Liam Halligan

High finance, low tricks

Michael Lewis, the author behind the new movie The Big Short, is furious that reforms have been blocked

High finance, low tricks
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It amazes me, simply amazes me, that journalists aren’t all over these stories. Doesn’t it amaze you too?’

I’m in a plush room in a swanky central London hotel, in conversation with Michael Lewis. He is all fired up, leaning forward as he perches on the hard edge of the cushion-strewn sofa. He oozes incredulity, palms upward, shoulders raised.

‘I’m not saying there aren’t good financial journalists,’ he concedes. But the qualification seems half-hearted — and is quickly reversed. ‘The Wall Street Journal is a much worse newspaper than it was 20 years ago,’ he asserts, taking aim at the bible of US high finance. ‘The news side of the paper has the fingerprints of the finance industry all over it’.

Lewis broadens his critique to the media as a whole. ‘We are underserved by critical, knowledge-able financial journalists who don’t have any fear whatsoever of what their subjects think of them.’ He winces as he speaks, as if pained by his own words.

Michael Lewis is, by a long way, the most important financial writer alive today — not just in his native America, but worldwide. At a time when public confidence in Wall Street and the City is at rock-bottom, his views pack a mighty punch. Lewis is in London to talk about his 2010 bestseller, The Big Short — a penetrating account of the build-up of the western world’s housing and credit bubble during the 2000s. The Oscar-nominated film version of the book has its UK premiere this week.

Described by Reuters as ‘probably the best single piece of financial journalism ever written’, The Big Short analysed how the international banking system came off the rails, with devastating consequences for the global economy, due to the crass, immoral behaviour of those running some of the world’s biggest banks.

Well aware of the potential cultural and political impact of a Hollywood movie (‘a lot more powerful than a mere book’), Lewis states his views on the financial reforms since the 2008 financial crisis. ‘Not nearly enough has been done — the regulatory response has been totally inadequate,’ he says. ‘The big banks have blocked serious reforms, meddling in the process so incentives haven’t changed enough to attack the heart of the problem — which is why it could happen again.’

Lewis wrote his first book, Liar’s Poker, in 1989 after a four-year stint as a fresh-from-the-Ivy-League New York bond dealer at the now defunct firm Salomon Brothers. A true insider’s account, it brilliantly lampooned the macho, aggressive behaviour of the ‘big swinging dicks’ who paced the carpet--tiled trading floors of Wall Street in the go-go, testosterone-fuelled 1980s. It went from instant bestseller to modern classic.

He had another hit in 2003 with Money-ball, confirming his knack of conveying complex non-fiction subjects through crystal-clear writing and larger-than-life characters. Describing how major league baseball coaches were picking teams based on highly detailed performance data, eschewing traditional attributes like athleticism and character, Moneyball revealed how poorer teams were beating the big boys by buying cheaper yet more effective players. A riveting David versus Goliath tale, it led to a spin-off movie starring Brad Pitt.

But it was when he returned his gaze to Wall Street with The Big Short that Lewis transformed himself into the revered chronicler of contemporary America that he is today. At the heart of the story are four sets of Wall Street ‘outsiders’ — from an eccentric doctor turned hedge-fund manager with a glass eye, to a couple of college-aged kids operating out of a parental garage who spotted the early warning signs of the US housing crash — signs everyone else wanted to ignore.

Set up as anti-heroes, they all took the audacious step of using complex financial instruments to bet against (or ‘short’) the market, pitching themselves against the banking titans of Wall Street. Until, that is, the big banks joined them, pulling the market down and the global economy with it, ruining millions of lives and livelihoods in the knowledge they’d ultimately be bailed out at taxpayers’ expense.

When he talks about this episode, Lewis shows real contempt for bankers and the politicians who have ‘utterly failed’ to regulate them. ‘We still have the same short-term-oriented compensation, the same big bonuses at year-end, as opposed to stakes in a firm that might become valuable if you build something over 20 or 30 years,’ he says. ‘Everyone is looking for quick kills — and people will find very crafty ways which, even if they’re not quite illegal, are just plain bad.’

Both the book and the film name names, aiming directly at some of America’s banking thoroughbreds. ‘I’ve never gotten over the feeling when I learnt Goldman Sachs had designed securities that would fail, so they could then short them,’ Lewis says. ‘It’s just shocking, like pollution in the system — yet it wasn’t, and still isn’t illegal.’

The 1997 repeal of the Glass-Steagall Act was ‘part of the problem’, he observes. Having long kept the savings of ordinary firms and households away from risky investment-banking activity, the removal of this Depression-era legislation by President Clinton, at the behest of various former and future bankers in his government, entrenched ‘too big to fail’ and put the broader economy at risk.

