Host: Brian Lamb
Guest Michael Lewis, Author
BRIAN LAMB, HOST, CSPAN Q&A: Michael Lewis author of ”The Big Short” I want to ask you a weird first question.
MICHAEL LEWIS, AUTHOR, THE BIG SHORT: Why does that not surprise me?
LAMB: Why is it that throughout this book almost on every page you have people that you’re talking to using the F-word?
LEWIS: Because they do. And it’s the profanity of that environment. It’s just part of describing that environment. You can’t write about people and take that out and have the flavor of the thing preserved. So there’s a I think that’s you listen to people on Wall Street, and you listen to the people on the streets of America the level of profanity is high but on Wall Street it is extremely high.
Wall Street and sports both place. And so if that’s the way people talk I just don’t change it. I mean in a way it would be manipulating the environment if I changed it.
LAMB: Have you thought about how often it happens? I mean it’s almost every page.
LEWIS: I was it’s probably not almost every page.
LAMB: No, but I mean almost every time
LEWIS: There’s one character, in particular, who in fact, I did think of that. I thought about how they spoke when I was writing them the characters, and there’s a character who uses no profanity at all who’s a Michael Burry the doctor doesn’t he doesn’t use profanity.
But then there’s a character Steve Eisman who actually exists in the story and in the real world to run around and insult people on Wall Street. And so he’s and that’s how he sounds. So I couldn’t remove it. I just simply couldn’t remove it. It was too much a part of him and he is on a lot of pages. When we talk that’s what comes out of his mouth.
LAMB: But at the end of your back in the last it’s not actually the last chapter but you have lunch with a former leader of a company that you work for how do you pronounce his name?
LEWIS: John Gutfreund who was the CEO of Salomon Brothers where I worked in my youth, my first job out of graduate school I worked as a bond salesman on the Salomon Brothers trading floor for a couple of years.
LAMB: Quote, ”Your f---ing book.” Why did he say that to you?
LEWIS: Well, he said, ”Your f---ing book” it destroyed my career and it made yours. I wrote a book called ”Liar’s Poker” about that experience at Salomon Brothers. And he thought he was really he kept repeating that line that he was just emphasizing how intensely he felt about it. And it was an awkward moment because I don’t completely agree.
I think that actually he did make my career. It was a great way to start a literary career. The book was a big success but he could have survived by a book. My book dealt him at most a glancing blow. But I think at that moment he was thinking here’s this guy. I’ve never laid eyes on him as far as I know who wrote this book that has followed me wherever I go and it has caused me some annoyance. I’m going to say what I think about and so I let him say it.
LAMB: Pronounce his name again.
LAMB: Gutfreund. Because it’s G-U-T-F-R
LEWIS: It looks like Gut-freund.
LAMB: Yes. So why did you end your book this way?
LEWIS: Well, because I started the book walking back into my past, walking back into this place Wall Street that I had left when I was 27 years old and never really come back to as a book writer.
And I was drawn back to it because of the experience I had 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 things that happened in the ’80s actually on the trading floor I worked. And so I thought it was appropriate to end the book by going back to sort of the person who was there you know and kind of got it all going.
I mean Gutfreund, in particular, was a seminal figure in Wall Street history because he had taken this legendary bond trading partnership Salomon Brothers and turned it into a public corporation. He had sold he had when he got control of the place he went public and this completely changed the relationship of the Wall Street firm to the rest of the society. It was a very big deal.
And I think 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 thought that was an important first act and I wanted to go to the man and talk to him about it and see if he saw the connection between what he had done then and what this story we just lived through now.
LAMB: You get one of the biggest send offs you can get on any book tour, ”60 Minutes” two segments. How did that come about?
LEWIS: You know I still haven’t seen it. So but it came out of the blue. Steve Kroft, the interviewer, who was fabulous but I never met him before really wanted to do it. And when he showed up at my house in Berkeley he said, ”You know we tried to do you two years or three years when the ’The Blind Side’ came out” a 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 of the material and not mention the book.”
And I think I did. They had called before and I had been so used to these news magazine shows basically appropriating material and helping them do their piece and then you got forgotten. That they forgot where they got all of the material. And I just thought this is a waste of time. And so I think I told ”60 Minutes” no once. And 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 a 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 any time soon?” I mean they really planted themselves in the house for two days and we sat and talked. It was great. I mean I had no idea. Having not seen the piece I can’t really comment on it but it’s an interesting experience this business of doing media unlike this experience, but the media that you see like a 60 minutes. You see you talk to them for five, six hours and it gets reduced to 20 minutes or whatever it is. It wasn’t a very long piece. But you don’t because you said so many things in six hours you really don’t know what’s going to come out of it.
And the main sensation one has when one is engaged in this activity is total self boredom. You think oh my God, how could anybody be interested in me. I just bored myself for six straight hours and they’re going to reduce this into an even more boring 20-minute piece.
LAMB: I had a reaction, the one to ask you about, they only focused on one of your characters.
