Q&A: Michael Lewis

[Music] this week on Q&A author Michael Lewis on his latest book the big short inside the doomsday machine [Music] Michael Lewis author of the big short I want to ask you a weird first question why does that not surprise me why is it that throughout this book on most every page you have people that you're talking to using the f-word because they do and and it's the profanity of that environment it's just part of describing that environment you can't you can't write about people and take that out and have the flavor of the thing preserved so there is a I think that's if you listen to people on Wall Street I mean you listen to people on the streets of America the level of profanities I've been on Wall Street it is extremely high Wall Street sports both both places and and so if that's why people talk I just don't change it it's in a way it's been it would be manipulating the environment if I changed it have you thought about how often it happens I mean it it's almost every page and yeah I was it's probably not almost every page no but I mean every almost every time they wonder about there's one character in particular who in fact I did think about I thought about how they spoke when I'm when I was writing them the characters and there's there's a character who uses no profanity at all who's that Michael burry the doctor doesn't he he doesn't use profanity but there's a character Steve Eisman who actually exists in the story and in this in the real world to run around and and self people on Wall Street and so he's and that's how he sounds so I couldn't I couldn't remove it I just simply couldn't remove it it was it was so it was too much a part of him and he is on a lot of pages and when he talks that's what comes out of his mouth but at the end of your book in the last I'm just I actually not the last chapter but you have a lunch yeah that's a former leader of a company that you work for yes how do you pronounce his name John good friend who is a CEO of Salomon Brothers where I worked in my youth my first job out of graduate school I worked out I worked as a volunteer on the Salomon Brothers trading for for a cup yes quote your effing book why did he say that to you uh-oh well he said your effing book it it destroyed my career and it made yours I wrote a book called liars poker about that experience of all Oh a Salomon Brothers and he thought he was really he kept repeating that line that and he was just emphasizing how intensely he felt about it and it was a it was an awkward moment because I don't completely agree I think that actually did make my career it's a bit was it was a great way to start a literary career the book was a big success but he he could have survived by a book my book was dealt him at most a glancing blow but I think I think at that moment he's thinking he was thinking here's this guy I've not never laid eyes on as far as I know who wrote this book that is it you know followed me wherever I go and it's caused me some annoyance I'm gonna say what I think about it and so I let him say it pronounce his name again good friend good friend cause it's GU T fr it looks like good Freund yeah so why did you end your book this way well because I started the book walking back into my past walking back into this place Wall Street that I left when I was 27 years old and never really come back to in as a book writer and I was drawn back to it because of the experience I'd had then and one of the themes that's teased out in the story is that an awful lot of the crisis we've been living through has its seeds in in things that happen in the eighties actually on the trading floor I worked and so I thought it was appropriate to end the book by going back to the person who was there you know and who kind of got it all going I mean good friend in particular was a seminal figure in Wall Street history because he had taken this this legendary bond trading partnership Salomon Brothers and turned it into a public corporation hit so he when he got in control of the place he went public and completely changed the relationship of the Wall Street firm to the rest of the society it was a very big deal and I think it's it that was I think I say in the book it was like the first pebble it was the pebble that was kicked off the top of the cliff that led to the avalanche so I I thought that was a an important first act and I wanted to go to the man and talk to him about it see if he saw the connection between what he'd done then and what this story this story we've just lived through now you get one of the biggest send offs you can get on any book to her 60 minutes two segments how'd that come about you know I still haven't seen it so but but it came out of the blue steve Kroft the the interviewer who i was fabulous but i never met him before really wanted to do it and when he showed up at my house in Berkeley he he said you know we tried to do you two years ago or three years ago when the blindside came out my book I wrote about football and other things and he said but you said you told your publisher you wouldn't talk to us because we just steal all the material and not mention the book and I think I did they had called before and I've been so used to these news magazine shows basically appropriating material and doing all and helping them do their piece and then oops you got forgotten and they forgot where they got all the material and I just thought it was just a waste of time and so I think I'd already told 60 minutes know once and that so they came back to the publisher I guess and said no we're actually serious we're very interested in his book he's doing and we just want to talk to him about his book and so I caved in a moment of weakness I caved and I thought it was going to be small and trivial piece on this book I didn't know what it was going to be actually and they came and they spent two days I mean my wife kept asking are they leaving anytime soon I mean I let it play themselves in the house for two days and and we sat and talked it was great I mean I don't I no idea having not seen the piece I can't really comment on it but but it's an interesting experience this business of doing media unlike this experience but the media that you see like the 60 Minutes you said you talked to them for five six hours and it gets reduced to 20 minutes or whatever it was a very long piece but you don't because you've said so many things in six hours you really don't know what's going to come out of it and the main the main sensation one has when one is engaged in this activity is total self boredom that you think oh my god how could anybody be interested in me that I just bored myself for six straight hours and they're gonna reduce this into an even more boring twenty minute piece I had a reaction the one to ask you about they only focused on one of your characters yes Mike burry Mike burry the one who doesn't use f-bombs yeah and and but I wondered because to reading the book he was interesting character but so Steve Eisman and so was literally literally and yeah oh yeah but why did they tell you why they were gonna focus on him and did Steve Eisman say I'm not gonna