Category Archives: finance

Michael Lewis: The Big Short


Michael Lewis is a talented writer. He succeeds in being entertaining and informative while rendering historical events into a compelling story. I got many chuckles from the detached bemusement he held towards his tenure at Salomon Brothers in Liar’s Poker. All of his storytelling gifts are on full display in his account of the housing crisis, The Big Short. However, make no mistake, Lewis is also a polemicist and the bemused tone of Liar’s Poker has metastasized into a smug preachiness which points the finger of reproach in one direction.

The Big Short recounts the housing crisis from three different vantage points. Each of these individuals saw the illusion at the center of the exuberance before everyone else and capitalized on it by shorting the housing market when no one really knew how badly the whole thing would fail. As a narrative, it is very entertaining. As a polemic, it suffers from confirmation bias and an extreme case of intellectual dishonesty.

Lewis isn’t so interested in getting to the real roots of the housing crisis as he is in spinning an entertaining yarn. In this respect, he’s every bit as deceptive as the bankers and the industry he smugly ridicules. His account focuses almost exclusively on the quirks and quips of his colorful characters and the sordid details of their improbable journey leading up to the collapse of 2008. Unfortunately, he devotes little attention to the incentives bred by legislative agendas, GSE’s, regulatory agencies or monetary policy which created an environment of such extreme moral hazard in the first place.

Measured in terms of storytelling appeal, The Big Short is very successful. Lewis does a great job of fleshing out the details and motivations of his central characters by portraying them as eccentric, scrappy underdogs that you want to cheer. Mike Burry is the antisocial doctor with Aspergers turned investment savant who made his name running a portfolio of straight up value investments which outperformed spectacularly in a falling market. Burry spent countless hours scouring mortgage bond prospectuses and saw a grand opportunity for the short of a lifetime. Steve Eisman is the brusque Oppenheimer analyst who made his bones being a truth speaking contrarian in an industry of sycophants and dittoheads. Like Burry, he smelled the rot in the subprime mortgage market and set out to get to the bottom of it. Rounding out the cast are Duetsche Bank trader, Gregg Lippman, and the “garage band hedge fund”, Cornwall Capital.

As a piece of finance history, The Big Short is fairly successful and reasonably informative. It distinguishes itself by recounting events from its unique point of view. The book is also a decent short study of structured finance and credit derivatives. Lewis does a good job of unraveling and demystifying CDO’s and credit default swaps. A recent college graduate told me that this was required reading in his finance class. This book has some merit as historical document, but let’s not get carried away, folks.

The book also succeeds in portraying how difficult it is to stand alone and hold on to an investment thesis when the chips are down. When things began to unravel in the subprime market, all of the players apparently faced incredible pressures from every side to stick to their convictions. Lewis apparently took some liberties describing the pressure Joel Greenblatt placed on his most successful disciple, Mike Burry. Just as any other life endeavor, sticking to your guns when the world is shouting you down is never easy.

On the other hand, one detects the unmistakable stink of partisanship throughout the book. The reinforcement of leftist caricatures and narratives are manifold. A particularly egregious example is his account of Cornwall Capital’s attendance at a Bear Stearns hosted client conference in Las Vegas. In their ongoing attempts to get to the bottom of CDO machine and confirm their bearish thesis, they attended a target practice session at a firing range. The Bear Stearns salesmen were surrounded by “men in tight black t-shirts who appeared to be taking the day off from hunting illegal immigrants with local militia”. He goes on to describe how the targets were pictures of Osama bin Laden, al Qaeda terrorists, a black kid attacking a “pretty white woman”, and an Asian “hoodlum waving a pistol”. That’s great, Lewis. Corrupt white investment bankers making piles of money exploiting the working class while indulging their irrational gun nuttery and racist proclivities on a firing range. Just sprinkle in some stuff about white privilege, white supremacy or gun control and it’s Salon ready. Stereotypes get created for a reason and there’s usually granules of truth to any stereotype you can name. Maybe all of the worst assumptions Lewis infers from his description are true, but it’s difficult to view these details serving any other purpose but to reinforce smug, elitist contempt for gun owners and investment bankers alike.