LAMB: Mike Burry.
LEWIS: Mike Burry, the one who doesn’t use F-bombs.
LAMB: Yes. And but I wondered reading the book he was an interesting character but so was Steve Eisman and so was
LEWIS: Charlie Ledley and Greg Lippman.
LAMB: But why did they did they tell you why they were only going to focus on him? Or did Steve Eisman say I’m not going to participate?
LEWIS: Steve Eisman said, ”I’m not going to participate”. All of the characters were I had a very I had a privileged access to Wall Street because of ”Liar’s 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 then they want me to be very write about them very intimately.
But it became a kind of intimate experience for them. It was just me and them hanging around talking and yes a book was going to come out of it but they 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 trust him basically so OK. 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. Morgan Stanley won’t let him go on the air. He would 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 on television. And Charlie Ledley and Jamie Mai and Ben Hockett the young men at Cornwall Capital who I had to badger really until letting me write about them I think they’re on an island somewhere waiting for this end because the last thing they want is to be on TV.
So they actually all spoke to ”60 Minutes”. They all talked to the producers and said, ”Yes, I exist, come over, I’ll help you, I’ll explain things to you that kind of thing but there’s no way my face is going on television.”
LAMB: Why did Mike Burry who you characterize in your book as being shy and not liking people.
LEWIS: He doesn’t like interaction, social interaction. Why did he agree?
LEWIS: Yes, that’s a great question. And I think that there’s a pretty simple answer. That a year-and-a-half ago he felt completely betrayed by the financial world.
LAMB: He’s on the screen right now, you can see him there with Steve.
LEWIS: And he felt neglected. He felt he thought he had been very prescient in diagnosing what was going in the American financial system. He had made a lot of money for other people making a bet against the sub prime mortgage market. And it wound up being a very unpleasant experience.
And then the world moves on and nobody notices what he’s done even though it actually is an incredible investment triumph. So when I called him to talk to him he was the one character who was very eager to talk to me because he had a story and he had three years of e-mails to document his every move. He had a story to tell that he really felt had been neglected. And so the ”60 Minutes” were just reinforcing that. He wanted to tell a story.
LAMB: Well, the next day Amazon you’re number one and here we are a week later when this is being taped, you’re still number one on Amazon. But you didn’t show up on the Wall Street Journal today which is interesting today in their poll for the week which I was surprised about. What about these numbers?
LEWIS: On the bestseller, I’ll give you a quick the way the bestseller lists work generally the things that are in the papers are usually with a lag. So you wouldn’t be the ”New York Times” bestseller list, and the ”Journal” bestsellers list it’s all from it’s sales from two weeks ago. The book hasn’t been on sale long-enough to hit those lists.
The market for it has surprised even me. The market for it seems to be vast. And that’s really great. It’s nice that everyone wants but I’m just trying to get my mind around what’s going on with this book right now because there’s clearly a reservoir not just of anger about what’s happened, but a real kind of intense curiosity to know what actually happened on Wall Street that I didn’t expect. I thought actually trying to get people to read my story was going to be a little more difficult than it’s been.
LAMB: Correct anything I see. New Orleans was your birthplace?
LEWIS: I grew up it’s where most of my gene pool still is. Everybody still lives there except me.
LAMB: And Princeton is your university.
LAMB: And you live in Berkeley. And you’re married to somebody my age would remember.
LEWIS: Tabitha Soren who was the
LAMB: I mean she’s not very old but I remember on MTV in the early days.
LEWIS: Well, she isn’t very old. She was 22 or 21 when she went on the air but she used to anchor the news for MTV and interview the rock stars and so on and so forth. And we have three kids, two daughters and a son. Ten ages 10, seven and three. And the only piece of major piece of my biography in just a minute is I went to graduate school in London and I spent eight years living in England right after college.
LAMB: And an art history major at Princeton.
LEWIS: Yes. I was an art history major at Princeton. And my first ambition was to be an art historian.
LAMB: ”Liar’s Poker” came out in 1989. You worked at Salomon Brothers for two years.
LEWIS: More like three, almost three. I got there in the summer of ’85 and I left in early ’88.
LAMB: And can you give us a couple of lines about ”Liar’s Poker” so we can come up to this book?
LEWIS: Sure. ”Liar’s Poker” was the few 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 had been an art history major at Princeton. I had, indeed, done an economics degree at the London School of Economics but it really didn’t have anything to do with giving investment advice.
And I had a pretty strong sense, as interested as I was in the kind of the sociology well the finance at Salomon Brothers I had pretty strong sense that I wasn’t particularly well suited to telling people what to do with their money. That I didn’t think I knew what was going to happen in the stock market and I just didn’t I didn’t feel like I was actually a useful making a useful contribution to the global economy but it was clear if I just sat in that seat I’d get rich. And that was a puzzle. Why on earth should I paid or anyone get paid all of this money just to sit in this seat? And the trick was just getting to the seat.
