Monday, March 28, 2011

Michael Lewis on the Reasons Behind the Financial Crisis

In All You Need to Know About Why Things Fell Apart (Bloomberg February 15th), Michael Lewis gives his humorous perspectives on the reasons behind the financial crisis. The author of the Big Short gives up. After the Financial Crisis Inquiry Commission basically blamed no one and everyone for what happened, there is only one way to deal with the outcome: Irony and Sarcasms!

What else can we do at this point? Nothing in the game has changed, neither the rules, nor the players. We are just waiting for things to get back to normal and for banks to slowly get back into the game. With sufficient time, they will wash away their toxic waste (which half life is shorter than a nuclear reactor's radioactive material), rebuild their capital and get back into the speculating business. With enough taxpayers money, that should be relatively soon.

However, I expect that their return to "business as usual" will differ in one aspect. Having learned that they can get burned too, banks will design new ways to further shelter themselves from risks and thus will rely more than ever on fees to generate returns. These new business segments will require less capital and be much less risky. Yet, in order to compensate for the loss of the carry-trade business segment, banks will be forced to come up with some more fee-based business ideas. However, these will just be refinement on a business model that emerged twenty years ago and which was perfected ever since (well, almost perfected!).

Securitisation was a nice trick: take any risks, package them and to sell them to others for a fee. This might still work provided that banks find better ways to manage their inventories of outstanding loans waiting to be securitised. Last time around, banks got stuck with a very large batch of very stinky loans which they were about to unload on us, just before the scheme collapsed.

Ponzi schemes do not always pay off. That is unless you are too big to fail and the government bails you out. Now that I am thinking about it, banks did find a way to unload that last stink batch of loans on us ...

Here is the piece:

A surprising number of my fellow citizens appear to be unaware of my service these past 18 months as a member of the Financial Crisis Inquiry Commission.

Thus it may come as news that I have declined to sign the report issued by the majority, or the dissent by the three- member minority, or even the dissent from their dissent, written by the now-immortal Peter J. Wallison. I hereby dissent from the dissent from the dissent. My dissent is different from all those other dissents, which is why I am dissenting.

I do this, of course, not to call attention to myself. Still less do I seek to enhance the status of my application for employment with JPMorgan Chase. I seek merely to inform the general public of the true causes of our so-called financial crisis.

The task is not a simple one. In limiting me to a mere two pages at the end of their 633-page book, the majority and the other dissenters have suppressed not only several apt metaphors, but deep truths.

Here, in a far-too-brief executive summary, they are:

Financial Crisis Cause No. 1: Wall Street’s shifting demographics.

In the commission’s report Federal Reserve Chairman Ben Bernanke describes recent events as “the worst financial crisis in global history, including the Great Depression.” The event, in other words, was unprecedented. To understand an event that has never before occurred, we must logically begin with those factors that have never before been present. On Wall Street, the most obvious such factor is women.

Distorted Judgment

Of course, the women who flooded into Wall Street firms before the crisis weren’t typically permitted to take big financial risks. As a rule they remained in the background, as “helpmates.” But their presence clearly distorted the judgment of male bond traders --- though the mechanics of their influence remains unexplored by the commission (on which several women sat).

They may have compelled the male risk takers to “show off for the ladies,” for instance, or perhaps they merely asked annoying questions and undermined the risk takers’ confidence.

At any rate, one sure sign of the importance of women in the financial crisis is the market’s subsequent response: to purge women from senior Wall Street roles. Wall Street’s gender problem is, for the moment, of merely academic interest. Less academic is...

Moral Collapse

Financial Crisis Cause No. 2: The moral collapse of the American working class.

AIG head Robert Benmosche has recently pointed out that the reason his firm has enjoyed such great success is precisely because it has avoided selling insurance to the large number of Americans who believe, as Benmosche put it, “that the government is responsible for what happens to me.” (As we know, the government is responsible only for what happens to AIG).

The CEO of JPMorgan, Jamie Dimon, has often called our attention to the outrageous amount of banker bashing by Americans outside the financial sector, who seek to blame their troubles on others.

Wall Street leaders now understand that they made a mistake, one born of their innocent and trusting nature. They trusted ordinary Americans to behave more responsibly than they themselves ever would, and these ordinary Americans betrayed their trust.

Amazingly, these ordinary Americans don’t even appear to feel guilty for their actions. Like wild animals that have lost their fear of humans, they continue to wander down from the hills to rummage through our garbage cans for sustenance.

Best Subprime

Frankly, the commission’s report does nothing to improve public morals. In discussing the role of the 1977 Community Reinvestment Act, for instance, the report notes that the loans made by big banks to meet the act’s requirements -- that is, loans to poor people in crap neighborhoods -- outperformed, dramatically, the general run of subprime loans.

Such nitpicking merely obscures the critical point. For at least two centuries the U.S. government has encouraged people who didn’t work on Wall Street to think of themselves as “equal.” Government policies have emboldened ordinary Americans to borrow money they never intended to repay, just like rich people do, and cowed the financial elite into lending it to them. You can’t forget to bear-proof the garbage cans, and expect the bears won’t notice.

Along these same lines I cannot help but point out...

Blame China

Financial Crisis Cause No. 3: The Chinese.

The willingness of this remote and curious people to sell us goods at ridiculously low prices is disruptive. It encourages our poor to believe they can afford many items which they should not be able to, for instance. And the vast number of dollars these same Chinese people willingly lend to us at absurdly low rates of interest places an unfair burden on our financiers, who must find someplace to put them.

This is a far more difficult job than is commonly understood; it often leaves Wall Street people feeling overworked and underappreciated. If we want our financiers to perform even better than they do, we must cease to expect more from them than they can give.

Which brings me to...

Financial Crisis Cause No. 4: Upon our trusting, hard- working and underappreciated financiers we thrust the impossible task of overcoming impersonal historical forces.

The most distressing aspect of the commission’s report is its attempt to blame actual human beings for the financial crisis: fraudulent CDO managers, greedy ratings companies, Wall Street bond traders and, especially, Wall Street CEOs. Think about this: If everyone on Wall Street is guilty, how can anyone be? If no one on Wall Street saw it coming, how can anyone be expected to have seen it?

Details for Dummies

Anyway, as several Wall Street CEOs tried patiently to explain to the commission, the details were never their responsibility. Martin Sullivan, the CEO of AIG in the three years leading up to its near collapse, even went so far as to prove that he had no idea how much he’d been paid ($107 million).

The commission proved incapable of grasping the point: the rare man capable of running a big Wall Street firm remains focused on the big picture. And in the big picture, from the point of view of their firms and their earnings potential, the so-called financial crisis was a blip. They’ve already forgotten about it.

And they assume that, eventually, you will, too.


  1. (1) Some will continue to speculate that they will be bailed-out again.
    (2) New players will be prevented to offer their services by regulators.

    There is no need in banks and this is the problem of our financial system: Banks are kept alive by regulators and not by market needs.

  2. I believe an important cause of the financial crisis was left off - reality TV, specifically the Real Housewives variety that created pent up demand for unrealistic lifestyles, accessorized with fantasy houses.

  3. I believe that rating firms now include the possibility of future government bailouts in their ranking indices. So, yes, we can assume their will likely be future bailouts.