participate Steve Eisman said I'm not gonna participate they all the characters were I had a very look I had a privileged access to Wall Street because of liars poker and other books that people were willing to talk to me who weren't willing to talk to other people and I developed relationships with these subjects over a long time and it enabled me to be very right about them very intimately but it became a kind of intimate experience for them it was just me and him hanging around talking and yeah book was gonna come out of it but yeah I didn't think very much about what that meant I don't think they thought well it's a book but it's by him and I trust him basically so okay and now the book comes out and they're getting calls from 60 minutes saying you want to go on the air now Steve Eisman is technically employed by morgan stanley gnorga stanley won't let him go on the air he'd probably do it anyway if he was feeling bloody-minded enough but he doesn't really want to be a famous person he doesn't want to be young television and charlie let Lee and Jamie May in Ben Hawk at the young man at Cornwall capital who I had to badger really into letting me write about them I mean they might I think they're in an island somewhere I'm waiting for this to end because the last thing they want is to be on TV so they all they actually all spoke to 60 minutes they all talked to the producers and said yeah I exist come over I'll help you I'll explain things to you with that kind of thing but there's no way my face is going on television why did Mike burry who you care Rison your book is being shy and not liking people they look like interaction social interaction why did he agree yeah yeah that's a great question I think that but there's a pretty simple answer is that a year and a half ago he felt completely betrayed by the financial world he's on the screen right now you can see him there was and and he felt neglected he felt he thought he had been very prescient in in diagnosing what was going on in the American financial system he had made a lot of money for other people making a bet against the subprime mortgage market and he and it was it had been a it went up being a very unpleasant experience for him and and then the world moves on and nobody notices what he's done even though it actually is an incredible investment triumph and so when I called him to talk to him he was he was the one character who was very eager to talk to me because he had a story and he had he had three years of emails to document his every move he had a story to tell that he really felt had been neglected and so the 60 Minutes people were just reinforcing that he just thought he wanted to tell a story well the next day Amazon you're number one and here we are a week later and when this is being taped you're still number one on Amazon but you didn't show up with a Wall Street Journal today which was interesting and there and there their poll for the week which I was surprised about deal what about these numbers it had a bust I give you a quick that with the way the bestseller work lists work generally the things that are in the papers are usually with a lag so you wouldn't be available list in the journal vessels is all a kind of a it's it's all from its sales from two weeks ago so the book the book hasn't been a sale long enough to hit those lists it's the market fort has surprised even me the market for it seems to be vast and I mean that's really great it's nice to everyone but but it's trying to get my mind around what's going along with this book right now because it's it's this clearly a reservoir not just of anger about what's happened but of real kind of intense curiosity to know what these would actually happen on Wall Street and that I didn't act I thought I thought actually trying to get people to read my story was gonna be a little more difficult than it's been correct to anything I say New Orleans was your birth I grew up it's where most of my gene pool still is everybody still lives there except me and Princeton is your University yeah and you live in Berkeley mm-hmm and you're married to somebody my age would remember Tabitha Soren who was the I mean she's very old but I remember on anime in the early days she was that well she isn't very old she was a she she hit she was 22 or 21 when she went on the air but she would used to anchor the news for MTV and interview the rock stars and so on and so forth and we have three we have three kids two daughters and a son 10 age 10 7 and 3 and the only piece of major piece of my biography just admitted as I went to graduate school in London and I spent eight years living in England right after college and an art history major and at Princeton yes over the art history major Preston my first ambition was to be art historian liars poker came out in 1989 you worked at Salomon Brothers what two years more like three - almost three I got there in the summer of 85 and I left in early 88 and can you give us a couple of lines about liars poker so we can come up to this book sure liars poker was the few of the oxygen for that story was just my own bewilderment that anybody was willing to pay me large sums of money to give investment advice I mean I had been art history major at Princeton I had indeed done an economics degree at the London School of Economics but really did have anything to do with giving investment advice and and and I had a pretty strong sense as interesting as interested that I was in the kind of the sociology well the finance at Salomon Brothers I had pretty good strong strong sense that I wasn't particularly well-suited to telling people what to do with their money then I didn't think I knew what was gonna happen in the stock market and I didn't I just didn't I didn't I didn't feel like I was actually a useful making a useful contribution to the global economy but there it was pretty clear if I just sat in that seat I get rich and that that was a puzzle I on earth should I get paid or anyone get paid all this money just to sit in this seat and the trick was just getting to the seat and so I wrote us I left to write us to worry about it a nonfiction story that was also trying to explain what had happened on Wall Street to make these sort of jobs possible to make them so lucrative but I really did think when I wrote it that this was it this was in the 1980s it was it was a strange little episode in American history it was going to end these seats would be less valuable so you had to get the story down on paper just so future generations would believe it and little did I know that you know 20 years later people would pity me for how little I made while I was there that the sums that were paid on Wall Street but had gotten so big that that you you that that just looked quaint the first person in your book is Meredith Whitney that seems to have rather strong importance can you tell us he's a catalyst for me in this story she she's an analyst she was she was until very recently what's called a sell side analysts which means she works for the Wall Street firm a Wall Street firm that is offering stocks to the public and she worked for a firm called