‘But it goes back even before that,’ says Lewis. ‘The earlier transformation of investment banks into public corporations was a big mistake — with bankers using shareholders’ money to bet, rather than their own.’ When asked why we haven’t seen more meaningful reform, Lewis points to the ‘massive’ influence of the financial services industry over politicians and regulators, not least in the US.

‘It isn’t just the big campaign contributions,’ he says. ‘Anyone at the table talking about financial reform is a potential hire and likely to end up working in the financial sector for huge sums, so they get captured.’

Lewis becomes most animated when he talks about Flashboys, his 2014 book, yet to be made into a film. This contains the jaw-dropping revelation that so-called ‘high-frequency’ trading firms on Wall Street and elsewhere pay intermediaries to ‘flash’ early access to information signalling the trading intention of large underlying customers — often pension funds and insurance companies managing the money of ordinary savers.

This allows computer-driven trading robots to nip in and buy just ahead of the original purchaser (we’re talking milliseconds), before selling the shares on to them at a slightly inflated price. Tiny gains on big volumes, of course, multiplied over many millions of trades daily, generate vast profits for the high-frequency firms — at the expense of everyone else. Maybe that’s why this galling practice, despite Lewis’s exposé, remains entirely legal.

‘Why were The Big Short and Flashboys available to me to be written?’ he asks. ‘These stories should have been gobbled up by newspaper and magazine journalists.’

Lewis also recounts that one group of financial innovators — featured in Flashboys — are trying to make US financial markets fairer by introducing a ‘fibre-optic speed-bump’ that levels out price transmission times, so foiling the high-frequency houses. Their efforts have so far met a barrage of obstructive regulation.Lewis then draws a chilling parallel between the dilemmas facing regulators and financial writers. ‘Journalists are often financially insecure, just as politicians and regulators are often financially insecure — and I’m talking about personally financially insecure,’ he says. ‘It seems journalists feel they have to, one way or another, accommodate the existing financial interests in their work — and that’s wrong.’

‘The US stock market is now very clearly rigged in favour of high-frequency traders,’ says Lewis. Not only has the SEC [the main US regulatory body] done nothing about the problems I discuss in Flashboys, it’s also holding up the guys who are trying to solve those problems — and that’s an outrage.’

We talk about the rising anger across the western world towards the financial elite, those winning handsomely from growing inequality, the so-called ‘1 per cent’ — and, conversely, the sense of economic insecurity that is increasingly felt even among previously comfortable middle classes. ‘You’d like to think democracy could translate those signals into reform,’ Lewis says. ‘But the financial sector is very good at batting away reforms and anger ends up being expressed in other ways — such as Donald Trump.’

The controversial Trump — who has outraged liberal Americans by pledging to build a wall to discourage immigrants — won’t get the Republican presidential nomination, predicts Lewis. ‘People think he’s a winner, yet his business record is very patchy,’ he says, while highlighting that Trump’s current electorate, Republican primary voters, ‘make up only a tiny slice of the population’. As the pool of voters gets wider, and encompasses the broader US population, ‘the less appeal Trump has’.

Conversations with Lewis, an intellectual omnivore, range widely. The European single currency ‘can’t last’ and ‘will eventually break up’, in his view. When it comes to geopolitics, he points to a ‘decline in American prestige’ caused by the financial crisis. ‘One day, when the history of this era is written, people will say financiers really cost my country — we’ve lost a lot of our ability to be a force for good because people don’t trust us in the same way.’

So what does Michael Lewis think of the film version of The Big Short? ‘I love the movie — Adam [McKay, the director] has seduced the audience with entertainment, so they watch something that would otherwise be hard to watch.’

A lot like Lewis’s books, the film focuses on intriguing and amusing characters, whose actions point to a broader, more serious truth. ‘There is laughter but it’s not a comedy — more of a tragedy, really,’ he observes.

I can confirm that the film is, as Lewis describes it, ‘very funny’. But, as he also observes, ‘humour is used as a weapon — you laugh, but at some point you stop laughing’.

So does he believe that this latest film adaptation of one of his books — which also stars Brad Pitt among its stellar cast — will generate such clamour for financial reform that it finally provokes the changes he so desperately wants?

‘I don’t think so,’ Lewis says. ‘The reality is that a major restructuring of the financial services industry will only ever happen if we get another really big crisis.’

Liam Halligan is an economist, financial journalist and broadcaster and a former Moscow Times columnist.