Written in 1989, Liar’s Poker [1]
Now Liar’s Poker author, Michael Lewis, has written on The End of Wall Street’s Boom [3] in Portfolio magazine, and as you’d hope it’s a cracker.
Lewis says he’d hoped Liar’s Poker would warn people away from becoming investment bankers or bond traders, but that it only made people keener to follow the money:
Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?
The whole article is a great read, especially the quotes about Steve Eisman, the professional bear who was one of the first to see through the Emperor’s new clothes:
“Steve’s fun to take to any Wall Street meeting. Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”
As someone who has got many things wrong in life, but not the sheer absurdity of the global housing booms (my mistake being bearish too soon, but my reasoning that house prices were up to 45% too high [4] was right), I liked the comments from Credit Suisse analyst Ivy Zelman:
There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. […] “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.
Even Eisman couldn’t figure out the full complicity stupidity of Wall Street, despite the fact he was already shorting sub-prime bonds as quickly as he could:
“We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
Read the full story of how Wall Street met its maker [3], and then come back and be glad that Wall Street is paying the price [5] for its folly.