Oppenheimer and she was a bank analyst a financial sector analyst and Meredith Whitney who I'd never heard of start saying things in kind of in 2008 2007 is when I first start paying attention about the Wall Street firms the sound of different meaning I never heard that she was she was saying they basically didn't know what their understanding their the risks they were taking they didn't understand their own balance sheets that they were gonna see predicts Citigroup is going to have to cut it cut or eliminate its dividend a week before they actually do she seems to know more about what's going on inside the places than the people who run them on and she's and it's a almost her tone that's it was as interesting as what she said she was actually kind of condescending to them to these Wall Street people and I call it so I call her up books because I just it just seemed she was making a different sound I thought I haven't been writing about this world but I'm kind of curious who this woman is and why she thinks this and she made such sense that she persuaded me pretty early on that she didn't put it this way but I put it this way that the Wall Street firms have become the dumb money at the poker table that somehow these firms which used to be the smart money when I left Salomon Brothers the last thing you wanted to do if you were an investor was being on the other side of one of Salomon Brothers trades there was some zero-sum bet to be made with Salomon Brothers who did not make it because you were sure to lose money and what had happened is somehow the firm's had become had turned stupid that are rather than as institutions that they had become they've become the dumb money and so that I was curious that that made me curious how something big had changed and then the natural question of course was well if they were the dumb money who was the smart money and that led me to my characters because they were the smart money you know when you years there's another word that I would say is throughout your book besides the F word the word lie yeah time and time again that people in these companies lied to each other lied to us lied to me you know but I want to read you one paragraph a little bit of one not a word that I'm using a lot Sproul II were the characters no I this is I'm pulling this out of page 174 he'd go to meetings with Wall Street CEOs and ask them the most basic questions about their balance sheets quote they didn't know he said they didn't know their own balance sheets this is your writing once he got himself invited to a meeting with a CEO of Bank America Ken Lewis quote I was sitting there listening to him I had an epiphany I said to myself oh my god he's dumb a light bulb went off the guy running one of the biggest banks in the world is dumb yeah is that fair is it fair yeah it's that it's absolutely his view it's a tribesman it's absolutely a pure representation of his view and then they proceeded to make bets against the Bank of America the is it is it that you know it's a that quote those kind of statements tell you they're very important in the in this in a story like this in a narrative because there was revelatory of stiva about Steve Osmond as they are about Ken Lewis is a guy really dumb which dumb but you know we probably know he can get out of bed in the morning and function he not dumb but in that sense but he's dumb in the sense that he doesn't persuasively understand his own business top you know Huysmans a mind and so it's Iceman's very blunt way of getting getting their point across let's talk a little bit about Steve Eisman who is he where is he from where is he live Steve Eisman who I'm led to by Meredith Whitney because Mareth Whitney had trained with him that she was a kid she was a school of Iseman in a way was a New York born and bred had gone to University of Pennsylvania been a brilliant student went to the Harvard Law School brilliant student instantly joined like so many Harvard Law School grads a corporate law firm and hated it immediately and and so called his momma as one does when one's in trouble and his mama was a and father had if they had a very they were both prominent brokers at Oppenheimer securities and his mama got him a job and it was a job as a step-in Fetchit he was a junior analyst but analyzing nothing at first and in the mid-90s when he joins subprime mortgage market is really just beginning in its earliest form and there's this new kind of company called a subprime mortgage originator meaning the people who are looking for for borrowers and someone asked him if he wants to be the analyst on it so he becomes one of the first two or three analysts of subprime mortgage companies on Wall Street and he so and pretty quickly he's the world's expert on the subject how old is he he's is mid-40s now that when this happens he's in his early 30s you spent in the book that he changes eventually but he seems angry and negative about everybody and says things there's a character you know okay it didn't occur to me until one of his his colleagues pointed it out they said that when the Curb Your Enthusiasm came on to HBO the Larry David show he said they said they just stole that that's Steve said he's Larry David he runs around offending people and his own wife says to me my husband is rude he has no manners I know that I've tried and I've tried and I've tried and there's nothing I can do about it and he is tactless and tactless throughout the story but it is a pattern to his tag ness list which cut sort of endeared him to me and it was he was never rude or mean to little people he wasn't mean to the secretary he wasn't mean to his to his nanny he was wonderful with him he was protective and caring about the people beneath him when he was to his tactless - were people who were in power who he thought were abusing their positions they met that made him angry and he would get in these over and over you find himself in these situations where he's in meetings with Wall Street big shots and saying things that caused the meeting to come to an end it caused the Wall Street Big Shot to say I'm never gonna set foot in the same room with this man again kind of thing and it got to the point where his colleagues the subordinates the people who work with him and his fund that he's managing they'll just stop their jobs for the day to follow eyes and wherever he's going because they want to see the show because they know that if he's going to be meeting someone important on Wall Street something's going to happen that they're gonna want to see they say one of them says it's like watching a car crash when you watch Iseman in a social situation you can't you can't watch but you can't not watch and and he didn't want to be interviewed on camera for 60 minutes he didn't wanna be going if you don't camera for 60 bits I don't pull you know I I'm very grateful to these people for letting me into their lives and let me write about them as I did I don't I don't blame them for not wanting to be on TV I mean it's a it's a peculiar kind of desire to want to be on TV some people have that bug but it does kind of just change your life a little bit to have your face know