Michael Lewiss and Henry Hank Paulsons inside stories,along with Andrew Ross Sorkins Too Big To Fail (which is not reviewed here),probably constitute the best very short reading list on that collection of events that have been politely christened as the global financial crisis. Politely christened because,as these two books and Sorkins demonstrate,albeit differently and from different perspectives,crisis is a hopelessly inadequate expression for crazy self-delusion. Of course,dry macro and microeconomic contexts of the crisis have been written about. Asian savings funding Americas financial sector,Americas long period of low-interest policy,the over-reliance on over-mathematised risk-assessment models among finance firms,which also had a steady supply of quants (mathematically gifted professionals,many of them detritus from Soviet and East European Cold War-fighting institutes),bank risk measurement norms that incentivised risky decisions all these were factors. But would what we politely call the crisis have happened were it not for the fact that an astonishing number of smart people astonishingly put their faith in voodoo finance that promised to take risk out of super dodgy home loans? The simple answer is no. That was the crazy self-delusion. All of us who are instinctively and intellectually for economic freedom,for freer finance must put that crazy self-delusion front and square in our continuing attempt to understand what happened.
Sorkins book gave a brilliant reporters story of the delusion. Paulsons book is written as if there was no delusion,which is incredibly instructive by itself (of this more later). Lewiss,with due apologies to Sorkins marvellous reportage,is the best book in this very short list. For,it looks at the crazy self-delusion about dodgy home loans from the perspective of a small number no more than twenty of American finance professionals who were very sane and totally not deluded.
This is Lewis,author of Liars Poker and entertainingly irreverent columnist,writing. So,of course,The Big Short is a great read cracking stories,zany writing,a sharp eye for exotic Americana and every financial jargon lucidly explained. But thats not the best bit about this book. What makes it very special is that when Lewis tells us the stories of the micro minority who betted against the sub-prime home loans-led boom,we understand better than via any other book on the crisis how crazy so many Wall Streeters were. Wall Street thought these guys Lewis tells the stories of guys running tiny hedge funds and a bank-employed bond salesman were crazy to bet against the boom. The markets verdict is out. The guys who betted against the boom made money,millions of dollars of it,and the guys who thought this was the boom that ended the concept of bust got money as handout from the government.
Please dont waste one second wondering whether it is ethical for 20 people to make money by betting on an outcome that meant misery for millions. Instead ask whether the crisis would have been less painful had there been more than a handful of truly smart people. Ask this more because as Lewis shows,the boom-wallahs were not just crazily self-deluded,they were wickedly clever with it. Big Wall Street types sort of felt before it all went belly up that not everything was all right. Did they do honest self-examination? No way. They just got more sophisticated in maintaining the delusion. Among these were people feted around the world for their financial acumen; solid,establishment,smart guys. And betting against them were social misfits.
Yes,sometimes Lewiss book reads as if hes convinced that were a Wall Street CEO to be spotted helping an old lady cross the street we must conclude hes conspiring to waste her lifes savings. The book isnt whats called balanced. But it isnt an unfair hit job: far from it. Its exaggerations are necessary; in fact,an antidote to anodyne accounts of the crisis.
Lewiss cast of characters who got it right comprises a doctor whos obsessed about investing and is diagnosed with Aspergers syndrome (Bollywood devotees please refer to My Name in Khan),a bond trader who has the sartorial inclinations of a porn star,and three guys who ran a fund out of a shed. Lewis tells great stories about all of them. My favourite: one of the guys who ran the tiny hedge fund is invited by Bear Stearns sub-prime mortgage salesmen for a spot of shootin on Sunday,in Las Vegas. So this obscure finance guy finds himself in a gun shop in Las Vegas,with Bear Stearns employees,who use a Bear Stearns credit card to buy guns and ammo. Bear Stearns,let us note,was the first major Wall Street firm to implode.
Is there a really smart Hollywood director who can make The Big Short into a film? If there is,the opening shot should be that scene from the Las Vegas gun shop,with a close up of the Bear Stearns credit card.
Theres no way Hank Paulsons On the Brink can be made into a film. This is not because theres no drama. Theres plenty: the former US treasury secretary genuinely and bravely fought to stop a financial collapse,so did his team and even Michael Lewis should be grateful that Paulson and his team managed to do what they did. The problem for a film-maker is that there are no bad guys.
Paulson,an A-list investment banker who was reluctant to join a deeply unpopular second-term Bush administration,never quite stops to ask what actions by which people brought about the economic war his term that he had to fight. For Paulson,the crisis was just a crisis. Thats fine when your job in the government is to fight against it. But when you sit down to write a book,shouldnt you be more reflective?
On the Brink is a highly informative,crisply written story about a great bad thing with no real villains. That,as we said,is incredibly instructive. Does Paulson tell the story this way because he was one of them (investment bankers),are investment bankers and self-introspection mutually exclusive? This is a crucial question. We need investment bankers. But we also need investment bankers who dont shy away from calling certain kind of CDS (credit default swap,a key financial instrument in the run up to the crisis) CSD (crazy self-delusion). Paulson the regulator (as treasury secretary) also lets the regulators off. Yes,the regulators were in the trenches. Yes,they did a good job in a dreadful situation. But,hello,where were you before it all went wrong,what were you thinking,what were you seeing? Theres more than a faint suggestion in this book of a member of an old boys club writing about old boys (bankers and regulators) who arent bad chaps really. Paulson says in the book hes a straight-forward guy. Thats a virtue and its a virtue many Americans share and its one of the very admirable things about American culture. But being straight-forward doesnt preclude you from looking beyond the surface. Thats why you need a book like Lewiss,and Sorkins.
That said,Paulsons book is a must-read for all those interested in understanding the crisis. Plus,there are some juicy bits. Paulson doesnt use a BlackBerry whoa,how did he manage! He and Mrs Paulson have used the same consumer electrical appliance,an old-model toaster,for four decades. That must be a record in America. There are stories that show how worried Wall Street alpha males were getting when the bust was unfolding. Richard Fuld,ex-CEO of Lehman Brothers,phoned Paulson from India and requested the treasury secretary use his office to get him (Fuld) flyover rights over Russia,so that he (Fuld) could come back to the US sooner. How could that have helped,you wonder. John McCain told Paulson to talk to his running mate,Sarah Palin,about the rescue packages because,said McCain,she gets things very quickly. What was McCain thinking? As the sub-prime market was unravelling,Paulson gave his boss,George W. Bush,a quick class in hedging. Bush comes out rather well,despite this need for a too-late-in-time coaching,in the book. Maybe thats partly because of Paulsons loyalty. But one also senses that Bush had the good sense to let technocrats get on with it,without wasting time over ideological grieving over bailouts. This becomes clearer because Paulson is quite unimpressed with many other Republicans.
Paulsons account of fire-fighting is also made better by admissions of frailty. He admits he read politicians and the public mood wrong sometimes. He says many of the bailout decisions burned him. You get the feeling hes eager to hear critical judgments on his actions from readers of On the Brink. Would that we could say this about many Indian policymakers,most of whom dont write books,or when they write,determinedly avoid anything interesting.
But Hank never asks the question one of the characters in Lewiss book asks: Was there,as everyone assumed,a grown-up in charge of American finance?
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines