George Trefgarne

The credit crunch with jokes

Unlike most financial writers, who are too serious for their own good, Michael Lewis has a sense of humour and he deploys it deftly.

The credit crunch with jokes
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The Big Short

Michael Lewis

Allen Lane, pp. 266, £

Unlike most financial writers, who are too serious for their own good, Michael Lewis has a sense of humour and he deploys it deftly. In Liar’s Poker, his semi-autobiographical account of the Salomon Brothers bond desk published 20 years ago, the traders always explain a market move they do not understand by blaming it on ‘the Arabs’. At once, we realise that the Masters of the Universe do not always know what they were talking about.

In The Big Short, Lewis examines the credit crunch through the eyes of a handful of ‘short-sellers’, who not only saw it all coming, but put their money where their mouths were by placing bets that the boom would go bust. Lewis also makes this tale digestible with little vignettes. In 2007, for instance, he tells us that the big players in the mortgage industry held a conference in the sober-suited setting of Las Vegas. Instead of the usual 500 attendees for this sort of event, there were 7000. If ever there was a top-of-the-market indicator, this near-orgy was it. Bear Stearns, now defunct, took its banker clients into the desert to blaze away with Uzi submachine guns at Saddam and bin Laden targets. One of Lewis’s heroes had his suspicions confirmed that Wall Street had constructed a doomsday machine, when he met a stripper who owned five investment properties.

On this stripper’s volatile earnings, which could potentially rise and fall as fast as her underwear, Lewis builds an analogy for the whole rickety edifice which came tumbling down. For at the heart of the credit crisis were sub-prime mortgages, doled out with abandon to poor or unskilled Americans (and Brits for that matter). These loans, sometimes only secured on mobile homes, had ‘teaser rates’ which shot up after the first few years and the short sellers reasoned that the borrowers would then never be able to repay. The big investment banks thought differently and parcelled the loans up to trade them on Wall Street and elsewhere.

It was a crisis 20 years in the making and began, rather blamelessly, when banks decided to help blue-collar America to take out mortgages in order to pay off their expensive credit card debt and store loans. It was given added impetus by the Clinton administration, which repeatedly pushed the banks into making credit available to those on low incomes, so they could buy their own homes. And it was made positively dangerous by Alan Greenspan, the octogenarian President of the Federal Reserve, who cut interest rates so low and for so long in the aftermath of 11 September, that he injected rocket fuel into an already roaring engine.

Lewis has provided perhaps the most readable account of the fiasco — mercifully brief, but sadly without an index, glossary or appendices, which would help those of us who cannot tell a CDS from a CDO. Although Lewis is a good writer it is a great pity that Dickens is not with us now, because short-sellers are an archetype under-explored in literature. It takes a curious person to make a living betting that we are all going to hell in a handcart, forever convinced that the emperor is wearing no clothes.

Many people, particularly left-wingers, archbishops and the like, see the short-seller as an immoral individual who drives share prices down and is no better than Dr Johnson’s stockjobber — ‘A low wretch who gets money by buying and selling shares in the funds.’ But short-sellers believe themselves to be prophets, truth-tellers, defiers of fashion, who are put on this earth to expose fraud and incompetence. There can be something tragic about them too — one of Lewis’s heroes has only one eye, another suffers from Asperger’s syndrome, and another had a child who died.

They can also be rude. Steve Eisman, who made millions forecasting the crisis, says: ‘When are shorts welcome anywhere? When you are short, the whole world is against you.’ Eisman has particular contempt for the investment bank Merrill Lynch. He reasons that whenever there is a calamity, like the internet bust, Merrill Lynch is there. This is Eisman’s Wall Street pecking order: Goldman Sachs is the big kid who runs all the games in the neighbourhood. Merrill Lynch is the fat kid, assigned the least pleasant roles.

Lewis’s light touch makes his conclusions easy to swallow. He regrets the selling of the old partnership firms to the investment banks, which created the perverse incentive of traders being able to risk shareholders’ capital, instead of their own. As for Lehman Brothers, the problem wasn’t that it was allowed to fail, but that it was allowed to succeed. If only British financial journalists were able to expose with equal élan what happened here.