do you have that book to be on TV no I get offered every now and then the chance to have a TV show and it just doesn't interest me it I did do I tell you no I when I my hope my interest in television was cauterized by the BBC when I was about 10 years ago my wife and I lived in Paris for a year and I did a series of documentaries for the BBC basically to pay for a house renovation and and I had to wander around be on camera all the time I wrote the show it was a doctor entry and I loved it because the interesting bits of what I do is learning about something and communicating in print in words then having to get the pictures to go with it and stand up in front of the camera it's unbelievably tedious and if you don't have a picture of it you can't communicate it on TV and I'd rather just create the picture out of words so um I don't particularly like it I've had to get used to it because when you go on the road and sell a book it's almost I mean a lot of its TV so you can't avoid it but it's not something I don't think I'm particularly good at and I don't particularly like it I picked a paragraph in your book page 68 and I want to read it it's long but I want you to interrupt it as we go because I want you to define all the stuff I mean you even say in a footnote if you're if you've gotten this far I can't remember where the footnote is but how you know god bless you you got this far buddy I'm gonna read this and just you doesn't have to be long explanations but to try to get through and understand all this length of jargon okay it will start the subprime mortgage market was generated half generating half a trillion dollars worth of new loans a year but the circle of people redistributing the risk that the entire market would collapse was tiny go back to subprime mortgage to star in it sure you know what a mortgage loan is you borrow money to buy a house a prime mortgage loan is to someone who's got a to a borrower who's got a credit score over a certain number credit scores are supposedly measuring your the likelihood you're going to repay your loan there's a company called the Fair Isaac corporation that generates something called a FICO score Fair Isaac corporation score that tells you what it suggests with the likelihood is above there's different definitions but above about at our scale of 800 above about 660 is a prime mortgage below 660 is a subprime voice well the point I want it's not doesn't mean the prime lending know the person who's doing the borrowing when when the Goldman Sachs saleswoman called Mike burry and told him that her firm would be happy to sell him credit default swaps in a hundred million dollar chunks very guessed rightly that Goldman wasn't ultimately on the other side of the bets the two things here the credit default or this is the mechanism that that is created in 2005 to bet against the subprime mortgage market credit default swap is is a essentially an insurance policy on a security so if I if if I buy a credit default swap on a subprime mortgage bond I'm I'm and I'm buying it I pay you if you're the seller a premium as you would insurance premium a couple of percent a year and in exchange you have to pay me the whole value of the of the subprime mortgage bond if the if the bond goes bad I bought insurance on that bond and the general idea of it is that people who own subprime mortgage bonds might like to have the ability to buy insurance on them as a kind of hedge it's a silly idea because you could just not buy the subprime mortgage bonds in the first place if you wanted to if you were worried about the risk but that's why these instruments are supposedly created but they quickly become tools for speculation instead of buying a credit default swap on a subprime mortgage bond to hedge my my risk of owning one i buy just a bet on the subprime mortgage bond and so that's what what he's buying is an insurance policy on the mortgage bonds you refer often in the book to the other side of the bet the other side of yes there's a bet the whole financial system has organized at this moment in financial history organizing itself around a bet and the bet is on subprime mortgage bonds which are which are essentially just pools of loans I mean that they're they're they're they're a bunch of people who borrowed money to buy a house and are they going to pay off their loans or are they not and that and in people and the vast majority of the financial system was betting yes that they're basically going to repay their loans and some people bet no I want to simplify it even more I I am gonna buy a house I go to a bank usually didn't happen that way more but I go to a bank no it does happen well so often your Realtor will say well I can get you a mortgage over here with this mortgage right but you go to a bank and you sign on the dotted line you owe them a hundred thousand dollars just keep it simple then the next thing you hear is that Bank says that Murray's been sold yes who does that bank sell the mortgage do they sell it to well they can be lots of steps in the chain but the simple step is they sell it to a Wall Street firm that pulls it together with lots of other loans and then issues in a trust and then issues bonds off the trust so the money coming in from you to pay off your loan is now going to some bond holder and it could be anywhere he could be in Germany it could be Japan it could be anywhere so the ultimate and he's the ultimate lender so the ultimate lender now is very far removed from the ultimate borrow should be some like it could be something like Goldman Sachs yes Goldman Sachs it very likely be gold but if I originally were gonna write checks to the local bank I'm now writing checks to Goldman Sachs but you don't see that you're still writing checks to some so there's some servicer of your mortgage who you're writing it who's standing in between go the Wall Street firm doesn't doesn't actually go and get your money from you let me go back to your paragraph Goldman would never be so stupid as to make huge naked bets that millions of insolvent Americans would repay their home loans go to insolvent Americans if you an insolvent American if you're getting these we're a lot of how many I'm worried about these subprime mortgages well the the dollar volume is unbelievable to put it in perspective the the subprime the subprime mortgage loan business does not exist until the mid 90s in the mid 90s it has a brief life and it's maybe 10 20 30 billion dollars a year of subprime mortgage loans they came from where by the way it came from where yeah who promoted it originally it was a it was it was there were several companies were born all at once that did it existed to to to make though to originate the loans to go find people into and package them into securities into balance and sell them off it was a company called Ames Financial another called the money store Green Green tree I mean they were these companies don't exist anymore but it was a it was a it was small it was tiny it Phil Rizzuto did the money store didn't he they the ads for those I don't know and I think it's for my time haha so so why was there a need for subprime mortgage well