6 billion out of $40 billion in sell orders on October 19, 1987. A factor that increases sell orders by 15% overnight is going to put very severe downward pressure on the stock market.
One of the longest pieces is a Michael Lewis essay from the NYT on the demise of Long Term Capital Management (LTCM) called “How the Eggheads Cracked.” And, it is a classic… very detailed, and very clearly explained. You have to remember that LTCM was headed by a former famous Salomon Brothers bond trader called John Meriwether. And, the latter was actually one of Michael Lewis boss when Lewis started his career at Salomon. Lewis will soon quit and write a bestseller “Liar’s Poker” where he describes Meriwether in great detail. In any case, Lewis demonstrates an excellent technical grasp of what happened to LTCM. And, this essay is really fascinating to read.
Another long and excellent piece by Michael Lewis is an essay about the dot.com bubble also published in the NYT called “In Defense of the Boom.” And, here he takes a positive take on this bubble. He makes a persuasive case that allowing for somewhat unrestrained form of high-tech innovation-capitalism has long term economic benefit for a society. The dot.com bubble generated a lot of new ideas and much new hi-tech infrastructure including a wild excess of fiber optics networks at the time (that will be eventually used up over time). Michael Lewis summarizes his theme as follows: “Failure in the valley was more honestly and bravely understood as the first cousin of success.”
John Hechinger writes an excellent article on the abuse of real estate appraisals that contributed to the subprime crisis. But, what were appraisers to do? They were paid by the lenders who needed a specific valuation to fund the subprime mortgage and in turn securitize those pools of mortgages at a great profit by reselling them to Wall Street. If the mortgage lenders and bankers did not get the appraisal values they needed they would stop hiring the appraisers.
Roger Lowenstein’s article “Triple-A Failure” in the NYT on the failing of the bond rating agencies in accurately assessing the credit risks of MBS and CDOs is probably the very best article in the book. For one thing, it focuses on the elephant in the room. The rating agencies have been mentioned in passing regarding the subprime crisis. However, if you understand their key role in passing junk debt for AAA rated ones, and their enormous conflict of interest (they were directly paid by the bond issuers), you realize they were truly the engine of the subprime crisis. With accurate ratings there would have been very little investor demand for subprime mortgage backed securities. Those would have been rated as junk bonds associated with a very moderate institutional investor demand. And, you would have had no subprime crisis period. When risk is priced accurately, everything is fine.
A really funny and politically incorrect article is the one written by Michael Lewis titled “A Wall Street Trader Draws Some Subprime Lessons.” It is by far the most cynical article within the book. It is also one of the funniest ones (numerous of them have much humor). I won’t repeat what this article says, I might get shot. You just will have to read it in secret yourself.
Matthew Lynn’s article titled “Hedge Funds Come Unstuck on Truth-Twisting, Lies” on the real poor performance of hedge funds is also excellent.
As you can tell, I have just mentioned a very small minority of the 56 articles included in the book. So, there is a lot more information and insights to be had from reading the whole book. I strongly recommend it.