Given the overarching disdain Lewis heaps on the finance industry throughout the book, his remarkable unwillingness to pile a comparable level of contempt on the central banking and regulatory apparatus which shaped it is very revealing. One wonders what, if anything, he ultimately wants to affirm with this book. He speaks of a na├»ve “hope that the government would intercede to prevent rich corporations from doing bad things to poor people” and unironically calls America a “free market”. Yet, he reveals the ineptitude and disconnection of the government at various points throughout the book. Between the scathing critique of banking and, when it occurs, failure of government oversight, what is Lewis promoting here beyond self-righteous disdain and knee-jerk cynicism for American finance?

Lewis is forthright about both the failure of the SEC to intercede when Cornwall Capital exposed the imminent CDO calamity in their own offices. He is equally contemptuous of the false triumphalism of Fed propaganda as it was blared from its CNBC megaphone. And yet, he has the audacity to assert that Wall Street uniformly opposes regulation in boom cycles but “insist” on being rescued in a market collapse. Based on what was revealed in Hank Greenberg’s lawsuit against the government, one can hardly say that the government’s confiscation of the majority of common shares in AIG was a product of pleading from AIG leadership. It’s not even completely clear that AIG needed a bailout in the first place. The TARP cash that was dispensed in the aftermath of the crash wasn’t exactly as willingly and eagerly taken by banking executives as Lewis would lead you to believe either. With regard to monetary policy, the ultimate source of all of the loose credit in the first place, he makes only one passing mention of it through the words of Steve Eisman.

Michael Lewis seems exclusively focused on heaping all of the blame for the crisis at the feet of the industry, and in this respect, The Big Short succeeds wildly. Individuals are responsible for their actions, and investment bankers certainly deserve their share of the blame. However, by refusing to point any finger of blame at the government power which shaped the industry or the central bank which pumped all the credit into the system in the first place, Lewis seems engaged in a game of self-deception of his own. He speaks of government “forcing” change on the financial industry as though government is this bastion of moral rectitude and virtue and that passing laws and regulation is some kind of unalloyed good. He bemoans industry consolidation and its transformation from a collection of private partnerships to publicly traded corporations, but leads you to believe that this too was the byproduct of capitalism’s inexorable march towards Armageddon.

Lewis also seems to be taking some unnecessary self-satisfaction in portraying his protagonists as the Prescient Ones while everyone else was asleep at the wheel. Lewis exhibits a common characteristic of anyone on the Left: selective deference to religious authority. At the beginning of the last chapter, he has the gall to insert a quote from none other than Pope Benedict XVI. Positively loathsome. Why doesn’t Ron Paul’s speech from 2001 count? He seemed more attuned to the situation than Paulson, the Wall Street establishment, the Fed or the SEC. What about Peter Schiff’s numerous warnings? What about the warnings of several other libertarian thinkers and economists? Even if it wasn’t his primary intention, Michael Lewis is affirming American state capitalism with this book. The Big Short is kind of a postmodern Horatio Alger story. Amidst a sea of industry-wide self-deception, several clever and enterprising individuals made a fortune as Rome burned. Murica, motherfuckers!

The banking industry is already nearly universally hated, and yet, Michael Lewis seems solely concerned with throwing gasoline on a fire that’s been stoked for years by politicians and demagogues alike. Just like the heroes of his own story, he’s having his cake and eating it too. Because even as he shows you all the financial arsonists who set Rome on fire, he’s earning a tidy sum by giving you the requisite dose of cynicism that government officials count on in order to keep the game rigged for themselves. Casino capitalism is great when you’re tacitly betting for the house to win. The only house which presents itself as too big to fail is the government, and in every hand, the house wins.

It’s sadly unsurprising that The Big Short has been dramatized for the big screen. It’s not the chronicle of the financial crisis the American public needs, but it’s the one that it gets. If anyone in television or film had any guts, they’d adapt The Great Deformation for the screen. Hollywood loves feelgood pablum, and Lewis is a very capable purveyor of the liberal agitprop that’s Hollywood’s stock in trade. So enjoy this smug moralizing disguised as definitive financial history while you queue up for the ballot box to vote for Hillary or Bernie, proles. The finance industry is filled with opportunities for skewering and Lewis has proven that he’s more than happy to turn a buck plying his brand of elitist cynicism.

David A. Stockman: The Great Deformation


This book is absolutely, positively essential for anyone who’s even remotely interested in economics, finance or American history.

I’m going to go out on a limb and say that this is one of the most important political and economic books ever written.

Yes, it’s that good.