it was more of an opportunity well why was there a need it's a good question and it has to do with just what's happened in the American economy but that you you you had lots of people living beyond their means and using their credit cards to do it the credit became you know one of the big changes in American life in the last 20 25 years has been the extension of credit to people who previously had trouble getting it and the credit card companies got their first auto loans and credit card companies in and there was an argument that all right credit card companies are charging some poor guy who can can't make ends meet 25% interest on his overdrafts on his own and on his back on his unpaid balances if we can get that guy same guy alone but that same guy owns a house and he's got equity in the house if we can get that same guy a home equity loan we can get we can lend to him justify lending him in at a much lower rate than the credit card company because it's our loan is secured by the house as an asset and and so it's good to be good for everybody because he's gonna pay off his credit card is 25 percent per annum credit card debt and instead oh you know of a 10 percent home mortgage who's getting scammed at this point well nobody should have been is it there in theory it could have worked the problem was the consumers were and were poorly protected there that what what with the minute that that the Wall Street firms were in the business of harvesting middle class and lower middle class Americans for their home equity value and making loans to them against it there was a natural risk of abuse because just generally in financial transactions people are bewildered when they get to the minute they get a little complicated they get a lot complicated in people's minds I don't know on the politics of this the Conservatives point the finger at Bill Clinton and the Liberals point their finger at the George Bush and others pointer finger Barney Frank and some point their finger at Fannie and Freddie all that stuff so where do you you point your finger at anybody in there I mean I think the first this this is really the story I've told as a story would happen in the private markets without a lot of government-held so that in this particular case that it was not these loans were not being made because the government said you've got to make loans to poor people that wasn't why they were being made they were being made because the lender was lending the money putting him into packaging him in the bonds and selling him off and didn't have any didn't bear the risk of the flow is not being repaid and so it was just it was a volume business it was they got paid fees for doing the business so it the trick was persuading people to take out the loans now some people didn't take a lot of persuading but there were lots of cases where the nature of the loan was sort of disguised from the person who was borrowing the money you talked about teaser rates well teaser rates so there should be criminal I mean essentially you talk someone into taking a loan out that has an artificially low rate for the first couple of years so it looks very very tempting and then it skyrockets after two years let's go back to the beginning so I could go in and they say here's a rate of 7% for the first three years and there's a rate of 2% yeah I'm first free here it's gonna go to 13 but the impression is left you can flip this house yes so all of a sudden they if they make you that loan what they've done you is turn you into a property speculator because you're you're completely dependent on the price of the property going up to refinance the loan if you're if the value of your house goes down you're stuck with this loan that that's going to eat you alive so let me just stop you there because you're asking questions that are really that this this pernicious relationship between the high finance and the American borrower is what iseman becomes an expert in and he starts to become very very cynical about about what Wall Street does in this situation so yes how big were these subprime loans well when we get to 2004 to 2007 period in that period in that period there were something like 1.6 trillion dollars of subprime loans made and another 1.2 trillion of what's called alte a loans which is not subprime but it their loans that for some reason lack the documentation so the they'll borrow was not required to follow the proof of prove his income so most cases though in a lot cases those were subprime too so the numbers were you're talking about almost three trillion dollars of loans that that were dubious so iseman sitting there buying what iseman is first sitting there investing in the stock market with his little hedge fund but then seeing this explosion of lending again in this beast he thought he had slayed back in the 90s the subprime mortgage lending business and he says this is all going to blow up again this is going to end badly because I know how this business is done and it's a sinister business and and so he starts to try to learn about the bond market the market that's that's uh that's that's creating this credit and he and his colleagues essentially starting from almost scratch they don't know anything about the ratings agencies and they don't know whether they don't know what a credit default swap is none of this they learned that you can actually make bets against these loans and he thinks the loans are gonna be bad and so he ends up making a massive bet against the loans through the credit defaults right buys credit default swaps on subprime mortgage bonds let me go back to this paragraph he didn't know who or why or how much but he knew that some giant corporate entity with a triple-a rating was out there selling credit default swaps on subprime mortgage bonds and here's this language the triple-a rating I think one of the my biggest shocks in this was when I woke up one day and saw that Moody's in sp I know nothing about these operations have been slapping these ratings on that and none of it meant anything right why how could they get away with it who was regulating them and who are they I mean Warren Buffett owns part of right of Moody's Moody's is I think his biggest shareholders we're in Buffett and S&P is owned by mcgraw-hill so that public they're both public corporations their their job has been they see themselves now they will tell you now we're just like Auto Trend magazine for for car for car buyers that we just we're all sure we give our views about the relative trustworthiness of these various securities relative likelihood they're gonna repay these ratings were taken far too seriously they were just meant as a kind of suggestion about what the the like nothing likelihood they default but suggestion of the way you that you should order them in your mind from riskiest the least risky and what but but their place in the world where I it was actually much more and is much more serious than that they are they're federally sanctioned enterprises they that that banks have to reserve capital against their assets and how much they have to reserve against each asset depends on the rating of the asset and