And so I left to write a story 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 is the 1980s. 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 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 had gotten so big that you that that just looked quaint.
LAMB: The first person in your book is Meredith Whitney that seems to have a rather strong importance. Can you tell us who she is?
LEWIS: Yes, she’s a catalyst for me in this story. She was until very recently what’s called a sell-side analyst which means she works for the Wall Street firm that 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 had never heard of started saying things in late 2007 is when I first started paying attention about the Wall Street that just sounded differently from anything I had ever heard. That she was saying they basically didn’t know understand the risks they were taking. They didn’t understand their own balance sheets. She predicts Citigroup is going to have to 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.
And it’s almost her tone that was as interesting as what she said. She was actually kind of condescending to these Wall Street people. And so I call her up because 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 had 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 be on the other side of one of Salomon Brothers’ trades. If there was some zero-sum bet to be made with Salomon Brothers you did not make it because you were sure to lose money.
And what had happened is somehow the firms had become had turned stupid or rather as institutions that that they had become the dumb money. And so that I was curious that maybe 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.
LAMB: You know when you use there’s another word that I would say is throughout your book besides the F-word, the word lie.
LAMB: Time and time again that people in these companies lied to each other, lied to us, lied to the but I want to read you one paragraph a little bit of one paragraph
LEWIS: Probably not a word that I’m using a lot. It’s probably a word that the characters are using.
LAMB: 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 Wall Street sheets.” Quote, ”They didn’t know he said,” they didn’t know their own balance sheets.
This is you writing. ”Once he got himself invited to a meeting with the CEO of Bank America Ken Lewis.” Quote, ”I was sitting there listening to him. I had an epiphany. I said to my oh my God he’s dumb. A light bulb went off the guy running one of the biggest banks in the world is dumb.”
LAMB: Is that fair?
LEWIS: Is it fair?
LEWIS: It’s absolutely his view.
LAMB: This is Eisman’s.
LEWIS: It’s absolutely a pure representation of his view and then they proceed to make bets against Bank of America.
The is it the no it’s that quote those kind of statements tell you they’re very important in a story like this, in a narrative because they are a revelatory about Steve Eisman as they are about Ken Lewis. Is the guy really dumb? What’s dumb? No, he can get out of the bed in the morning and function. He’s not dumb in that sense. But he’s dumb in a sense that he doesn’t persuasively understand his own business in Eisman’s mind. And so it’s Eisman’s very blunt way of getting that point across.
LAMB: Let’s talk a little bit about Steve Eisman. Who is he? Where is he from? Where does he live?
LEWIS: Steve Eisman who I was led to by Meredith Whitney because Meredith Whitney had trained with him. She was the school of Eisman in a way. Was a New York born and bred. Had gone to the 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 so called his mama as one does when one’s in trouble and his mama was a and father 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 and fetch it. He was a junior analyst but analyzing noting at first. And in the mid ’90s when he joins the sub prime mortgage market is really just beginning in its earliest form. And there’s this new kind of company called a sub prime mortgage originator meaning the people who are looking 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 sub prime mortgage companies on Wall Street. And so and pretty quickly he’s the world’s expert on the subject.
LAMB: How old is he?
LEWIS: He’s in the mid 40s now. When this happened he’s in his early 30s.
LAMB: You paint in the book that he changes eventually but he seems angry and negative about everybody and says things
LEWIS: There’s a character you know it didn’t occur to me until one of his colleagues pointed it out they said that when ”Curb Your Enthusiasm” came on to HBO, the Larry David show, they just they just stole that. That’s Steve. They 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 there is a pattern to his tactless which 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 nanny. He was wonderful with them. He was protective and caring about the people beneath him. What he was who he was tactless too were people who were in power, who he thought were abusing their positions. It made him angry.
And he would get in these over and over he would find himself in these situations where he’s in meetings with Wall Street big shots and saying things that caused the meeting to come an end or cause the Wall Street big shot to say I’m never going to set foot in the same room with this man, again, kind of thing. And it got to the point where his colleagues or his subordinates the people who work with him in this fund that he’s managing they’ll just stop their jobs for the day to follow Eisman wherever he’s going because they want to see the show because they know that if he’s going to be meeting someone important Wall Street something is going to happen that they’re going to want to see. They say one of them says, ”It’s like watching a crash car when you’re watching Eisman” in a social situation. You can’t watch but you can’t not watch.
LAMB: And he didn’t want to be interviewed on camera for ”60 Minutes”?
LEWIS: He didn’t want to be on camera for ”60 Minutes”. I don’t blame him. You know 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 blame them for not wanting to be on TV. I mean it’s a peculiar kind of desire to want to be on TV. Some people have that bug, but it does kind of it does change your life a little bit to have your face known.
LAMB: Do you have that bug?
LEWIS: To be on TV?
LAMB: No. I get offered every now and then a chance to have a TV show and it just doesn’t interest me. It I did do I’ll tell you now when my whole 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 I had to wander around and be on camera all of the time.
