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
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
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
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
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
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
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
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
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