Innovation Blog

The Big Short: How Wall Street Screwed Us and Itself

By Shlomo Maital

  Michael Lewis

   Sorry for the vulgar language — but, it fits the subject and it accurately reflects the views of someone far wiser than me:  Michael Lewis, author of the new book The Big Short, about the global financial crisis of 2007-9.

    Interviewed on the CBS News program 60 Minutes, by Steve Croft, Lewis succinctly nailed the root causes of the crisis.  “Mass delusion!”    Here is a summary of the interview:

    “Our culture will come to the conclusion that everybody (on Wall St.) is a criminal.  But the story is much more interesting.  There is mass delusion.”

     A handful of people saw it coming. Dr. Michael Berry, a medical doctor with Asperger’s Disease (and one blind eye, from a bout with cancer) saw it.  [Ironic, someone with one eye saw things those with two good eyes failed to!].  He started a hedge fund in Cupertino, CA., and in 2005 foresaw the 2007 crisis in sub-prime mortgages. He invested in CDS (credit default swaps, insurance against bond default), betting on default — and made $720 m. ! How?  He took the trouble to read the sub-prime mortgage documents, while others did not.   He saw through the scam, in which Goldman Sachs investment bank persuaded AIG to issue CDS’s in the amount of $20 b., and later, another $30 b.,  without understanding at all what they were insuring  (not a 1 in 1,000 event, but a 100% certainty of collapse, owing to the nature of the subprime mortgages).    Why didn’t others on Wall St. see it?  “Wall St. is paid to delude itself,” he says.  Berry explains why the bonuses are so huge.  “The top people there want to be paid huge sums, so they have to pay people below them very large sums,” he explains.    Berry thought, when he bought up CDS’s, that others would copy him, eliminating the profit. But they did not. Perhaps 10 or 20 people acted like him, seeing the looming crisis coming. 

      Lewis told Croft:   Wall St., in its present form, cannot be sustained.  It is getting subsidized credit from the Fed, paying zero interest, then lending and investing at higher interest, and making billions.  This cannot be sustained.  “The (Wall St.) leaders have lost their sense of responsibility  to society”, he observes.  “Wall St. has become disconnected from reality,  from real productivity”.  It was an elegant form of theft, he believes.   Wall St. bankers paid themselves $20 b. in bonuses in 2009 — after the crisis!   In 2007, they paid even more:  $33 b. in bonuses!  

   But the worst part, the least believable part?    Nothing has been fixed.  The bond rating agencies that rated junk as AAA (Moody’s, S&P) are still paid by the folks who issue and sell the bonds — the investment banks.  And Credit Default Swaps?  Well, they still are unregulated, and nobody knows to this day how much they total or what they are worth?  And the icing on the cake?  The same ‘experts’ who caused the crisis — are now cashing in, with huge consulting constracts for the government, because they are the only ones who really understand the garbage paper they inflicted on society.   “A neat trick Wall St. does often,” Lewis notes,  “charging fortunes for cleaning up the messes it created in the first place.”

   What did the broadcaster Beale say,  on  the 1976 film Network: “I’m mad as hell and I’m not going to take this any more!”.  Well, we are mad as hell — and we are, alas, taking it every single day.

   Is there any consolation?  Lewis has been right so far. He thinks Wall St.  in its present form is unsustainable…it will disappear.   Let’s hope he is right.