And I wrote the show. It was a documentary and I loathed it because the interesting bits of what I do is learning about something and communicating 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 pictures out of words.
So I don’t particularly like. 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 it’s TV so you can’t avoid it but it’s not something I’m I don’t think I’m particularly good at and I don’t particularly like it.
LAMB: I picked a paragraph in your book, page 68 and I want to read it. It’s long but I wanted you to interrupt it as we go because I want you to define all of this stuff. I mean you even say in a footnote if you’ve gotten this far, I can’t remember where the footnote is, but God bless you you got this far but I’m going to read this. And just it doesn’t have to be long explanations but to try to get through an understand all of this language.
LEWIS: The jargon.
LAMB: OK. Let’s start. ”The sub prime mortgage market was 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 sub prime mortgage, define it.
LEWIS: 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 or a certain number. Credit scores are supposedly measuring 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 that suggest what the likelihood is.
Above you know it has different definitions but above about on a scale of 800 above 660 is a prime mortgage, below 660 is a sub prime mortgage.
LAMB: But the point I wanted it’s not doesn’t mean the prime lending rate.
LEWIS: No, no, it’s the person who’s doing the borrowing.
LAMB: ”When the Goldman Sachs saleswoman called Mike Burry and told him that her firm would be happy to sell him credit default swaps in $100 million chunks Burry guessed rightly that Goldman wasn’t ultimately on the other side of the bets.” Two things here the credit default swap.
LEWIS: Sure. This is the mechanism that is created in 2005 to bet against the sub prime mortgage market. The credit default swap is a essentially an insurance policy on a security. So if I buy a credit default swap on a sub prime mortgage loan and I’m buying it I pay you if you’re a seller a premium as you would an insurance premium, a couple of percent a year.
And in exchange you have to pay me the whole value of the sub prime mortgage bond if the bond goes bad. I bought insurance on that bond. And the general idea of it is that people who own sub prime 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 can just not buy the sub prime 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 sub prime mortgage bond to hedge my risk of owning one I buy just a bet on a sub prime mortgage bond. And so that’s what he’s buying is an insurance policy on the mortgage bond.
LAMB: You refer often in the book to the other side of the bet, the other side of
LEWIS: Yes, is a bet. The whole financial system is organized at this moment in financial history organizing itself around a bet and the bet is on sub prime mortgage bonds which are essentially just pools of loans. I mean there are 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 the vast majority of the financial system was betting yes, they’re basically going to repay their loans. And some people bet no.
LAMB: Let’s simplify it even more. I am going to buy a house. I go to a bank it usually doesn’t happen that way any more but I go to a bank
LEWIS: No, it does happen.
LAMB: Well, so often your realtor will say well I can get you a mortgage over here with this mortgage company.
LAMB: But you go to a bank and you sign on the dotted-line and you owe them $100,000 just to keep it simple. Then the next thing you hear is that bank says that mortgage has been sold.
LAMB: Who does that bank sell the mortgage too?
LEWIS: They sell it to well there could be lots of steps in the change but the simple step is they sell it to a Wall Street firm that pools 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 bondholder and it could be anywhere. It could be in Germany. It could be Japan. It could be anywhere. So the ultimate he’s the ultimate lender. So the ultimate lender now is very far removed from the ultimate borrower.
LAMB: So it could be somebody like Goldman Sachs?
LEWIS: Yes. Goldman Sachs. It’s very likely to be Goldman Sachs.
LAMB: But if I originally were going to write checks to the local bank I’m now writing checks to Goldman Sachs.
LEWIS: But you don’t see that. You’re still writing checks to some servicer of your mortgage who you’re writing it who’s standing in between the Wall Street doesn’t actually go and get your money from you.
LAMB: Let me go back to your paragraph. ”Goldman would never be so stupid as to make hug naked bets that millions of insolvent Americans would repay their home loans.” Go to insolvent Americans. Are you can insolvent American if you’re getting these were a lot of them how many of them were about these sub prime mortgages?
LEWIS: Well, the dollar volume is unbelievable. To put it in perspective. The sub prime 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 a year of sub prime mortgage loans.
LAMB: It came from where, by the way?
LEWIS: It came from where?
LAMB: Yes, who promoted it originally?
LEWIS: It was there were several companies were born all at once that did that existed to make the to originate the loans, to go find people to lend to and package them into securities and to bonds and sell them off. It was a company called Aims Financial, another called The Money Store, Green Tree. I mean these companies don’t exist any more. But it was small. It was tiny.
LAMB: I remember Phil Rizutto did The Money Store didn’t he? The ad for those.
LEWIS: I don’t know.
LAMB: I think so.
LEWIS: Before my time.
LAMB: Why was there a need for sub prime mortgages?
