It didn't have the most auspicious start. When I emailed a couple of weeks to set up an interview, the author of Liar's Poker, Moneyball and The Blind Side said Sure, call me on Tuesday at noon. And so I called at noon -- only to find him still in bed. I was thinking EST. He meant PST. I apologized. We rescheduled.
There might have been something fitting about this. After all, most of what Lewis has been writing about recently has been the migration of geographical power: the end of Wall Street. In magazine articles, op-eds and a new edited volume, he's documented the decline and fall of high finance. So when the Atlantic started to put together a new website about business and finance, he seemed like a good person to talk to.
And, after a few more apologies for waking him up, we did.
So we're putting together this new business and finance site, and I was hoping to talk about some of what you've written recently.
Michael Lewis: You know it's funny -- I've written nothing about finance for a very long time. I wrote that piece for Portfolio and then I had that piece in the New York Times. And I write a column for Bloomberg, I guess that counts. So I suppose I'm back in the game a bit.
But those two pieces together were probably about 700,000 words. That Times op-ed with David Einhorn must have been the longest op-ed in the history of the newspaper.
I asked [op-ed page editor] David Shipley if we had that distinction and he said no. It was 5,000 words. Originally it was supposed to run in three pieces, and then two, and then he decided to throw it together all at the same time. But Tom Wolfe, I guess, wrote something on Columbus Circle went on even longer. So we didn't get the distinction. But one of the reasons I think we got so much space was that the people who normally occupy that space were on vacation. You know, Maureen Dowd and Thomas Friedman and all those people were gone. So he had all this blank territory.
That's very modest.
Well, they don't bump the regulars.
It seemed like it might have been the longest only because I think the Times only opened the back page only recently to op-ed content. I think before it was all just one page. Now the Sunday paper has three pages for op-eds.
That's right. But anyway, as you know, the longer the piece the fewer the readers. You have this shock and awe effect when you publish something like this. And then you ask people "what did you think of the ending?" and you get a glazed look back.
I can assure you that I read the first two and the last two paragraphs.
But that's only because you had to. It was homework.
Well anyway, I did read your new book [Panic, Norton, November 2008] and I suppose I should ask you some questions about it. So how did it all start? In the afterword you talk about having a conversation with Dave Eggers about the project. But I suppose if I were to rank everyone in the world on the basis of how close they are to finance, Dave Eggers would be pretty near the bottom.
Well it had really impure beginnings. Dave is a friend, and he has this philanthropy that is forever in need of dollars. And he came over here in early 2007 and we were having lunch. And he asked me if I would edit one of these anthologies for McSweeney's. And they've had some very distinguished people do them -- you know, David Sedaris and Michael Chabon and so on. But they never sell. But there's an advance -- you know, ten grand or twenty grand or whatever -- and so we schemed. What could we throw out there that we could fool people into buying that would actually generate real dollars? And so we weren't thinking, Oh, there's going to be a financial panic and this would be really good for that. Remember, this was February 2007 and we were just thinking, What could we fool people into buying?
So I suggested this, and he said great, and then he gave me a team of interns to dig the stuff up. And the timing of it -- I mean, we sold this to the publisher for a bunch of money, for an anthology, so everybody was very pleased. And I think we thought that would be the end of it. It would go the way of all anthologies and wouldn't be reviewed and there wouldn't be a book tour and anything like that. And then all of a sudden its relevant. All of a sudden I'm being dragged on to the Colbert Report to talk about my book.
And are you on book tour now?
No, no. I did three days of TV and another day on the radio and that was it. But the book came within a millimeter of hitting the New York Times bestseller list. I think it's still on the extended list. So it's going to generate some bucks. It's really kind of great. But on the other hand I get letters from people who are very angry -- who bought this book and it turned out not to be written by me. You know, they bought it because of the way the publisher marketed it, because they thought it was a real book.
