Prophets and Pariahs: Michael Lewis’ “The Big Short” and the Old Testament

I just finished Michael Lewis’ The Big Short: Inside the Doomsday Machine, a brisk ride through the careers of those few investors that foresaw and cashed in on the biggest financial crash in history. Along the way, Lewis offers a glimpse at the forces that helped demolish our financial system and drive us into one of the world’s worst recessions. The book is a lively read, if albeit depressing and ghastly (who are we supposed to root for? the guys that took advantage of this “rare opportunity” and made millions?). Lewis, who most famously wrote Liar’s Poker, an expose of the 1980s financial world, is able to strike a balance between explaining the technical details of Wall Street’s bond-trading underbelly and keeping an eye of the human characters at the heart of his yarn. A great read if you’re looking for a unique, though not comprehensive, perspective on how the s*&! hit the fan.

The question I found myself constantly asking, as we have all wondered I’m sure, is “What can we learn from this? How can we prevent it from happening again?” And as you might expect, the lessons are as old as greed itself: obfuscating risks, passing responsibility onto other people, ignoring warning signs, assuming you can’t be wrong or things can’t go bad. Truly there is nothing new under the sun. Banks saw subprime borrowers as a perfect opportunity to make money by selling their mortgages to financial firms, which in turned packaged those bonds into greater derivatives that were sold on a world market and which were in turn insured for and against their failure. The rating companies that were supposed to raise red flags were duped by manipulative firms and wooed by exorbitant fees. Essentially, no one had a long term interest in the success rate of these mortgages–and those who did had no clue what the risks actually were. Everyone assumed the chances of the national real estate market plummeting simultaneously were nil–and of course, this is exactly what happened. Greed, yes, but all this was more than greed–it was the complete severance of actions and consequences; reality ceased to exist. Government bailouts–however necessary–certainly didn’t correct this vision.

Trying to categorize this book, I found it a difficult tale to pin down. It would be a tragedy if it were not so banal: there are no great visible evils , just the numbing proliferation of numbers and risks as millions become billions without anyone blinking. Nor is it a heroic tale: the “winners” of the story, who foresaw the crash and either tried to warn everyone else and/or make a profit off of it, end up either marginalized, physically broken, or directionless (if still millions richer). They are not anti-heroes, they are no heroes at all, just cogs in the wheel that caught a glimpse a brief glimpse of where we were collectively headed but were otherwise powerless. Maybe it’s because I’ve been reading from the Bible lately, but the whole story strikes me as one of the many Old Testament stories: society goes corrupt, prophets try to warn the people, but there is no rejoicing when the people finally reap the whirlwind. Those that foresee the impending doom are outcasted, ignored, ridiculed. “A prophet hath no honour in his own country.” Nobody wins; everyone suffers. One of the  investors even suggests as much, comparing himself to Noah: sure, Noah was right all along, but what comfort is that when everyone else is drowning? Of course, this parallel is just as depressing: the Old Testament is the tale of many things, but “progress” is certainly not one of them. Frankly, I don’t see how we do not make the same mistakes again. We can regulate it these sectors more (as we should) but the chances of remaining ahead of the game are unimpressive when regulators and rating agencies are always at the low-end of the career totem pole for financial analysts. Furthermore, I don’t see any serious moral revolt against what happened: sure, its disgusting to see bailed-out companies hand out golden parachutes, but no one is having a serious discussion about the (minuscule?) differences between investment trading and gambling, about the value of allowing any entity be “too big to fail.” I think Solomon (the prophet-king, not Salomon Brothers) nailed it thousands of years ago: “Vanity of vanities, saith the preacher, vanity of vanities, all is vanity.”