LEWIS: Well, it was more of an opportunity. Well, why was there was a need is a good question and it as to do with just what’s happened in the American economy but that you you had lots of people leaving beyond their means and using their credit cards to do it. That credit became you know one of the big changes in American life in the last 20 to 25 years has been the extension of credit to people who previously had trouble getting it and the credit companies got there first, auto loans and credit companies.
In and there was an argument that all right the credit companies are charging some poor guy who can’t make ends meet 25 percent interest on his overdrafts on his unpaid balances. If we can get that guy the same guy 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 at a much lower rate than the credit card company because our loan is secured by the house as an asset.
And so it’s good it will be for everybody because he’s going to pay off his credit card his 25 percent per annum credit card debt and instead owe a 10 percent home mortgage.
LAMB: Who’s getting scammed at this point?
LEWIS: Well, nobody should have been. There’s a theory in theory it could have worked. The problem was the consumers were poorly protected. What the minute 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. The minute they get a little complicated they get a lot complicated in people’s minds.
LAMB: On the politics of this the the conservatives point the finger at Bill Clinton, liberals point their finger at George Bush and others point the finger at Barney Frank and some point their finger at Fannie and Freddie and all of that stuff, so where do you point your finger at anybody?
LEWIS: I mean I think the first and this is really the story I’ve told is the story of what happened in the private markets without a lot of government help. So in this particular case 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 getting made. They were being made because the lender was lending the money putting them packing them in the bonds and selling them off and didn’t have any didn’t bear the risk of the loans of not being repaid.
And so it was just it was a volume business. It was they got paid fees for doing the business. So 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.
LAMB: You talked about teaser rates?
LEWIS: Well, teaser rates are they 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 temping. And then it skyrockets after two years.
LAMB: Now, let’s go back to the beginning. So I could go in and they say here’s the rate of seven percent for the first three years. And
LEWIS: Here’s a rate of two percent.
LAMB: Yes, for the first three years.
LEWIS: And then it’s going to go to 13.
LAMB: But the impression is left that you can flip this house within the two years.
LEWIS: Yes. So all of a sudden if they make you that loan what they’ve done is turned you into a property speculator because you’re completely dependent on the price of the property going up to refinance the loan. If the value of your house goes down you’re stuck with this loan that’s going to eat you alive.
So let me just stop you there because you’re asking questions that are really this pernicious relationships between the high finance and the American borrower is what Eisman becomes an expert in. And he starts to become very, very cynical about what Wall Street does in this situation.
So he asks how big were these sub prime loans, well, when we get to 2004 to 2007 period in that period there were something like $1.6 trillion of sub prime loans made an another 1.2 trillion of what’s called Alt-A loans which are not sub prime but they’re loans that for some reason lack the documentation. So the borrower is not required to file proof of income. So in most cases, in a lot of cases those were sub prime too. So the numbers were you’re talking about almost $3 trillion of loans that were dubious.
LAMB: So Eisman is sitting there buying what?
LEWIS: Eisman is first sitting here 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 slain back in the ’90s, the sub prime mortgage lending business and he says, ”This is all going to blow up again. This is all going to end badly because I know how this business is done.” And it’s a sinister business.
And so he starts to try to learn about the bond market. The market 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 what a credit default swap is, none of this. They learn that you can actually make bets against these loans. And he thinks the loans are going to bad. And so he ends up making a massive bet against the loans.
LAMB: Through the credit default swaps.
LEWIS: Right. He buys credit default swaps on the sub prime mortgage bonds.
LAMB: 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 sub prime mortgage bonds.” And here’s this language the triple A rating. I think one of my biggest shocks in this was when I woke up one day and saw that Moody’s and S&P and I know nothing about these operations had been slapping these ratings on it and one of it meant anything.
LAMB: Why? How could they get away it? Who are regulating them? And who are they? And Warren Buffett owns part of Moody’s?
LEWIS: Right. Moody’s is, I think, its biggest shareholder is Warren Buffett and S&P is owned by McGraw-Hill. So the public they’re both public corporations.
Their job has been they see themselves now they will tell you now we’re just like Auto Trend magazine for car buyers. That we’re just journalists. We give our views about the relative trustworthiness of these various securities, relative likelihood they’re going to repay. These ratings were taken far too seriously. They were just meant as a kind of suggestion about what the like not the likelihood they’d default but suggestion of the way you should order them in your mind from riskiest to least risky.
And what but their place in the world was actually much and is much more serious than that. They are they’re federally sanctioned enterprises 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 bestowed on that asset by Moody’s and Standard and Poor. So their ratings have a huge effect on the ability of the institutions to hold these securities.
A triple A rating government is what the federal government has. It’s what the U.S. treasury has. So they slapped triple A ratings on piles of sub prime mortgage bonds. And then on derivatives called from these piles and they were triple A ratings priced at 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.
LAMB: So if I bought that mortgage and it moved to pick your place.
LAMB: Yes, wherever.
LEWIS: Goldman Sachs and they sell it on to IKB in a German bank in Dόsseldorf who thinks that they’re being really smart investing in sub prime mortgage bonds.
