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Michael Lewis Tackles the Mortgage Crisis in ‘The Big Short’

March 24, 2010 at 12:00 AM EST
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Jeffrey Brown takes a look inside the doomsday machine of the subprime lending crisis with author Michael Lewis in a conversation about his new book, "The Big Short."
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TRANSCRIPT

JEFFREY BROWN: When the stock market tumbled and major financial institutions collapsed in late 2008, it was a surprise and shock to many Americans. But for a few people deep inside the world of mortgage-backed securities and complex derivatives, it was just what they had expected and even bet on.

Some of their stories are told and the larger financial drama explained in “The Big Short.” The author is Michael Lewis, a journalist and writer, whose previous books include “Liar’s Poker” and “The Blind Side.”

Welcome to you.

MICHAEL LEWIS, author, “The Big Short”: Thank you.

JEFFREY BROWN: Your way into is not the big, epic sweep, but these few characters who were running against the pack. Why was that a way in?

MICHAEL LEWIS: Well, it was — it was — first, it was a fantastic story that I couldn’t believe hadn’t been told, that the financial world had essentially, between 2005 and 2007, organized itself around a giant bet.

And the entire financial system, but for a few, were on one side of the bet. They were — they were betting on the subprime mortgage market. And on the other side were a handful of people who sort of saw what was happening.

JEFFREY BROWN: What did they see? What did they see that everybody else didn’t see?

MICHAEL LEWIS: They saw — different people saw different things. But they saw the corruption of — of lending standards in the subprime mortgage market. They saw the corruption of the ratings agencies that led to bonds that should never have been rated being rated AAA.

They saw — they saw the investment banks, the large Wall Street firms, which had always kind of been the smart money at the table, becoming the dumb money at the table. Historically, the last thing you wanted to do was be on the other side of a trade of Morgan Stanley or Goldman Sachs.

They saw that that actually — actually, there was a trade to be on the other side…

MICHAEL LEWIS: … that made sense.

JEFFREY BROWN: Suddenly made good sense.

MICHAEL LEWIS: Made good sense.

JEFFREY BROWN: Right.

MICHAEL LEWIS: And so — but — but the characters were so rich. And what I’m writing is a narrative. It’s not an editorial. And the characters are sort of the oxygen for any narrative. So, they led me to this way of explaining the crisis.

JEFFREY BROWN: There are a number of characters. Just tell us about one, Steve — is it Eisman?

MICHAEL LEWIS: Steve Eisman.

JEFFREY BROWN: Eisman.

MICHAEL LEWIS: Eisman was one of the first two or three original analysts of subprime mortgage originators, back when they were first kind of invented as an idea in the 1990s.

And he had come to see this interface that was growing between Wall Street and middle- and lower-middle-class America. And it’s a different interface than — I mean, Wall Street is usually involved in America’s assets, you know, its stock market decisions.

This was Wall Street getting very involved in people’s debts. And he saw this relationship very cynically. In fact, he starts his life on Wall Street as a kind of conservative Republican. And, by the time he is done, he is almost a socialist.

And it’s because he sees, essentially, the systematic exploitation of people who are on the other side of Wall Street’s trades.

JEFFREY BROWN: No, but what is funny, though, they’re the heroes — he and the others are the heroes of your book. They’re not real heroes. They’re doing this to make money.

MICHAEL LEWIS: Yes.

JEFFREY BROWN: They make a lot of money betting against these institutions, but essentially betting against the U.S. economy in a sense.

MICHAEL LEWIS: Yes, they not real — they’re complicated heroes.

JEFFREY BROWN: Yes.

MICHAEL LEWIS: I mean, they’re heroes in the sense that, if everybody had seen the world as they saw the world, this crisis never would have happened.

JEFFREY BROWN: And they wouldn’t have gotten rich.

MICHAEL LEWIS: And they wouldn’t have gotten rich.

And they — they’re also — you know, in each case, they did sound alarms. I mean, they were screaming to high heaven that this was — what was going on was crazy. I mean, one of the characters actually bothers to go to the SEC and try to explain to the SEC what they think is kind of a fraudulent, rigged system.

So, in that sense, too, they were useful citizens of the republic. But it is true, it is a very curious tale, in which the heroes are betting on the collapse of the financial system.

JEFFREY BROWN: Now — now — now, I think what people still — what — you know, still debate here, I mean, what unfolds through their story and their discovery is — and you have just said, a sort of greed, corruption, venality. Everybody is sort of gaming the system.

I think what people still or wonder about, is it mass delusion that happened, or is it acting with intent?

MICHAEL LEWIS: This is a great question. And it is a question that they, themselves, never completely resolve.

And it is part because it is hard to know what lies inside the hearts of others, but part because, actually, they found pretty — like a great deal of evidence that the other side of their trades were just deluded, that they actually didn’t understand what was going on, that, in fact, this was more — less a story of kind of systematic criminality than it was systematic misperception, that you had these facts in the financial world, and you could arrange them into different kinds of pictures.

And the system, the financial system, arranged it into — the facts into a pretty picture, and that was a false picture. And the question was kind of why it did that. And it did that because there were incentives not to see the world as it was. I mean, people were being paid a lot of money to ignore pretty basic, simple things that were right under their nose.

JEFFREY BROWN: There is a line where you write of two of your characters they — this is quote — “They had always sort of assumed that there was some grownup in charge of the financial system whom they had never met. Now they saw there was not.”

MICHAEL LEWIS: Yes, that they were the grownups. This was a revelation to many of them, because they just assumed — for many of these characters, it was very odd that they were in this position of making this bet, because they were, constitutionally, essentially value investors in the stock market, who had figured out that they couldn’t make their investments, not understanding this strange, crazy thing that was happening in the lending markets.

And so they had to actually kind of, as innocents, learn about how the bond markets worked in America. And, at every stage, they’re shocked that there isn’t some grownup who is saying, this is wrong. You shouldn’t be doing this — and, so, that they find that there’s essentially — it’s this headless beast.

And that’s what enables me to explain it. That’s — you asked me why I chose this story. Because they, themselves, had to figure it out. And, so, it is a kind of — it is an adventure for them. They are learning as they go.

JEFFREY BROWN: So, here we are, still — you know, we’re in Washington. There is still all this talk about financial reform. We keep reporting on it on this program all the time.

What do you see? I mean, has there been any change? Has there been any progress?

MICHAEL LEWIS: There hasn’t been change, but there has been progress.

I think that, broadly, you can say that the powers that be — the general — the thing that is generally true about everybody who has been — the authorities who have been dealing with the crisis is that they’re all people who didn’t see it coming. They’re all the positions — people who were in positions of authority when it happened. They didn’t see it coming, unlike these characters.

They have been dealing with the symptoms of the crisis. They have not dealt with the cause. There has been no meaningful change in the way Wall Street is — it is worse, in a way, because one of the problems on Wall Street was that these firms were playing with shareholders’ capital, rather than their own money, which caused them to take some pretty silly risks.

Now they’re playing with taxpayer-guaranteed money. And you can only imagine the sort of risks they might run if they’re allowed to run them. However, I think the — sort of the basic relationship between the Wall Street man and the rest of the society has shifted pretty dramatically.

I think that it has gone from — they have gone from being sort of an unquestioned master class to being, well, first, wards of the state, and now almost enemies of the state.

JEFFREY BROWN: Right, a lot of anger at them.

MICHAEL LEWIS: There is a lot of anger. And, so, I think that’s going to find a political expression.

JEFFREY BROWN: All right. The book is “The Big Short.”

Michael Lewis, nice to talk to you.

MICHAEL LEWIS: Thanks for having me.