the rating is is bestowed on that asset by Moody's and Standard & Poor so say so their ratings have a huge effect on the written the the the ability of institutions to hold these securities a triple-a rating is what the federal government has it's what the US Treasury has so they slap triple-a ratings on piles of subprime mortgage bonds and then under riveted call from these piles and they were triple-a ratings placed on hundreds of billions of dollars of bonds that didn't just decline in value that went to zero so the ratings in this world end up meaning nothing so if I bought that mortgage and it moved to pick pick your place goosal Dorf Goldman Sachs and they sell it on ikb in the German bank in Dusseldorf who thinks that they're being really smart investing in subprime mortgage bonds and all along I'm starting to not be able to pay at some point I mean three years into it I know I go from 2 percent to 12 verses and you know the teaser rates over and now and my house prices not kept going up I can't refinance and all of a sudden I'm defaulting and Steve Eisman and others Mike burry and others are sitting there watching this betting a that it will all collapse right betting that it will all collapse are they risking very much I mean you go into the billions of dollars that they have invested in these bonds and then they let me finish this paragraph because well I did because the paragraph here don't give your viewers the impression that it's all so complicated because it isn't I think that it's pretty good it gets pretty it's I think it's well I went to my mother understood it I here's it's not that it's so composit I had an aha moment here and I'm gonna read the rest of it trying to figure all this out only a triple-a rated corporation could assume such risk no money down and no question asked burry Mike burry the investor of the vast agonist of the story was right about this too but he would it would be three years before he knew it hmm all right here's what I'm getting at the party on the other side of his bet against subprime mortgage bonds was the triple-a rated insurance company AIG yep American International Group incorporated or rather a unit of AIG called AIG FP its financial products but it was at this moment that I said you know try I mean I don't invest in this stuff but I don't well nobody's died you know but as I saw that I thought so the hundred and eighty billion dollars to AIG from the federal taxpayer yes yes yes yes subsequently then went to bailout goldman sachs and all the rest of yes we're bets it was a they were bets they were bets that AIG made this bet why did cannot can but Henry Paulson every Falls and Ben Bernanke why did the two of them won I mean why did they want to pay off the gambling debts yeah exactly what was it about I mean they said that the whole country would collapse it because all the Wall Street firms were we're on the other side of those bets and if a IG didn't pay off the bets the firms would have experienced the law think of it this way Goldman Sachs had lost on its bet to Michael Barry but they they really but they weren't it wasn't that they thought they were just brokering the bet between Michael burry and and and AIG so they paid off Michael burry and their out of pocket they want to get paid off by AIG and if they aren't paid off they got it they've got a thirteen billion dollar loss this was the I don't defend I'm the same what hat with their thinking the Paulson and Bernanke and Tim Geithner are thinking if we don't make the Wall Street firms whole the Wall Street firms are going to be believed are gonna collapse the block is not going to believe they're gonna come on yeah yeah and they would have all collapsed if the got hurt who got hurt from the collapse not Wall Street people people the rest of the country got hurt the rest could cut you got hurt by what the Wall Street firms have been doing the previous five years generating this this this frenzy of finance where finance shouldn't have happened but it take Lehman Brothers who got hurt can you give me an example if I'm out here in just an ordinary citizen if I had stock in Lehman Brothers I got yes you guys sell yes or if you were leaving Brothers bondholder you got hurt if you were a Leland brothers employee you got hurt and that's about it but you say here that everybody at the table the big players all of them walked away with millions and you even cite a couple of minutes yes everybody but the people of Lehman Brothers well as the philemon brothers people say I mean they still walked away with dick full the CEO of Lehman Brothers and made many many many tens of millions of dollars that he got to keep after his firm collapsed but who was Howie Hubler the Ru blur is sort of the reductio ad absurdum of this because if this is this was to me my revelation that that first that the financial system had organized itself around this bed and second was that no matter which side of the bet you're he still got rich personally your institution might have lost you some of the money but you yourself got rich how a humor is a trader at Morgan Stanley Morgan Stanley the Wall Street investment bank he's regarded as the the hub of a little of the smartest group of traders and they trade subprime back mortgage bonds they agitate they're not satisfied making just millions of dollars a year they want to make tens of millions of dollars a year so they start to agitate within the firm for a piece of the action for a bigger piece of the action they want to be given they're sort of like their own little hedge fund within Morgan Stanley owned by Morgan Stanley so they're giving it it's it becomes the Morgan Stanley proprietary trading group and and they very soon months after they're set they make an enormous bet and it's a complicated bet but the gist of it is they end up owning about fifteen billion dollars they buy in a matter of a couple of months fifteen billion dollars of putative triple-a rated CDOs backed by subprime mortgage below like all right sorry sorry CDOs collateralized debt obligation now what is that all right so the loans goat the loans create the bonds the bonds the loans go into a trust the trust as they say is tranche DUP it's sliced in that there are the claim their junior and senior claims on this trust if you are if you if you get them if you're entitled to get the first dollars they get repaid you have less risk then the person who gets the last dollars they get repaid so you get a lower rate of interest and you have a higher rated bond a triple-a rated bond the person who gets the who experiences the first losses that come from the trust gets it gets a triple B minus rated bond and a much higher rated interest rate of interesting what Wall Street did is it took the the triple B minus rated bonds pile them all into another another trust slice that up and 80 percent of that is triple-a rated so what how a Hubler buys is essentially a pile of triple be rated subprime mortgage bonds fifteen billion dollars of them and he does this very quickly with goldman sachs Deutsche Bank Merrill Lynch I think what Deutsche Bank and Goldman Sachs were the two big counterparties