LAMB: And all along I’m starting to not be able to pay at some point. I mean three years into it I go from two percent to 12 percent.
LEWIS: The teaser rate is over and my house price has not kept going up. I can’t refinance and all of a sudden I’m defaulting.
LAMB: And Steve Eisman and others Mike Burry and others are sitting there watching this betting that it will all collapse.
LEWIS: Right. Betting that it will all collapse.
LAMB: 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
LEWIS: All right. You kind of hung up on this.
LAMB: Well, I did because the paragraph here
LEWIS: Don’t give your view as the impression that it’s all so complicated because it isn’t. I think it’s pretty
LEWIS: My mother understood it.
LAMB: Well here’s it’s not that it’s so complicated is I had an ah-ha moment here and I’m going to read the rest of it trying to figure out all of this out.
LAMB: Only a triple A rated corporation could assume such risk. No money down and no questions asked. Burry, Mike Burry
LEWIS: The investor, the protagonist of the story.
LAMB: Was right about this too but he it would be three years before he knew it. All right here’s what I’m getting at.
”The party on the other side of his bet against sub prime mortgage bonds was the triple A rated insurance company AIG, American International Group Incorporated or rather a unit of AIG called AIG FP” it’s financial products.
LAMB: ”But it was at this moment that I said” I mean I don’t invest in this stuff but as I saw that I thought so the $180 billion to AIG from the federal taxpayer
LEWIS: Yes, yes, yes.
LAMB: Subsequently then went to bail out Goldman Sachs and all of the rest of them.
LEWIS: Yes. For bets. They were bets. They were bets that AIG made this bet.
LAMB: Why did Ken not Ken but Henry Paulson.
LEWIS: Henry Paulson.
LAMB: And Ben Bernanke why did the two of them want to I mean
LEWIS: Why did they want to pay the gambling debts of AIG?
LAMB: Yes, exactly. What was it about it? I mean they said that the whole country would collapse.
LEWIS: Because all of the Wall Street firms were on the other side of those bets. And if AIG didn’t pay off the bets the firms would have experienced the loss. Think of it this way.
Goldman Sachs had lost on its bet to Michael Burry but they really they weren’t it wasn’t that they thought they were just brokering the debt between Michael Burry and AIG. So they paid off Michael Burry in their out of pocket. They want to get paid off by AIG and if they aren’t paid off they’ve got a $13 billion loss.
This was I don’t defend this. I’m just saying what they’re thinking. 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 going to collapse. The market’s not going to believe they’re going to survive.
LAMB: A couple of them did.
LEWIS: Yes. And they would have all collapsed if that
LAMB: Who did that hurt?
LEWIS: Who did that hurt from the collapse?
LEWIS: Not Wall Street people. People the rest of the country got hurt. The rest of the country got hurt by what the Wall Street firms had been doing the previous five years generating this frenzy of finance where finance shouldn’t have happened.
LAMB: Take Lehman Brothers, who got hurt? Can you give me an example if I’m out here just an ordinary citizen if I had stock in Lehman Brothers?
LEWIS: Yes. If you were a Lehman Brothers’ bondholder you got hurt. If you were a Lehman Brothers’ employee you got hurt. And that’s about it.
LAMB: 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 them.
LEWIS: Yes, everybody but the people at Lehman Brothers. But the Lehman Brothers people I mean they still walked away Dick Fuld, the CEO of Lehman Brothers they made many, many, many tens of millions of dollars that he got to keep after his firm collapsed.
LAMB: Who was Howie Hubler?
LEWIS: Yes, Howie Hubler is sort of the reductio ad absurdum of this because this is this was to me my revelation that first that the financial system had organized itself around this bet. And second was that no matter which side of the bet you were on you still got rich personally. Your institution might have lost huge sums of money but you, yourself, got rich.
Howie Hubler the trader at Morgan Stanley. Morgan Stanley the Wall Street investment bank. He’s regarded as the hub of a little of the smartest group of traders and they trade sub prime backed 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 sort of like their own little hedge fund within Morgan Stanley owned by Morgan Stanley.
So they’re given it. And it becomes the Morgan Stanley proprietary trading group. And they very soon months after they’re set up they make an enormous bet and it’s a complicated bet but the gist of it is they end up owning about $15 billion they buy in a matter of a couple of months $15 billion of punitive of triple A rated CDOs backed by sub prime mortgage.
LAMB: Wait, wait.
LEWIS: All right, sorry.
LEWIS: Collateralized debt obligation. Now, what is that? All right, so the loans create the bonds. The bonds the loans go into a trust. The trust as I said is traunched up. It’s sliced in that there are there are junior and senior claims on this trust. If you get them if you’re entitled to get the first dollars that get repaid you have less risk than the first person who gets the last dollars that 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 to come from the trust gets a triple B minus rated bond and a much higher rate of interest. What Wall Street is it took the triple B minus rated bonds and piled them all into another trust. Slice that up and 80 percent of that is triple A rated. So what Howie Hubler buys is essentially a pile of triple B rated sub prime mortgage bonds $15 billion of them.
