He has revisited his old stomping ground for his latest book, The Big Short: Inside the Doomsday Machine, a highly readable look at the financial system of mortgage-backed derivatives that so spectacularly imploded in 2008, told through the eyes of the hedge funds, investors and mavericks who saw that the whole thing was built on sand.
On the day we spoke, Goldman Sachs were being criticised by the SEC, and the sovereign debt crisis was still raging. So, having turned his microscope on the financial collapse and followed the fallout, who does this seasoned Wall Street-watcher blame for the debacle? Pretty much everyone, it seems: “the insane system of incentives”, “ the people who ran the big firms”, “the people who ran the CDO machines”, “ the stupid investors”, and then “the average American; millions of people were willing to lie on their mortgage forms.” In fact, he says, “it’s easier to mention people who weren’t to blame”. “There was a lot of behaviour that was probably not illegal, but morally wrong. It’s like the creation of pollution.”
The root of the problem, he says, is simple: pay, and the way that having large amounts of money disassociates you from reality. “It’s not so much that people on Wall Street are greedy, they always have been – you don’t go and work on Wall Street unless you are interested in making money – it’s that the expectations of what was a handsome pay-check have grown out of all proportion to sanity,” he says. “People who work on Wall Street lack a sense of their own absurdity. The people who are running big firms don’t sit back and say: ‘This is crazy! This is not that useful to society, it’s crazy that we are paid by a factor or 10 times or more than our fathers were for doing the same job’. There is nothing in your brain to regulate your material ambitions, and once that happens then you start doing things like creating CDOs so that you can short them, you take that extra step to screw the customer. If you had some realistic constraint you just wouldn’t do that.” He’s been called the scourge of Wall Street, but this makes Lewis sounds more like a Scrooge.
The unravelling of the system killed off one Wall Street institution in Lehman Brothers, and Lewis thinks that there could still be at least one more high-profile casualty. “This is a prediction that is going to come back and haunt me, but I think that Goldman Sachs is doomed. I don’t think that in its current form it can survive. We could be looking at four to five years, but the proprietary activities will split off, those people will end up in their own hedge fund – that is if new regulation doesn’t forbid it anyway.” The PR problems, Lewis thinks, will just be insurmountable. “Their relationships with customers on every front are poisoned, and they can’t function as an investment consultant if they have this problem of honesty.”
Whatever happens in its US lawsuit, the reputational damage was done long ago, and it was a result of the bank’s success. “Their problem is that they made money. With the others you think: ‘How crooked could they be if they lost $40bn?’ Goldman is exposed because it is more successful.”
So how would Lewis change things? Reducing pay would be the first priority. “If the financial firms were properly regulated they would be much less profitable, duller and there wouldn’t be money to be made like that. It makes sense to ban proprietary trading in a deposit-taking institution, and if you do that you will reduce pay. Take away a lot of the upside and downside, make the business much less volatile. If you forced everything to be traded on screens, you would dramatically reduce the profits. If I was in Washington, thinking: ‘What’s my goal here?’ I’d be thinking to myself that if I didn’t make these places less profitable then I’d screwed up.”
This anti-corporate attitude certainly informs The Big Short. Some reviewers have complained that he was all too ready to picture the few people who saw that Wall Street CDO machine was flawed as heroes, gunslingers with MBAs, when in fact all they did was short the mortgage-backed derivatives and enrich themselves. It’s true, he says, that they are “complicated” heroes, but is still perplexed by the reaction.
“I thought there would be some, but it would be the normal hostility to short-sellers. But they went to the SEC, to the newspapers, they wrote letters and they blew the whistle, but nobody wanted to listen. I’m not sure what more they could have done. Abstain from the market? That would have been absurd. When markets work and you are shorting, you are helping them work better. Their activity was so small that they were not able to drive prices, but that’d not their fault. The problem was that there weren’t enough of them if there had been more then this might not have happened.”
But what of the UK’s woes? Lewis, who studied at the LSE, thinks that they stem directly from our desire to Americanise our society. “I don’t understand why the British people don’t just hate us,” he says. “We introduced this system in the 80s and we changed the tone of your society and made acceptable all sorts of behaviour that you previously condemned – the overt pursuit of dough, thinking that this is an acceptable way to structure your life and being so bold about it. It’s the sense of financial entitlement that used to be alien to you. We made it normal to be sitting in Oxbridge and thinking: ‘I’ll get a job in Goldman Sachs and it will guarantee me millions a year.’”
When he was here in the 80s, he says that he saw the change happen first-hand. “The first time I heard a British person say ‘learning curve’ I thought: ‘Oh my God, we’ve ruined these people.’ I was distraught watching us financialise you, it seemed like comedy and it seemed like tragedy. But I never get any sense that people in Britain associate all this with us. When they are thinking ill of the City, they don’t naturally hate us, and they should. I’m amazed that there’s not a movement in Britain to ban American banks, or Americans. I think we owe you an apology, and I’m surprised nobody has demanded it.”
The Big Short: Inside the Doomsday Machine is out now, priced £25
CV | MICHAEL LEWIS
Lives: In California with his wife and three children.
Education: Princeton, where he studied for a BA in Art History, and then LSE, for a masters in economics.
Work: Took a job as an investment banker in New York for Salomon Brothers, before moving to the firm’s London HQ.
Books: Liar’s Poker (1989), the classic account of the excesses of Wall Street in the 80s. This was followed in 1999 by The New New Thing, about the dotcom boom in Silicon Valley. He has also written about the business of baseball in and The Blind Side.