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If you had to pick someone to write the autopsy report on the Wall Street financial collapse 18 months ago, you couldn't do any better than Michael Lewis. He is one of the country's preeminent non-fiction writers with a knack for turning complicated, mind numbing material into fascinating yarns.
He wrote his first bestseller, "Liar's Poker,"
about his experiences as a young Wall Street bond trader when he was still in his 20s and has since followed up with seven more bestsellers on subjects ranging from Silicon Valley in "The New New Thing" to big time sports in "Money Ball" and "The Blind Side."
His new book, called "The Big Short: Inside the Doomsday Machine," comes out later this week and
it explains how some of Wall Street's finest minds managed to destroy $1.75 trillion of wealth in the subprime mortgage markets.
"The
incentive$ for people on Wall Street got
so screwed up, that
the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests."
"I'm afraid that our culture will come to the conclusion, 'cause it's always the easy conclusion, that everybody was just a bunch of criminals. I think the story is much more interesting than that.
I think it's a story of mass delusion," Lewis said.
Asked how many people he thinks were in the world who understood what was going on, Lewis told Kroft, "
Between 10 and 20 investors at most and this is from the universe of tens of thousands of people who could have conceivably made that bet."
"Do you think that the executives at the big investment houses who were issuing these bonds had read them? Or understood them?" Kroft asked.
"No, they didn't read them," Burry replied. "I think that there were
probably junior analysts that were given the tasks of reviewing these documents. However, I think that
this was a profit center. It was a profit center.
It was something the organization wanted to do."
Burry figured out that these mortgage-backed securities would become worthless if just a small percentage of the dicey loans went bad and he wanted to bet against the worst of them. He decided that the best way to do it would be to get Wall Street to sell him inexpensive insurance contracts on the securities that would pay off big time if they failed. The contracts were called "credit default swaps."
"How can they not look at the numbers? I mean, how can Wall Street be buying all of these mortgages and repackaging them, and not realizing that they're not very good mortgages?" Kroft asked.
"
Wall Street is able to delude itself because it's paid to delude itself. I mean one of the lessons of this story is that
people see what they're incentivized to see. If you
pay someone not to see the truth, they will not see the truth. And,
Wall Street organized itself so people were paid to see something other than the truth. And that's one of the central messages of this story. You have to be very careful how you incentivize people, 'cause they will respond to the incentives," Lewis explained.
And
all of the incentives in
Wall $treet's largely UNREGULATED bond market were geared toward
keeping the subprime money machine humming."