And he does this very quickly with Goldman Sachs, Deutsche Bank, Merrill Lynch, I think, but Deutsche Bank and Goldman Sachs are the two big counterpoint parties. These bonds go zero. Now, you’ve got some bets against it so he doesn’t lose all $15 billion but he loses $9-and-a-half billion. 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 resign. He’s allowed to keep all of his deferred compensation that has not been paid millions of dollars and he’s rich. He goes away (INAUDIBLE). And the amazing thing to me, this is another reason I got reengaged with the subject is that that had become nobody knows who he is. His name is not mentioned. He’s just allowed to move on.
And you know 20 years ago when a trader lost a lot of money he was shamed. He was that everybody knew his name. That this had happened and had been kind of regarded as a private matter in a public corporation was an incredible thing to me. And so I recreated I went and talked to all of the people involved and wrote the story.
LAMB: You talked to Howie Hubler.
LEWIS: Not allowed to say.
LAMB: But you know one of the things we haven’t I mean you got to some of these guys and other books have gotten to them but you never see them on television. You envision that they’re all at a country club up in Connecticut somewhere. And still have vast millions of dollars, never paid a price for any of this stuff and it’s people all across the United States who are suffering because they lost.
LEWIS: You put your finger on it.
LAMB: They lost everything. They lost their house, they’re in debt. The last statistic I heard is that one-fourth of all of the outstanding mortgages in this country are under water.
LAMB: And so is that going to pop up here in the next
LEWIS: 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, that we’re going to be living I mean I’m not an economic forecaster but everything I read suggests we’re going to be living with unusually high levels of unemployment, a lot of pain from over indebtedness. I mean a quarter of the country is on food stamps I saw it on TV.
I mean it’s not a Great Depression. We’re not reprising exactly what happened in the ’30s but it’s a version of that.
LAMB: And your characters in this book I shouldn’t probably use I’m sure they are characters.
LEWIS: They are characters.
LAMB: Steve Eisman and Mike Burry and Charlie Ludley and Greg Lippman who haven’t talked about yet.
LEWIS: Yes. Well, he is the one Wall Street trader who was actually on the right side of the bet very early on. He’s the sub prime bond trader at Deutsche Bank right.
LEWIS: Selling well he’s betting against sub prime this is where it gets very strange. Here is this trader who’s the senior trader inside a big Wall Street firm. It’s a German bank but it’s still a big Wall Street firm. And his firm is creating these sub prime mortgage bonds and creating the CDOs and he’s saying it’s all going bad. I’m going to 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 him. And he’s telling them you’re crazy and you’re stupid and you’re wasting money.
He’s running around trying to talk people out of buying the stuff his firm is selling. And so he becomes a he’s an annoying character to a lot of people in his own firm but he’s the other principal short seller in this.
LAMB: How much of all of this is made up just so that these people that worked at these firms could take the money whether it’s credit default swaps, CDOs, traunches, all of this language that the average person hasn’t you know we can’t figure all of this out.
LEWIS: The jargon 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 that Wall Street. The it’s a very interesting thing. The complexity is a form of obscurity. That if you make it complicated enough no matter how punitively transparent it is. And a lot of this stuff isn’t even transparent. It’s a lot of hidden deals.
But you just dissuade the public from taking too much of an interest. And I think that what 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 could explain this to people they’re going to be outraged because they and they really need to know. You need to know. That there’s a financial reform bill coming out and people need to know.
LAMB: Let me ask you, you’ve gotten whacked some that you may or may not know about. Are you aware of al of the negative reviews you’ve gotten in the Amazon.com group?
LEWIS: Yes, the people who are upset it’s not on kindle.
LAMB: Yes. I just I got some of them out just because I thought it was interesting. As a matter of fact, the negatives in your outweigh everybody else’s and it’s
LEWIS: Yes, but it’s all people because they can’t buy it. They’re upset they can’t buy it.
LAMB: But let me ask you did you know this was going to happen?
LEWIS: With the Kindle?
LEWIS: I didn’t it didn’t even cross my I didn’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 it’s my publisher who makes those decisions. I’m not in control over it.
LAMB: Explain what we’re talking about.
LEWIS: All right. The Kindle is Amazon’s e-book. It’s a device that allows you enables you to download electronically books. You can buy them cheaper as a result.
LAMB: For 9.99.
LEWIS: Yes, for 9.99 instead of paying 15 bucks for the hardback. So the publisher decides when to release the e-book version. And the publishers just generally have been often delaying the e-book version because they’d rather sell the hardback. And it’s curious why they make this decision. 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. It doesn’t matter to 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 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 it. And, I think, that’s what’s troubling the publishers because Amazon has been known to abuse its marketplace
LAMB: Well, and 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 publisher. They do better under the circumstances.
