There are so many books about the financial chaos of 2007-09. Most of which have appeared in the last six months or so—long after (given how fast markets move) the bear market actually ended. All of them talk about "doomsday" and "financial apocalypse," and yet few or none offer up the appropriate self-effacing irony that, you know, doomsday didn't actually happen.
I realize I'm in the minority, but my view is 50 years from now this episode—inclusive of its blunder and folly—will reveal itself more broadly as a stunning example of just how versatile, adaptive, and strong the global economy has become.
Let's take Michael Lewis' newest offering: The Big Short: Inside the Doomsday Machine. It's about—as are all these books—complex debt and derivative instruments, real estate, the inner dealings of big financial institutions, and the recent recession/bear market. And, like the others, this book touts the end of the financial world (and, indeed, we just witnessed one of its all-time upheavals)…but where is the apocalypse?
There isn't even a hint of irony that, by the time of The Big Short's publication (a few weeks ago), capital markets are by now generally revitalized, stock markets are up +70%, bond issuance (particularly the junky stuff) has surged, and the global economy probably exited recession more than half a year ago. Seriously none! If you read this book and its ilk, you'd think this was actually the end of the world as we knew it.
Yet, yesterday, as I spent a few lazy Sunday hours reading this book, I inhabited a world where my bank account was still insured and whole, my portfolio was ailing but recovering, and, well, life was going on. Is it a perfect world? Certainly not—there are bad things out there still, including high unemployment. But the here and now is about recovery from shallower lows than most anyone expected—not some kind of Cormac McCarthy-ian dystopia. I guess that fact doesn't make for particularly great copy: The Big Short: Inside the Stuff That Made for This Decade's Recession. Doesn't quite have that same "pop", you know?
Make no mistake: Michael Lewis is still the most entertaining financial journalist around. This book is pithy and entertaining—it's classic Lewis. And on that basis, call me a fan. He takes you on a ride. Mr. Lewis now owns a niche of his own creation: He takes the personal stories of a few folks and uses them to explain a much larger phenomenon. The Blind Side, The New New Thing, Liar's Poker, and Money Ball all essentially do this. This may not be revolutionary journalism, but he owns this method like no other.
To wit, this book is about a handful of folks who foresaw the housing and debt bust and bet against it to their great profit, and Lewis uses that to describe how the whole system went bad. That's great, and let's not mitigate their foresight a bit—but let's also not mistake these folks as seers with long track records of investing success. These aren't Warren Buffetts, these are folks making huge contrary bets for hedge funds and proprietary trading desks who got this one right where most didn't. Through every market upheaval, there are such folks, and more power to them, but I wouldn't necessarily trust them with the next market call and beyond. I'm willing to bet, while these particular folks saw this downturn, most or none also forecast the subsequent upturn and recovery. So it goes.
Other critics have said this book presents the "clearest" explanations of what happened. I don't think so. Lewis describes things like synthetic CDOs with great dexterity, but the book is otherwise overly reductionist and misses much larger concepts. I'm shocked at how many writers, in trying to grapple with this situation, spend all their time with the ennui of CDOs and MBSs instead of trying to piece together how all this could actually come together to contaminate equity markets and the global economy. I suppose we are meant to take it as given that "greed" and overextension of credit and related products took down the economy. Thus, few ever spend much time contemplating if that is actually the case. As I've said in previous columns—where is the commentary on FAS 157? Or the general bumblings and exacerbations of the government through all this? This book is, at best, half a story.
And, yes, Mr. Lewis does have a Blind Side. He's just so darn cynical. Goodness gracious—at many points he writes, in no uncertain terms, that Wall Street's foundation is about "screwing" people. This is a shame. Wall Street is a tough, rugged, and often unsavory place. Like any industry. There's no need to defend these folks, they're big boys and girls making their living. But it's worth pointing out that—for better or worse—Wall Street and its ilk have been the lubricant for capitalism's tremendous success and the requisite good features of today's very developed world. Without capital markets, few of us would own homes, cars, or even go to college.
In contrast, the great virtue of this book is Lewis' outright excoriation of ratings agencies. I have seldom read such a lucid and correct view on the sheer absurdity of how debt ratings agencies operate. Mr. Lewis hits the mark precisely in explaining that not only is there little or no real competition between these agencies, and that they have virtually no incentive to be hawkish about these matters, but also that, like many bureaucracies, they do not have the talent, quickness, nor a high enough pay scale to outsmart those on Wall Street. This is absolutely right—through history ratings agencies have been reactive to what the market discovers on its own, not proactive.
If you read this book, do me the favor of reading it with the thought—at least in the back of your mind—that this is a story about an awful period in financial history, not the lynchpin episode of financial history. Smart folks are almost ubiquitously skeptics, but cynics are just grumpy people.