I'm a poker player. I've been playing poker semi-seriously, several times a month, for maybe 25 years. I even played online for money for a couple of years before the Bush adminstration, in its wisdom, made it illegal to do so in the United States. I've always thought that it was more than a little ironic that the government has been taking such an interest in the moral hazard that online poker presents to the average citizen, while at the same time doing everything in its power to support corporate high rollers by deregulating the banking industry and the bond markets, with results that are now all too familiar to all of us.
So it was with perhaps more than usual interest that I picked up, on Barney's recommendation, the new book by Michael Lewis, The Big Short. I've always enjoyed Michael Lewis: he's perceptive and he's funny and he knows both how to tell a story and how to pick stories to tell that have resonance and heft. The former principal at my school, who was one of the founders and instigators of a group of teachers devoted to the idea that teaching well was largely about helping students to think well, once remarked that Moneyball, Lewis's analysis of the paradigm shift in major league baseball was the best book on critical thinking he had ever come across. (I'm inclined to agree. If you're going to try take the team with the lowest salaries in professional baseball and make them win more games over a period of five years than any other team in baseball - which is what Billly Beane did with the Oakland A's - you need to come up with a new way of evaluating talent, and a new way of thinking about process. Of course, once you've invented the new paradigm, it's there for anyone to steal. Billy Beane's example had a lot to do with the World Series victories of the Florida Marlins in 2003 and the Boston Red Sox in 2004.) I started The Big Short on Sunday afternoon, read well into the evening, worked on Monday, and finished it on Monday night.
The Big Short is every bit as thought-provoking and revelatory - and funny, in a terrifying sort of way - as Moneyball. The difference is that Lewis is talking not about Our National Pastime, baseball, but about our Other National Pastime, which is Screwing People Over For Money. As in Moneyball, Lewis has structured his narrative about the subprime mortgage meltdown not from the point of view of the major players, the ones who pretend to know what they're doing, but from the point of view of outsiders, the relatively small number of people who saw it coming and did NOT succumb to the willful and self-serving acceptance of a completely illogical and unsustainable status quo. (Not that they weren't eminently self-serving in other ways.) Lewis is terrific at capturing the idiosyncracies of his characters in ways that reveal how it is that they were able to see what others could not or would not see. One of the key players in this drama is a guy named Steve Eisman, whose penetrating intelligence is combined with an unwillingness to suffer fools gladly. Two examples:
Working for Eisman, you never felt you were working for Eisman. He'd teach you but he wouldn't supervise you. Eisman also put a fine point on the absurdity they saw everywhere around them. "Steve's a fun guy to take to any Wall Street meeting," said Vinny. "Because he'll say 'explain that to me' thirty different times. Or 'could you explain that more, in English?' Because once you do that, there's a few things you learn. For a start you figure out if they even know what they're talking about. And a lot of times, they don't." (22-3)
Eisman had a curious way of listening; he didn't so much listen to what you were saying as subcontract to some remote region of his brain the task of deciding whether whatever you were saying was worth listening to, while his mind went off to play on its own. As a result, he never actually heard what you said to him the first time you said it. If his mental subcontractor detected a level of interest in what you had just said, it radioed a signal to the mother ship, which then wheeled around with the most intense focus. "Say that again," he'd say. And you would! Because now Eisman was so obviously listening to you, and, as he listened so selectively, you felt flattered. (139)Lewis is also extraordinarily adept at using the thought processes of his characters, as they themselves try to wade through the murky waters of bureauocratic obfuscation, to explain in terms which ultimately do make sense such abstruse financial assemblages as LEAPs (Long-term Equity AnticiPation Securities) and CDOs (Collateralized Debt Obligations). And what emerges from the murk is essentially a systemic attempt to mislead people in order to be able to sell them a pile of crap:
The subprime mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn't called a subprime mortgage bond. It was called an ABS, or asset-backed security. When Charlie asked Deutsche Bank exactly what assets secured an asset-backed security, he was handed a list of abbreviations and more acronyms—RMBS, HELs, HELOCs, Alt-A—along with categories of credit he did not know existed ("midprime"). RMBS stood for residential mortgage-backed security. HEL stood for home equity loan. HELOC stood for home equity line of credit. Alt-A was just what they called crappy mortgage loans for which they hadn't even bothered to acquire the proper documents—to verify the owner's income, say. "A" was the designation attached to the most creditworthy borrowers; Alt-A, which stood for "Alternative A-paper," meant an alternative to the most creditworthy, which of course sounds a lot more fishy once it is put that way. As a rule, any loan that had been turned into an acronym or abbreviation could more clearly be called a "subprime loan," but the bond market didn't want to be clear..."It took me a while to figure out that all of this stuff inside the bonds was pretty much exactly the same thing," said Charlie. "The Wall Street firms just got the ratings agencies to accept different names for it so they could make it seem like a diversified pool of assets." (127-8)The Big Short is first of all a terrific read. Sure, I play poker, but I have next to no experience in the world of finance, and came to the book with no expectations other than that I like the way Lewis writes. The book just blew me away and felt like at the end I had had a great reading experience but had also gotten an amazing education as to What Went Wrong, and why. The scary part is that there is no real reason to believe that it couldn't happen again, or that it is not already happening again, not in exactly in the same arena, but in some parallel form. As Lewis points out in his final chapter:
The line between gambling and investing is artificial and thin. The soundest investment has the defining trait of a bet (you losing all your money in hopes of making a bit more), and the wildest speculation has the salient characteristic of an investment (you might get your money back with interest Maybe the best definition of "investing" is "gambling with the odds in your favor." The people on the short side of the subprime mortgage market [the featured characters in Lewis's book] had gambled with the odds in their favor. The people on the other side—the entire financial system, essentially— had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What's strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich... The CEOs of every major Wall Street firm, ... without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.
What are the odds that people will make smart decisions about money if they don't need to make smart decisions—if they can get rich making dumb decisions? (256-7)
Wait, wait, don't tell me! I know the answer to that one. And the answer calls to mind unfortunately, the oldest poker adage of all: If you don't know who the fish is at the table, it's you.