these bonds go to zero now he's got some he's got some bets against it so he doesn't lose all fifteen billion dollars B loses nine and a half billion dollars not a half billion dollars and it's I think by far the single largest trading loss from a single bet in the history of Wall Street and he walks away he's allowed to resolving his he's he's allowed to keep all of his deferred compensation that has not been paid of dollars and he's rich goes way to morose and and and the amazing thing to me this is another reason I got reengaged with the subject is that that had become he's nobody nobody knows who he is his name is not mentioned he's just allowed to move on it and you know 20 years ago when the trader lost a lot of money he was shamed that he was he was that everybody knew his name that this had happened and it had been kind of regarded as a private matter in a public corporation was an incredible thing to me and so I recreate I went and talked to all the people involved and wrote the stories you talk to how Huber not allowed to say but you know one of the things we haven't talked I mean you got to these some of these guys and other books have gotten to them but you never see them on television they're you envision that they're all at a country club up in Connecticut still have vast millions of dollars never paid a price for any of this stuff and it's people all across the United States that are suffering because they lost you put your finger on it they lost everything they lost their house their debt the last statistic I heard is that one-fourth of all the outstanding workers in this country are underwater yeah and so is that gonna pop up here in the next we are living through a really traumatic period and it is not over we're sort of at the beginning rather than the end and there are real structural problems I mean yes we're gonna get that we're gonna be living I mean I'm not an economic forecaster but everything I read suggests we're gonna be living with unusually high levels of unemployment a lot of pain from over-indebtedness I mean whether the court or the country is on food stamps I saw it on TV I mean it's a it's it's not a Great Depression it we we're not reprising exactly what happened in the 30s but it's a version of that and your characters in this book I shouldn't probably use it cause I'm sure they are carry the arc Steve Iseman and Mike burry and Charlie Lindley and Greg Lippmann yes who you haven't talked about yet well he's that he's the one Wall Street trader who was actually on the right side of the bed very early on and he's a he's a he's the subprime bonds Raider I don't back right selling so well he hit his he's betting against subprime more is this this is where it gets very strange here is this trader who's a senior trader inside a big Wall Street firm it's a German bank but still a big Wall Street firm and his firm is creating these subprime mortgage bonds and creating the CDOs and he's saying it's all going bad I'm gonna make a big bet and he spends 18 months at war with his own firm because people are telling him he's crazy and he's stupid and he's wasting money and he's telling them you're crazy and you're stupid you're wasting money he's running around trying to talk people out of buying these buying the stuff his firm is selling and and so he's a he becomes a lady because he's an annoying character to a lot of people in his own firm but he's a he's a the other principle short seller in this how much of all this is made up just so that these people that worked at these firms could take the money whether it's credit default swaps cdo's tranches all this language that the average person hasn't you know we can't figure all this out the the jargon it just generally the complexity is probably not self-consciously invented to hide what's going on but that's the effect and people are happy to have that effect on Wall Street then it's a very interesting thing but complexity is a form of obscurity that if you make it complicated enough no matter how putatively transparent it is and a lot of this stuff isn't even transparent it's all a lot of hidden deals but you just dissuade the public from taking too much of an interest and I think that one the the the the only social purpose I had in writing the book I was mainly just interested in what a great story it was was I thought if I explain this to people they're gonna be outraged because they were and they really need to know you need to know that there's a financial reform bill coming out and and people need to know let me ask you you've gotten quite some that you may or may not know about yeah you're aware of all the negative reviews you've gotten and in the amazon.com group oh yeah the people who are upset it's not on the Kindle yeah I just I got some of them out just because I thought it was interesting a matter of fact and the negatives and you're our way everybody else is in it whatever it's all yeah everybody can't buy it like I said I can't find it but let me let me ask you did you know this was gonna happen with the Kindle yeah I didn't even cry I don't even think about it because I didn't realize there was that big of a market for the things I didn't I don't have its my publisher makes those decisions that I make controller will explain what we're talking all right so the kindle is amazon's e-book it's a it's a it's a device it analogy enables you to download electronically books you can buy them cheaper as a resign 99 yes for $9.99 instead of paying 15 bucks for the hardback so the the publisher decides when to release the eBook version and and the publishers just generally have been often delaying the eBook version because they'd rather sell the hardback and it's curious why they make this decision I mean I've been I haven't figured out exactly what's going on in my publishing house but I make as much money when they sell a Kindle book and say it doesn't matter me they make as much money I think they're worried about Amazon's market power I think they're worried about giving Amazon the right to prep because Amazon keeps the right to put the price they can price it wherever they want so they can take losses on the book if they want to do and I think that's what's troubling the publishers because Amazon has been known to abuse this market well in the new deal is that prices have gone up but at $9.99 and if you get $15 in a store more than the $9.99 goes back to the publishers they do better on those circumstances is that really yeah I think I mean that publish so so there's not enough so so people who own Kindles are furious they can't download it but it's a you know I I guess I'll get involved at some point I'm having a hard time understanding where God gave them the right to have an e-book at whatever price they want when they want it I mean the day we're talking there are a hundred and one reviews of your book and 56 of them gave you one star because of the Kindle but let me read though what they're saying just so you can get a chance to kick back on this unbelievable in 2007 Michael Lewis was writing articles praising the role of derivatives and banking and in fact he dismissed skeptics