LEWIS: Is that
LAMB: Yes. I mean the
LEWIS: So people who own Kindles are furious they can’t download it but it’s a you know 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.
LAMB: On the day we’re talking there are 101 reviews of your book and 56 of them gave you one star.
LEWIS: Because of the Kindle.
LAMB: 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 is writing articles praising the world of derivatives in banking. In fact, he dismissed skeptics as being ignorant of the importance of derivatives and redistributing risk and supplementing” just let me finish this.
”In an article criticizing those who showed concern over the stability of the derivatives Michael Lewis 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 freefall. Give me a bloody break, Michael.”
LEWIS: They’re upset because of the Kindle version.
LAMB: No, no, but this guy is StarFox 2020 whoever that is.
LEWIS: Yes, well, this is what I did do. This is what I did do. That I wrote every now and then I write a column for a little column for Bloomberg news. And I wrote a column making fund 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 the they say the same thing every year. So I made fun I poked fun at 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 central bank governors or whatever they’re doing and not do anything.
So and there was a line in there that did say you know because they were all saying derivatives are the big scary thing but nobody was explaining why. Nobody was talking about sub prime mortgages. There was this they were derivatives. And so I just said, now, in theory derivatives are meant to redistribute the risk in an intelligent way and I’ve never nobody’s explained to me why that isn’t being done.
Now, it is true that 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 I mean myself. I don’t make any claims that I saw anything coming, just the opposite. I wasn’t paying attention. I was writing books about baseball and football.
But the people who are persuasive to me as the guy the diagnosticians of this event were the people who actually put their money where their mouth was. The people kind of bloviate a lot of the time mean a lot less to me because they go on TV and they say whatever they say to get attention and then they move on and you never know what they really think or what they’re telling the next interviewer. So they were very none of those people in Davos made a lot of money betting against the sub prime mortgage market. And if they really understood it what’s what they would have done.
LAMB: Just another quickie, do you know Janet Tavakoli?
LEWIS: She was in kind of I don’t know her but
LAMB: I was wondering what you did to her to make her mad.
LEWIS: I can explain it.
LAMB: Let me read what she says. She says, ”I was in the Salomon Brothers 1985 training class that Michael Lewis lampooned in this amusing book, ”Liars Poker.” Imagine my surprise to see him billed as a trader on ”60 Minutes” since he was actually he was actually a junior salesman. Well-heeled male peacocks strutted the training floor and junior salesman were girlie-men mere eunuchs serving their pashes.”
LEWIS: I’ve gotten a little too much attention for my own good. And it this is the backlash is people who feel like they’ve not gotten 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 trader is just a guy who anybody who works on the trading floor. I wrote a whole book about how insignificant I was at Salomon Brothers. I had not made much effort to puff myself up as a bond trader.
She that particular person 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.
LAMB: We’re about out of time. When did you do you remember the moment that you decided to call it ”The Big Short” and what does it mean?
LEWIS: 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 Eisman was the center of that article.
And 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. It’s an interesting story. There’s 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 ”The End” or something like that. But it so that’s when the title popped into my head when I was working on the magazine piece. And what was the other question?
LAMB: What does it mean?
LEWIS: Well, short is to bet against something to bet the price is falling. And this was the single greatest opportunity to bet on prices falling in the history of mankind.
LAMB: So Steve Eisman or Michael Burry all of these guys all of these guys are sitting there hoping or wishing or betting that the whole thing is going to collapse and they won big.
LEWIS: Well, there are very mixed feelings about it though. I mean one of them goes to the SEC and tries to get them to take action. All of them are screaming to high heaven this is insane. They are torn up about it. Eisman, himself, says, he says, ”When it all works and they’re making their money” he says ”you feel like Noah.”
LAMB: How much does he have, do you know?
LEWIS: How much did he make?
LEWIS: For himself, I don’t know. Fifty million, 100 million they made for their investors 700 or $800 million.
LAMB: What about Burry, how much did he make.
LEWIS: About the same. About the same.
LAMB: Anybody else in that group that you wrote about, Greg Lippman, do you have any idea how much he made?
LEWIS: You know I was told by someone in his firm that he was paid a bonus of about $50 million at the end of ’07. So the got rich. But Eisman, it was interesting and I think he was sincere. He says, ”You feel like Noah, yes, yes, you built the arc and yes you’re going to survive but at that moment when the flood happens and you’re on the arc you’re not it’s not a happy moment for Noah. It’s a kind of a- it’s a torn up moment.
LAMB: We’re out of time. Michael Lewis, as you go to your six weeks of why do you this by the way? Why are you going to all of the you got ”60 Minutes” you’re number one on the list. Why are you running all over the country?
LEWIS: Because they tell me to. You know it’s I think it’s even in my publishing that I’ve got to them a few weeks to go to publicize the book. I think I’ve signed something that says I do it.
LAMB: Thank you for joining us.
LEWIS: Thank you.