Paid Now, Pay Later
link Book Review: The Big Short – WSJ.com.
Back in early March, I wrote a comment on Michael Lewis’ new book, The Big Short, based on an excerpt printed in the WSJ. Since then, I’ve been able to read the book itself as well as watch an interview with the author on the ramifications of his story. For professionals and laypeople alike, Lewis is able to describe the environment and characters involved with the banking debacle in both an understandable and interesting way. One of the main themes of the book is that despite the size of the bets being made via very complex financial derivatives tied to sub prime lending in the mortgage market, very few people, certainly not the heads of the major investment firms creating these toxic products, truly understood the nature and scale of the bets.
I’m certain that as understanding of the scale and depth of the con (and that’s what it was, a con), is digested by people in government who would care about such activity, the backlash will be massive against Wall Street. It will also be interesting that since the present administration is Democratically controlled in both houses, how they will spin the outrage against the banks. Why? Because the very roots of the crisis began with players with links to the Democratic party. Recall that individuals in top government finance positions were also heads of the big investment firms responsible for the creation and expansion of these toxic products, notably those at Goldman Sachs. Interestingly, top level positions at Goldman Sachs seems to be a requisite stepping stone to government service. Former treasury secretary Robert Rubin is an obvious example as is ex New Jersey governor John Corzine. Let us not forget present alumni of Goldman Sachs, Tim Geithner and Henry Paulson who are charged with regulating and cleaning up the mess essentially created by their old firm. Kind of like asking the wolves to solve the problem of disappearing sheep.
Let us also not forget that the entire idea of creating a market for subprime loans to unqualified home buyers began with a “good intentioned” program initiated by Democrats during the Clinton administration to allow more people to jump into the homeownership market under The Community Reinvestment Act in 1994. History will show that with Democratic pressuring by such as Barney Frank, Chris Dodd, Andrew Cuomo and many of the administration, banks were legally compelled to make loans available to home purchasers not otherwise eligible, under duress of fines. Goldman and the other wall street firms then came along to create financial instruments based on the ballooning sum of dubious credit quality loans. To be sure, the repeal of Glass Stegall also enabled banks to assume these outsized risks, but that will be the topic of another piece.
Ironically, the interview that Lewis gives about his book includes some snide jabs at Republicans as they were being made aware of the scope of the con. Undoubtedly, when you are employed by Vanity Fair, you are required to toss in the obligatory partisan dig. We can forgive him for that, since you have to please your friends and employers. But if the Republicans are outraged by what has happened, it doesn’t say much about the other side, who, either don’t appreciate the scale of stupidity involved or who were complicit. Based on Lewis’ own work, I’d say it was a lot of both.