(note from Randy – this is one of my “I’ve been thinking” posts.)
It’s been hard to miss Michael Lewis lately. I saw him on 60 Minutes, I heard him interviewed by Terry Gross on Fresh Air (By the way, I think Terry Gross may be the champion interviewer. Listen to that interview here – you want the broadcast from March 16, 2010). A friend caught him on CNBC. I’m ordering The Big Short, and I’ve read the article from Portfolio from two years ago, The End: The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong. And I’ve read the book excerpt from The Big Short on Slate’s The Big Money: Crapping Out at the Subprime Casino: An exclusive excerpt from Michael Lewis’ The Big Short.
The more I listen, the more I wonder – what are the lessons we will learn?
You know the litany of lessons that are trickling out:
Lesson # 1: we need more regulation, to catch up with the changing times.
We basically never created the regulations needed for this modern complex financial market. I heard an interview on NPR that described how new regulations came about three years after the crash of 1929. So, it takes a while for regulations to be decided upon and put in place. But, as we know, regulations do a pretty good job with yesterday’s problems, but may not have the foresight to deal with tomorrow’s problems.
Here is a quote from This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff:
“it would be extremely desirable to create a new international financial institution to help develop and enforce international financial regulations. Our argument rests not only on the need to better coordinate rules across countries but also on the need for regulators to be more independent of national political pressures.”
Lesson #2: Beware of bubbles – they will repeat, and they are always trouble.
Again from This Time is Different:
The huge run-up in housing prices – over 100 percent nationally over five years – should have been an alarm, especially fueled as it was by rising leverage.
There are other culprits, including a little, or a lot of, greed and corruption. But surely not everyone was a crook.
But the lessons and the growing list don’t quite feel adequate to the enormity of the problem. And that’s where Michael Lewis comes in. He tells the stories. And the stories are about real people, who saw things differently, and acted differently
I think that we are slowly learning that there is data, and there are stories, and the stories are about both data and the personalities of the people. I read this quote about/from Jerry Brown, the once and hopes-to-be future Governor of California, in The Daily Beast’s The Madonna of Politics by Lloyd Grove:
How would Jerry Brown 2.0 be different from the original?
“I think the difference,” Brown answers, “is best encapsulated by something my chief of staff, B.T. Collins, the Green Beret who lost his arm and a leg in Vietnam [and died of a heart attack in 1993 at age 52], once said: ‘If you want to understand politics, it’s all personalities, it’s not ideas.’ Well, that was his point of view, and I do think ideas are very, very important. But this time around, I think the personality of every single legislator, all 120, is extremely important. Being able to get the requisite number of Republicans and Democrats to sign on to a budget that takes a two-thirds vote means a very serious engagement with the world view, the political life, of each of these legislators in a very extended set of meetings and exchanges, such that I can build camaraderie, mutual understanding and the kind of working together that existed to a much greater degree when I was governor and to even a far greater degree when my father was governor.”
One part of the excerpt from Lewis especially captivated me. It’s about “Steve Eisman, the CEO of FrontPoint Partners, a hedge fund that detected the subprime mess before nearly everyone else – and the clueless masses.”
The Venetian hotel—Palazzo Ducale on the outside, Divine Comedy on the inside—was overrun by thousands of white men in business casual now earning their living, one way or another, off subprime mortgages.
“I’d been to equity conferences,” said Eisman. “This was totally different. At an equity conference you’re lucky if you get 500 people. There were 7,000 people at this thing. Just the fact that no one from the equity world was there told you that no one had figured it out. We knew no one. We still assumed we were the only ones who were short.”
Think about that. 7,000 people, many of them smart, well-educated, hard working. All wrong.
Lewis tells the story of the meltdown through the stories of individuals who saw it coming, like Steve Eisman. And it is through such stories that we learn the lessons. Here’s one lesson – if the crowd is going one way, maybe we ought to stop, look, and listen.
This crisis is a crisis facilitated by, enabled by, a whole lot of people following the crowd. It is groupthink at its worst. The wisdom of crowds is a wonderful, powerful thing for the good. The foolishness of crowds is a deadly, dangerous thing at its worst. And we have definitely seen the foolishness of crowds in the midst of this crisis.
A piece that made the rounds a few years back was by Robert Fulghum’s All I Really Need To Know I Learned In Kindergarten.
It included this gem:
And then remember the Dick-and-Jane books and the first word you learned – the biggest word of all – LOOK.
It looks like we needed a whole lot of people to stop, and look, and ask, before they said “sign me up.”
Just because we hear it, or read it, even from trusted sources and authors and advisors, we may still need to exercise a little skeptical caution. To quote from The Black Swan, maybe nobody knows anything. Or, at least, very few know anything.
Look at the room in the Venetian. 7,000 were wrong. Steve Eisman was right. One out of 7,000. It truly is a cautionary tale.