It must be said: The words "edited by" are in
extremely small print, and the words "Michael Lewis" are in extremely
large print.Well the only reason the words Michael Lewis
aren't in even bigger print, and "edited by" is there at all, is
because I protested to the publisher. I was part of this deceitful
project. But the deceitful project was for a good cause. I don't get a
But I still feel a little badly about it.
[Laughs] Well that's what counts. But on to the contents. One of the interesting things about the book, and I suppose about some of your work more generally, is that there are these recurring characters. And one of them is John Meriwether, who was at Solomon Brothers and then at Long Term Capital Management and I think now he's at another hedge fund.
He's at the same office. They just renamed it JMW, his initials.
But to some extent it seems like this might be in tension with another one of your themes -- you know, "The End of Things." I think the title of both the Portfolio piece and that NY Times piece was something like "The End." But if these same characters keep coming up over and over again, why is this current crisis the end of anything?
Because they're finished now. I think there have been a lot of false endings before this, but this one if different. The character of what's going on now is completely different than in anything that's happened before now.
In what sense?
John Meriwether is not going to be able to raise money for a new hedge fund. In that sense. There's a long list of things that I think are not going to recur, at least for a very, very long time. Like half the graduating classes of Princeton, Harvard and Yale getting jobs on Wall Street, or even wanting to be on Wall Street, because the jobs on Wall Street won't pay anything like they paid in the past. The availability of credit generally has been extinguished.
You know, John Meriwether was really at the beginning of this fetish that was made of proprietary trading. It first started as a little thing. And the idea was that these big investment banks -- Solomon, Lehman, Goldman -- were supposed to but borrowers and lenders together in various ways. They were essentially advisers. But inside these institutions was a place for the gambler, for the guy who knew how to make really smart bets. And John Meriwether was one of the first breed of guys who knew how to make smart bets that no one else understood because they were so complicated. And at first these bets weren't so big. But by the time I left Solomon Brothers they were dominating the firms so much that the firms returns were driven by whatever John Meriwether was doing. Which led to the question of why John Meriwether needed the firm. It was a question that also occurred to John Meriwether, who went off and created his own little thing.
And that was Long Term Capital Management.
Yes, and all of Wall Street started doing this. Goldman and Morgan Stanley and Lehman Brothers: their returns were increasingly generated by these smart traders making complicated gambles. But that's ended. The complicated gambles require, one, people to trust them, and two, the ability to borrow large sums of money to make the gambles. And both those things have ended.
A related thing is that there was blind faith in the value of financial innovation. Wall Street dreamed up increasingly complicated things, and they were allowed to do it because it was always assumed that if the market wanted it then it made some positive contribution to society. It's now quite clear that some of these things they dreamed up were instruments of doom and should never have been allowed in the marketplace. So the blind faith in financial innovation has ended, and we're probably going to enter a period now where even inventions that are useful are going to be clamped down because people are now terrified of this stuff.
That's another question. What do you think is lost in all this? If one era of Wall Street is coming to an end, is there a cost?
That's right: What's the risk that the backlash will go too far? Well, everything overshoots, so you can be sure that whatever the reaction is, it will be excessive. But it's hard to answer because nothing's happened yet. New regulation hasn't been formulated. Everyone is waiting to see what the Obama administration does. So I don't know. But the risks are that some of the things that are really good will get flushed out.
One thing that was really good? Mortgage-backed securities. In the beginning, mortgage-backed securities were a really good thing. The ability to spread certain kinds of risk was good. It lowered your home mortgage interest rate once it was possible for investors from all over the world to invest in you -- the mortgage borrower. That simple innovation was very valuable. But on top of that all sorts of things were developed that were awful.
There's a possibility that whoever comes in to regulate these markets anew will be able to parse what's useful from what's not. But god knows if that will happen. My guess is that probably won't happen. My guess is that the regulators will probably gum up the markets in ways that are counterproductive. But you don't want to damn the regulators from the start, and there are important things they need to do. You just want to hope that they do them intelligently.
