Friday, April 30, 2010

More on The Big Short

When I wrote that Michael Lewis had written an almost uplifting account of the financial crisis in "The Big Short" by concentrating on some of the winners, I did not consider that he was keeping something back. If you want to find out what he really thinks, read this interview on Bloomberg.com. He explains many of the choices that he made in the book, like for instance not including John Paulson who has been celebrated in other places for "The Greatest Trade Ever". He also expresses his outrage over what happened and suggests that part of the reason he left Wall Street in 1989 was because his job was basically "exploiting the idiocy of my customers". It is a long interview and well worth reading in its entirety.

One issue that Lewis touches on is the fact that shorting the market is supposed to dampen the market and perhaps bring sanity into it, but in this case the structured investment vehicles like synthetic CDOs had the opposite effect of amplifying the market and making the subsequent downfall much worse. The "This American Life" radio show and podcast has a recent segment where they discuss the role of the Magnetar Hedge Fund in creating many several subprime bonds and then making huge sums of money by shorting parts of them. Again well worth hearing.

Finally, Lewis discusses the poisonous interface between the big Wall Street firms and their customers. If Goldman Sachs is responsible for defrauding its customers as the recent lawsuit suggests, there is the question of why anyone would want to do business with them. The Big Money blog posits that Goldman Sachs is losing its "Social License" to operate in an interesting post. Given their behavior, this may be a good thing.

1 comment:

Paul O'Rorke said...

If a few Goldman Sachs people went to jail, that would be an even better thing. The best way to make the system change is not just to re-introduce old regulations or introduce more regulations or regulatory agencies. Individual people have to be held accountable.

Thanks for this post. The Bloomberg article is interesting. I finally got an audiobook copy of the book and it's fun listening to Michael reading.