As a libertarian and as someone who’s worked in banking and finance my entire adult life, I’m accustomed to hearing antipathy toward Wall Street and the financial complex. After the 2008 collapse and bailout, I empathize with those who regard the system as predatory.

Unfortunately, the current state of affairs makes it difficult for those of us advocating for free markets to make the case for freedom when people generally perceive “free markets” not only to be the source of everything that caused the collapse, but pretty much anything else that adversely affects humanity. From climate change to racism to income inequality to rape, capitalism gets the finger of blame for every malady that plagues society. Since the time Marx enshrined whinging about the bourgeoisie as a virtuous guiding principle, the very notion of “capitalism” has become freighted with increasingly negative connotations.  

Well, socialists, Occupiers and capitalism haters everywhere, it’s time to set the record straight. David Stockman has laid down a devastating and record settling case against the mutant strain of state capitalism that is infecting the world today.

If you are really interested in learning about how the state corporate financial complex came to be the reviled beast that it is, this is the book to read. Put down Piketty and open your mind, because Stockman lays down a century’s worth of narrative busting truth in this book.

From the New Deal up to the housing collapse of 2008, Stockman dissects and disassembles one narrative after another in painstaking detail. No administration or monetary authority is spared.

In opposition to virtually all of the received wisdom, Stockman takes FDR’s New Deal out for a thorough demolition. From the Thomas Amendment’s destruction of hard currency to the ad hoc grab bag of bureaucratic agencies which bloated the administrative state to the origins of farm belt cronyism, no doubt remains that FDR’s true legacy is “the patron saint of crony capitalism.”

A final attempt at fiscal and monetary restraint was achieved in the Eisenhower administration. Between Ike’s budget discipline and the steady hand of Fed Chairman William McChesney Martin, the “old time fiscal religion” that now lives as GOP rhetoric more than reality was an actual phenomenon for a couple short years.

It proved to be a short lived victory. The Kennedy administration was the beginning of the end of fiscal and monetary restraint. After an initial promise to maintain the stability of the price of gold and the convertibility of the dollar under the Bretton Woods framework, Kennedy eventually succumbed to the ascendant gospel of Keynesian “full employment” budgets and tax cuts paid for on federal credit.

After the JFK administration’s capitulation to Keynesian dogma and the combined profligacy Johnson’s domestic spending expansion and war largesse, America’s fiscal house took a turn towards permanent deformation.

The only person whose legacy receives an even more punishing rebuke than FDR is Tricky Dick Nixon. Richard Milhous Nixon was solely responsible for the complete and total degeneration of American fiscal and monetary discipline. Between price and wage controls and the closing of the gold window, Nixon all but assured the rise of a permanent regime of statist economics. Financial markets would be the province of debt fueled speculation and bubble finance while giving rise to budget deficits without pain. The most eye opening of Stockman’s Nixon era claims are twofold: the silent destruction of Glass-Steagall through floating the dollar and the flagrant error of indexing Social Security to inflation in 1972.

Sadly, the progenitor of this deformation is none other than Milton Friedman. Starting with his misdiagnosis of the Great Depression, the flawed theory of a controlled expansion of the money supply took root amongst the political class. From this deeply flawed thesis, the FOMC committee transformed into an unelected politburo of central economic planning which heavily favored the financial class over the real economy.

It is supremely ironic that one of the 20th century’s greatest libertarian intellectuals laid the foundation for what Stockman argues is the mother of all deformations: central economic planning by fiat currency. A form of socialism that is perhaps more insidious than the more overt manifestation since its effects are invisible to most citizens and the blame ends up being assigned to capitalism itself.

From this single act of ultimate political hubris and ignorance, the Pandora’s Box of financial engineering was unleashed.

He delves into the history of Leo Melamed, the Chicago Mercantile Exchange, and the rise of currency and T-Bill futures; innovations that carried an aura of free market ingenuity, but ushered in a new era of speculative finance which added nothing to the real task of capital formation or job creation. Once the world shifted to a regime of floating currency, the genie was out of the bottle. Central bankers were in a perpetual battle with market forces that were made volatile by their own policy decisions. Exchange rates were subject to wild and unpredictable fluctuations, central bankers stumbled and bumbled through phenomena they could never truly manage while Wall Street gorged on the elixirs of leverage and easy credit.