And on the sorts of innovation that should be cut out: I suppose one question is, what's the degree to which these new instruments are just by their nature instruments of death and destruction or whatever, and to what extent is the problem that they're not properly implemented or understood or regulated. I think there's one moment in the book where Robert Rubin takes over Citigroup and it's reported that he doesn't know what a liquidity put is. So are there innovations that would help markets operate more efficiently and so on if only people understood them better? Or are they really just useless innovations?
Well, there's probably no innovation that's entirely useless. But there are some innovations whose use value is so trivial -- except as a tool for disguising risk and enabling reckless innovation. A really good example of this is credit default swaps, which everyone has seen mentioned. Credit default swaps are not that complicated on the surface. On the surface they're just bond insurance. If you buy a credit default swap from me, you're buying insurance against a municipal bond or a corporate bond or a subprime bond or a treasury bond going bust.
The difference, I guess, being that a third party can buy the swap.
That's right. And that the value of the insurance can be many times the value of the original bond. So let's say there's some really dodgy subprime bond out that everybody knows is going to go bust but that the market is still pretending is a triple-A bond. You might have insurance that is 100 times the value of the actual bond. So lets say there's a million dollars in a bond out there. You might have 100 million dollars in insurance contracts on it. So it's obviously not insurance at that point. It's something else. It's a way to bet on the bond. And it's a very simple and clean way to bet on the bond.
And one of the really weird things about this instrument is -- well, back away from it and think about it for a second. Lets take a bond, let's say a General Electric bond. A General Electric bond trades at some spread over treasuries. So let's say you get, I dunno, in normal times, 75 basis points over treasuries, or 100 basis points over Treasuries, over the equivalent maturity in Treasury bonds. So you get paid more investing in GE. And what does that represent? You get paid more because you're taking the risk that GE is going welsh on its debts. That the GE bond is going to default. So the bond market is already pricing the risk of owning General Electric bonds. So then these credit default swaps come along. Someone will sell you a credit default swap -- what enables the market is that it's cheaper than that 75 basis point spread -- and he's saying that in doing this he knows GE is less likely default than the bond market believes.
Why does he know that? Well, he doesn't know that. What really happened was that traders on Wall Street have the risk on their books measured by their bosses, by an abstruse formula called Value at Risk. And if you're a trader on Wall Street you will be paid more if your VaR is lower -- if you are supposedly taking less risk for any given level of profit that you generate. The firm will reward you for that.
Well, one way to lower your Value at Risk as a trader is to sell a lot of credit default insurance because the VaR formula doesn't count it as risk. Because it's so unlikely to happen, the formula doesn't grab it. The formula thinks you're doing business that is essentially riskless. And the formula is screwed up. So this encouraged traders to sell lots and lots of default insurance because, while they get a small premium for it, it doesn't matter to them because the firm is essentially saying, "Do it, because we're not going to regard this risk you're taking as actual risk."
It's insane. That market is huge as a result. But if people actually had to have the capital, like a real insurer, to back up the contracts they're riding, the market would shrink by -- who knows? Who knows what would be left of it?
So yes, if you just made the rules better, a lot of the problems would just take care of themselves. If you're sitting in the SEC or if you're sitting in Washington, I don't know if it's easier to make the rules better or if it's easier to ban the things themselves.
In the book Franklin Edwards has this analogy between the kind of situation you're describing and the choice between building better roads and scrapping new cars. And I suppose if the credit default swap is the new car, it sounds like one solution here might be build a better road -- change the in-house rules by which risk is evaluated and so on.
But to follow the analogy through, the better road would cause most of the new cars to leave the road. You know, I have yet to have a financial person persuade me that there's a really useful reason for a credit default swap. I know why they exist and I know why they're used. They're mostly used as speculative instruments. And the people who are selling the insurance are mostly selling it because they don't pay a price for it until everything goes bad. They weren't judged as taking any particular risk. But I have yet to have anybody explain to me why these things are terribly useful. They might have some good use and I just haven't heard it yet, but I'm dubious.
