The Big Short – witnessing the collapse of capitalism

Book cover: The Big ShortMichael Lewis is my hero. I came to see him talk about his new book, The Big Short, and by the look of the jam-packed LSE lecture theatre a lot of us came to see their own “my hero”.

Lewis is an ethnographer extraordinaier. His insights into the “behavioural smorgasbord” of the traders at Solomon Brothers are what sets Liar’s Poker, his first book, alight. His first-hand account and knowledge make the story ring of an absolute truth: and therefore electrifying. Now he has done it again. 

Lewis inspired a generation of traders in the City and on Wall Street. Liar’s Poker, almost defines that generation. Countless MBA graduates wrote to him after reading the book, asking how they can get in to the business. Many of them were in the audience no doubt.

My hero stepped onto the stage with the dress sense of a display on a flea market table: a jumble of pastel pink, light blue and beige. To me he looked exactly the same as his photo promoting his first book. The boyish look is deceiving, disarming even. His observations are as sharp as ever.

As Lewis speaks his native New Orleans southern twang crops up every now and again, like the twinge of hot chilli in a sweet and spicy dish. In The Big Short Lewis uses his knowledge as a trader to ask the right questions about the subprime catastrophe. Namely, who was betting that the housing market would collapse?

Every bet, financial or other, has two counterparties believing the opposite; if they believe the same thing there is no bet. While the postmortem of the crisis largely focused on those who bet the housing market would go up: those “stupid”, “greedy”, “reckless”, Wall Street Banks. Some people, somewhere, had to be on the other side of the trade, betting the housing market will collapse. Lewis finds those people.

And what a bunch they are. A ragtag assortment of misfits. A one-eyed recluse who mostly communicates with the world through email; a guy who thinks he is spiderman and walks around with a t-shirt saying “I am short your house” [meaning he bet on the housing market collapsing]; and a chronic liar that even when he told you the truth you thought he was lying.

This motley crew of speculators opens up to Lewis enabling him to reconstruct a chronology of the crisis. He does not necessarily see them as evil, but is rather filled with empathy for what they witnessed.

As Lewis explains, “If you think about it, there is no credible alternative to capitalism in the world today and these guys saw the system collapsing in front of their eyes. They knew exactly when everything would collapse: in 2007, two years after many of the cheap promotional rates on subprime mortgages reverted to real interest rates. That’s when all the defaults started.”

In the Q&A after the talk Lewis made one of his most pointed observations about the crisis and the investment banks. “It is incredible,” he says, “that the world’s most financially self interested people caused so much damage to themselves.”

The statement could not have been lost on Victor Haghani, a founder of Long Term Capital Management – the ‘daddy’ of too-big-to-fail – who was sitting two rows from the stage.

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About Gideon Benari
Solvency II Wire a site dedicated to informing professionals in financial services industry about Solvency II, the new regulation for the European insurance industry.

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