Despite Paul Volcker’s final attempt to restore a semblance of sound monetary policy, Alan Greenspan abandoned his Objectivist roots and embraced the power of the Federal Reserve to propel stock prices and speculation. Between the Keynesian defense buildup and loose monetary policy enabled by the Greenspan Fed, the mythology of pain free deficit driven prosperity which ultimately defined the Reagan era was enshrined.

By the end of the Reagan era, the three dogmas of statist economics, Keynesianism, supply-side and monetarism, were accorded unquestioned deference.

From these central deformations, Stockman skillfully traces the ascent of the Wall Street financial complex that we have come to know.  Originating at the at the Salomon Brothers trading desks, the model of “long and leveraged” became the template that would be replicated in every investment bank on Wall Street.

While I empathize with those who regard our brand of state capitalism with cynicism and contempt, I genuinely hope that skeptics and cynics will take the time to read this book to understand that the myth of casino style easy money from the stock market is a phenomenon made possible because of central bankers.

Stockman addresses three phenomena of contemporary finance that should be of interest to progressives or anyone who regards the outsize gains of the Wall Street complex with suspicion or disdain: the hedge fund and private equity complex, the entire panoply of leveraged speculation on which it’s built, and financial bubbles which feed them.

In all three cases, Stockman argues that the Greenspan/Bernanke Put, the Fed’s implicit guarantee of lowering the funds rate into negative yield if stock prices dip below a certain threshold, is the lynchpin behind an entire host of speculative deformations.  Primary among these  phenomena are stock buybacks, M&A, and LBO’S.

The phenomenon that may hold the greatest interest to people is Stockman’s detailed but imminently readable analysis of the housing bubble. Contrary to the standard wisdom, this was not in any way a natural phenomenon of the free market. Warehouse credit lines, GSE’s, a legislative agenda and an accommodating Fed all conspired to create a speculative feeding frenzy which met an inevitable unhappy ending.

Perhaps the most provocative claim is his argument that the 2008 collapse was an artificially ginned up panic that was confined to Wall Street and should have run its course. Even more provocative is his claim that AIG did not need a bailout. It’s radical shit and it flies in the face of virtually all conventional wisdom, but his case is very persuasively argued.

The so-called green energy “investments” of the Obama administration are hauled out into the daylight for a righteous thrashing.  Little did I know that even America’s Tony Stark, Elon Musk, fed at the government trough.  The colossal waste of Solyndra debacle is laid bare in fair detail and the elitist hubris behind it will make your blood boil.  I’m completely in favor of the evolution of new technology, but the insistence on government support has turned this effort into yet another denomination in the Cult of the State which has little regard for whether the Green Revolution reality is anywhere near the rhetoric.

Stockman rounds out the book with a tour through the various failures and deformations of the market and the sycophants, parasites and opportunists who profited from them. This cesspool of corruption was made possible because of the abandonment of fiscal and monetary discipline and made worse by a class of political hacks who shamelessly feed off peddling the delusion of a free lunch. Among these deformations and predators are the subprime auto loan complex, the crony capitalist parasites who feed at the federal trough, the unsustainable welfare state, and the swarm of vulture capitalists who gorge on state-enabled windfall profits.

Stylistically speaking, Stockman is biting and acerbic throughout. My kind of guy. The sobering bluntness of his message is leavened by some healthy sarcasm and contempt.

The book is chock full of meme-worthy quotes and turns of phrase that can only be described as Stockmanisms.  For example:

Full-Retard Antediluvian: The Forgotten Standard of Honest Public Finance

And many, many more.

He’s a bit repetitive, but I don’t begrudge him on this point because I feel that it ultimately gives an accretive power to the core themes.

Make no mistake, Stockman’s prognosis for the state is bleak. This is a pessimistic view of the deterioration of public finance in the years to come.  Stockman predicts an unpleasant day of reckoning for all of us.

This doesn’t mean that he’s unwilling to proffer solutions. He has many, but they’re so radical that he admits their inherent impossibility in the current political climate right off the bat.

Stockman’s programme for reform is similar to the one proffered by Ron Paul; a radical separation of market and state, a full throated call for a rollback of the warfare/welfare state, and a return to sound money.

Though I applaud his sincere attempt to lay out a course of action, my concern (aside from the fact that it’s a form of political suicide in and of itself) is the same one that lies at the heart of all minarchist arguments. Even if this agenda were to be fulfilled, what would prevent the state from engaging in monetary and fiscal profligacy recidivism?

Regardless, this book is nothing short of a tour de force.  It has my highest recommendation.