I'm also dubious about mezzanine CDOs. Do you know what those are?
Well they're the way that crappy subprime mortgage loans because triple-A bonds. The general idea is that you take a big pot of loans that are sort of likely to go bad. But if they are diversified enough -- some are in Florida and some are in North Dakota and some are in California -- then the theory is that they won't all go bad together. So if you put them in a big pot and you let some people get the first payments that come out of the pot, those people will have a security that is effectively triple-A. because even though everything in the pot is crap, it's not all crap that behaves in exactly the same way. So the diversification creates a kind of security for the first few people who have the first claims on the pot.
People who have the last claims still have a crappy security, but people have the first claims have triple-A bonds. And the pot is a CDO -- the pot is a collateralized debt obligation. The problem was that all the crappy mortgages went bad together. The original argument was specious. There was no diversification. And it was pretty obviously specious but nobody wanted to acknowledge it because there were a lot of people selling triple-A-rated subprime mortgage-backed bonds to people.
And one of the problems with the CDO is that it's unbeliavably complicated to figure out what the hell is in the pot. It's a gazillion loans from all over the place, or bonds that are from all over the place, that are divided into all these tranches. When you sit down -- and I've never done this but I've talked to smart people who have done this --
So when one sits down and does this.
Right, when one sits down in the spirit of inquiry and does this thing, it's virtually impossible. Nobody's going to put the effort into it. So it's a little unclear what purpose this pot serves except to disguise risk. And maybe that's at the bottom of the problem with some of these innovations. When innovation is used to disguise risk, as it often has been of late, it really can have disastrous consequences.
One of the other themes in the book, sort of on this note, in the '87 crash and with the Asian currency crisis, is the degree to which there's a lack of consensus about what's behind the crisis and what policy response should look like. In the '87 crash I think there was a lot of speculation that, you know, computers were responsible and with the Asian crisis you have extremely smart economists basically offering diametrically opposite prescriptions on whether interest rates should be raised or lowered. So to what extent are you confident that a problem like that can be avoided, or is this going to be one of those cases where failure is an orphan and the blame is passed around endlessly?
I think this is different. This is going to be politically different and sociologically different, because it's going to have huger economic consequences.
And that's because, as you've said elsewhere, this crash is more egalitarian than the other recent ones? Because it's more than just a bunch of rich dudes?
That's part of it. It's usually the case that it's rich tycoons on Wall Street exploiting the little guy, or so the story goes. In this case it's hard to draw a clean line between culprits and victims.
Because of all the poor people exploiting the innocent, helpless rich?
[Laughs] Yes! Or at least there's a lot of blame, from top to bottom of the economic order. But what I mean is that we've all these kerfuffles in the financial markets -- the crash of '87, the Asian panic, the Russian thing that led to the collapse of Long Term Capital Management, the bursting internet bubble. But they never really hit the economy in a serious way. But now we're going into something really awful. I don't know how awful it's going to be or exactly what it's going to look like. But there's already a political response that's unlike the political response we've had to any of the previous crises. And it's not going to just pass easily. So there's going to be a different sort of approach to trying to figure out what happened.
I don't have any great hope that there's going to be a really clean solution to the problem and that entirely good things are going to happen because of the severity of the problem. But I think that we're in an environment where there can be pretty radical institutional change. So it wouldn't be radical to see the SEC abolished and replaced with something else, for example. Or it wouldn't be shocking to see a number of these institutions that are being propped up, like Citigroup and -- well, there's no need to name them all. But it wouldn't be surprinsing to see those institutions just fail.