as being ignorant of the importance of derivatives in redistributing risk and supplementing instrument just let me finish this in an article criticizing those who showed concern over the stability of the derivatives market Louis referred to the derivatives naysayers as wimps and ninnies and then went on to dismiss their concerns fast-forward 36 months and Lewis writes a book completely reversing his position in 2010 he can boldly knowingly assert that derivatives caused the current American economic freefall give me a bloody break Michael that's what this were they're upset because of the Kindle version I don't know this guy's starfox 2020 yeah well this is this is what I did do that I write every time they would write a column from a little column for Bloomberg News and I wrote a column making fun of the people at Davos three years ago every year these self-important people go to Davos for the economic summit and every year they say the sky is falling and I just went back and I looked at they say the same thing every year so I made fund and that dad's the self-important people at Davos every year coming together to explain how awful things were going to be and then going back to their roles as the central bank governors whoever they were not doing anything so and there was a line in there that did say you know because they were all saying derivatives of the big scary thing but nobody was explaining why nobody's talking about subprime mortgages there was this derivatives and and so I just you know I just said you know the in theory derivatives are meant to redistribute the risk in an intelligent way and I've never said nobody's explained to me why that isn't being done now it is true that that the the naysayers were right but they didn't know why they were right and the book I've written I mean I'm sort of agnostic about I mean my said I I don't think it claims that I saw anything coming just the opposite I wasn't paying attention it's writing books about baseball and football but the people the people who are persuasive to me as as died the diagnosticians of this event were the people who actually put their money where their mouth was the people who kind of bloviator all the time I mean a lot less to me because they say they go into they say whatever they say to get attention and then they move on and you never know what they really think or what they tell us tell him the next interviewer so the they were very none of those people in Davos made a lot of money betting against the subprime mortgage market and if they really understood it that's what they would have done there's another quickie you know Janet Tavakoli she was in kind I don't know her but I was she did to her to make her mad I can explain it but let me read what she said she says I was in the Salomon Brothers 1985 training class that Michael Lewis lampooned in is amusing book liars poker imagine my surprise to see him billed as a traitor on 60 minutes since he was actually a junior salesman well-heeled male peacocks strutted the trading floor and junior salesmen were girly men I'm a mere mere unique serving their Pasha's I've gotten a little too much attention for my own good and it's this is this is this is the backlash as people who feel I've got not got enough attention get upset but you know people when they interview me about what I did on Wall Street I can't control how they describe me and generally in the public's mind a traitor is this the guy who anybody works on the trade floor oh yeah I I wrote a whole book about how insignificant I was and Salomon Brothers I have not made many much effort to to puff myself up as a as a bond trader she that particular person was in it was indeed in my training class and I think was upset that I didn't write about her because she thinks she saw the crisis coming and I've had some of that people getting really upset that they weren't the characters in my book and that's a little weird to me I mean I'm sorry we're about out of time wait when did you do you remember the moment that you decided to call it the Big Short and what does it mean yes it was a little bit of a devious moment because I wrote a little magazine article for portfolio magazine now deceased portfolio magazine a year and a half ago when I met Steve Eisman Steve Osmond was the center of that article and I thought the phrase popped into my head I thought great title for the piece and I said this isn't actually a piece it's going to be a big book an interesting story is much more than a magazine article here so I ripped it off the top of the magazine piece and I kept it in my back pocket and they called the piece at the end or something like that but just it it so that's when the title pops in my head when I was working on the magazine piece and what was the other question which I mean oh well short is to bet against the bet against something to bet to bet the price is falling and this was the the single greatest opportunity to bet on prices falling in the history of man so Steve Yzerman our Michael burry all these because guys are sitting there hoping or wishing or betting that the whole thing's gonna collapse and they want big well they're very mixed feelings about it though I mean one of them goes the SEC and tries to get them to take action all of them screaming to high heaven this is insane they are torn up about it and Iseman himself says it says it when it all works out and they're making their money he says you feel like Noah how much does he have do you know how much did he make yeah for himself I don't know 50 million 100 million that they made for their investors seven or eight hundred million dollars what about burry how much did he about the same not the same how'd he house on that group that you wrote about Greg Lippmann you have any idea how much he made I you know I was told by someone in his firm that he was paid a bonus of about fifty million dollars at the end of a seven so they maybe they got rich but Iseman it was interesting he and I think he was some serious as you feel like Noah yeah yeah you built the ark and yeah you're gonna survive but at that moment when the flood happens and you're on the ark you're not it's not a happy moment for Noah it's a kind of it's a torn-up moment we're out of time Michael Lewis says you go to your six weeks of why do you do this but why are you going to all that you you got 60 minutes you're number one in the list where you run out all over the country because they tell me to you know it's part I think it's even in my publishing contract and I've got to give them a few weeks to go to publicize the book I think I've signed something that says I do it thank you for joining us thank you [Music] for a DVD copy of this program call one eight seven seven six six to seven seven to six for free transcripts or to give us your comments about this program visit us at QA or QA programs are also available as c-span podcasts next week on Q

Channel: C-SPAN

Views: 81,322

Keywords: C-SPAN, cspan, q&a, lewis, lamb, doomsday, machine, subprime, mortgage, crisis, credit, default, swaps

Id: x387_k963yY

Length: 58min 18sec (3498 seconds)

Published: Mon Apr 05 2010