Saturday, May 29, 2010

THE BIG SHORT

I am not very skilled in financial matters. When the nation was plunged into a crisis in ’08, called by some the Big Recession, I had a difficult time grasping what had happened. I listened intently to the news, the testimonials of those involved and the opinions of the talking heads. Though these made some of the details clear, the contradictory views of the crash actually confused me.

But one face kept popping up again and again – on 60 Minutes, the PBS News Hour, the major network news – even The Daily Show: Michael Lewis, author of THE BIG SHORT: Inside the Doomsday Machine. This guy seemed to make sense of some things, and even where he didn’t, he was entertaining to listen to. So I bought his book. I have to confess, however, that after reading it, I’m still confused. But not nearly as confused as I once was.

First, what to me, the very ignorant reader, appear to be the book’s greatest faults: it lacks all those neat little things that a book of this sort needs – an index, so I could keep up with the various players and organizations involved; a glossary, not only of the usual bewildering financial terms, but also of all those acronyms and initialed things; a few more explanatory footnotes or endnotes. I did find, however, at the end of the book, the Acknowledgements, in which the author made reference to his sources (he calls them “subjects”), most of them the very people he was writing about.

Now the good stuff. Michael Lewis is a great story teller! The history he writes is not just cold hard facts, but the stories of people – real people – real characters – people he has talked to. One could almost get the idea that these are his heroes, people that he admires. They are not the ordinary run-of-the-mill Wall Street bankers; they don’t fit the stereotype; they are men who bet against the system and got rich – even when the system came crashing down.

Every time I saw Michael Lewis on TV, he had a smile on his face. He told stories with a childlike enthusiasm I’ve seldom seen in an adult! He seemed to enjoy his topic and to take great pleasure in describing the wins and losses of his “characters” (or “subjects”). The same delight permeates his book. However, I believe that the lightheartedness disguises a sense of moral conviction that pops up throughout the book, often inserted into the descriptions of his subjects.

The book tells the story of how Wall Street bond traders grew filthily rich by selling subprime mortgage bonds and buying default insurance on them and of how certain persons (Lewis’ “subjects”) basically bet against them and cleaned up. (That’s the best I can do to explain.)

The following is my attempt at summarizing what went on as Michael Lewis explained it. May the reader please forgive me, if I misunderstood. I welcome any clarifying comments.

In the years preceding the crash, home mortgages were given out to people who could not afford them. Often the mortgagees were people whose incomes did not justify the size of the mortgages they took out. Lewis tells some horror stories of people being granted mortgages whose values were five or 10 times their income. These people were given low interest payments for the first few years followed by skyrocketing “adjustable rates” afterward, sometimes more than doubling the monthly payments. Often there were second mortgages granted on homes to those who took them out to pay credit card debt.

These bad mortgages were then bundled into bond packages, rated by (complicit or ignorant) rating agencies as AAA bonds and sold on the bond market. Traders grew fabulously rich. Default insurance was sold on these bonds, even though many of them were doomed to fail.

Some false premises underlay these sales. One was the assumption that the housing bubble wouldn’t burst, that housing prices wouldn’t even go down. “Here was a strange but true fact: The closer you were to the market, the harder it was to perceive its folly” (page 91).

“These people believed that the collapse of the subprime mortgage market was unlikely because it would be such a catastrophe. Nothing so terrible could ever actually happen” (page 148).

Another problem, an ethical one, was that the people who bought the mortgages and went broke didn’t count to those who were making money.

In fact, the poor and the financial lower class are seen almost as an object of contempt to the bankers. One incident involving Steve Eisman, one of the main characters, was when he questioned free checking offered by banks and finance companies. It was perceived as “a tax on poor people – in the forms of fines for overdrawing their checking accounts” and was completely unregulated. He says, “That’s when I decided the system was really ‘______ the poor.’ I now realized there was an entire industry called consumer finance, that basically existed to rip people off” (page 20).

Well we all have some knowledge of what eventually happened: the housing bubble burst, housing prices crashed, people were left with higher payments on houses that were not worth what they were mortgaged for, mortgages went into default by the thousands, subprime mortgage bonds were worthless and the big banks and bond sellers went broke. “One trillion dollars in losses had been created by American financiers, out of whole cloth and embedded in the American financial system” (page 225).

But that’s okay. Uncle Sam bailed them out and the people who should have gone to the poorhouse (if not to prison) ended up richer than ever. “By early 2009 risks and losses associated with more than a trillion dollars’ worth of bad investments were transferred from big Wall Street firms to the U.S. taxpayer” (page 261).
“The world’s most powerful and highly paid financiers had been entirely discredited; without government intervention every single one of them would have lost his job; and yet those same financiers were using the government to enrich themselves” (page 262).

Lewis’ “subjects” also grew rich, only it was because they were betting against the system. But they are also portrayed as Cassandras, who saw and warned about the underlying false assumptions of the system, but with very few people actually listening.

I appreciate that the author, though often revealing his moral conviction, does not offer simple solutions. He clearly points out many things that are wrong with the system without offering a cure-all.

It is easy for evangelical Christians to point out many of the sins and moral failures in our society. It is also easy to overlook many. I have to say that I have heard much preaching and many pronouncements on certain ills (usually having to do in some way or other with sex) and very little, if any, preaching on other evils, such as the one this book exposes: greed! But the “subjects” of this book have some things to say about it! Steve Eisman: “The upper classes of this country raped this country … Not once in all these years have I come across a person inside the big Wall Street firm who was having a crisis of conscience. Nobody ever said, ‘This is wrong.’ And no one ever gave a ______ about what I had to say” (page 232).

“Whenever Wall Street people tried to argue – as they often did – that the subprime lending problem was caused by the mendacity and financial irresponsibility of ordinary Americans he’d (Eisman) say ‘What – the entire American population woke up one morning and said, ‘Yeah, I’m going to lie on my loan application?’ Yeah, people lied. They lied because they were told to lie’” (pages 227, 228).

And while greed is a problem for all, the Bible often speaks directly to the problem of greed in the wealthy, and its corollary: the oppression of the poor. Not only in the Old Testament (See: WHAT DID AMOS MEAN, PART 2) but also in the New Testament.

“Go now, you rich, cry and howl over your coming miseries. Your wealth is rotten and your clothes are moth eaten. Your gold and silver have rusted and their rust will be a witness against you and will eat your flesh like fire. You have stored up your treasure for the last days. Look! The wages of the workers who mowed your fields, which were kept back by you, cries out, and the cries of the reapers have reached the ears of the Lord of Hosts. You have lived in luxury on the earth and have lived indulgently; you have fattened your hearts for the day of slaughter!” (James 5:1-5)

That is unless Uncle Sam bails you out!

Bill Ball
5/29/2010

2 comments:

Sherry said...

LOL at the last line.

I had hoped that with the crash more talking about the evils of greed & consumerism would take place within the Christian community.

Instead it's in a non-spiritual book.

Go figure.

Bill Ball said...

It seems to me that it's often those who make no religious claims who are better able to see the moral and ethical problems in our culture. We have the answers but we don't seem to know what the questions are.