It wouldn't be shocking to see entirely new rules written about derivatives, about leverage and capital requirements in banks. It wouldn't be shocking to see new rules written about how securities get rated or see the rating agencies as we know them vanishing. So my guess is that we're going to get big institutional change, and some of it's going to be bad and stupid, and some of it's going to be good.
But the only model that I can really think of for what's about to happen is the early '30s, when you had the great depression spawning things like what, the SEC, the FDIC -- a regulatory infrastructure that is now, I think, going to ripped apart and rebuilt. That's my guess anyway.
I'm curious to get your thoughts on two final things. The first is, you've written a lot about money and finance, but it sort of seems like one of the only industries that is having more money problems than financial services is the journalism industry.
How about the car industry?
Well, okay. Journalism is in the top five. But it's more interesting for me to ask you about the mgazine industry than the car industry because, at least to my knowledge, you're only heavily invested in one of them. And so I wonder what you think about that industry changing over the next couple of years. Especially since you're a guy who does long-form journalism and books, and those are arguably things that translate less well to the internet.
Well my personal experience has been very nice. The market for me has only gotten better!
[Laughs] That's not terribly helpful.
Well it makes it a little hard for me to prophesize doom. And I hate spinning theories to which I'm an exception. So my sense is, there'll always be a hunger for long-form journalism, and that it's just a question of how it's packaged. And that people will always figure out how to make it sort of viable. It's never going to be a hugely profitable business: it's more like the movie business or the car business in that there are all sorts of good non-economic reasons to be involved in it. The economic returns will always probably be driven down by too many people wanting to be in it.
But I don't feel gloomy about the magazine business at all.
Well that's nice! I feel pretty gloomy.
It's always inherently in a state of turmoil of one form or another. But let me put it this way: when I write a long magazine piece that gets attention I feel like it's more widely read now than it was ten years ago, by a long way. In fact, it feels excessively well read. Twenty years ago I might get a couple of notes in the mail and I'd hear about it maybe at a dinner party. And that would be the end of it, and it would go away very quickly. Ten years ago it would get passed around by email, and it would seem to have a life to me that would go on a little longer. Now the blogosphere picks it up and it becomes almost like a book: it lives for months. I'm getting responses to it for months. And I don't think the journalism has gotten any better. It's just the environment you publish it in is more able to rapidly get it to the people who are or might be interested in it. They're more likely to see it. So the demand side of things is not a problem. People really want to read this stuff. The question is how you monetize that.
And there are still magazines that make plenty of money. Vanity Fair makes plenty of money. Huge sums of money. The New York Times Magazine makes plenty of money, it's just buried inside this institution that doesn't.
Well the Atlantic doesn't have that problem. But I guess the question for us is how we copy something like Vanity Fair or the Economist or --
The Economist makes money, doesn't it?
I think the Economist makes tons of money. I think their subscriber base is growing by the minute.
So it may be that the Atlantic and the New Yorker are inherently unprofitable. But they've always been inherently unprofitable enterprises. It's not as if anyone was ever rolling in dough because they published the New Yorker.
That's a good point, but I'm not sure it makes me feel any better.
But the fact that it's not making money now is not really news. It's nothing to be gloomy about. In fact it would be slightly disturbing if it were making money. That would suggest a real change in the magazine industry.
Well, thanks. That's a nice optimistic note. Sort of. Just one more question. Do you invest?
Yes but pretty passively. You mean in the market?
Well not very heavily. Anyone who's read Liar's Poker would understand that I don't have any great confidence in my ability to turn money into more money. And I don't make much of it. I think I'd rather spend my time trying to figure out how to make more of it, and write things, than I would manipulate what savings I have.
But I do invest. [Laughs] I make grand, global decisions that leave me feeling very important for about five seconds and then I forget about it. So the grand global decisions are, "Do I buy into the stock market through indices now or later?" "What percentage of our assets should be in the stock market versus in corporate bonds or government bonds versus foreign stocks?" But I don't sit around thinking about it a lot. It's a very trivial part of my life.