The low tricks of high finance: how greedy bankers, weak politicians and timid journalists could cause a new crash

Michael Lewis, the author behind the new movie The Big Short, is furious that reforms have been blocked

23 January 2016

9:00 AM

23 January 2016

9:00 AM

It amazes me, simply amazes me, that journalists aren’t all over these stories. Doesn’t it amaze you too?’

I’m in a plush room in a swanky central London hotel, in conversation with Michael Lewis. He is all fired up, leaning forward as he perches on the hard edge of the cushion-strewn sofa. He oozes incredulity, palms upward, shoulders raised.

‘I’m not saying there aren’t good financial journalists,’ he concedes. But the qualification seems half-hearted — and is quickly reversed. ‘The Wall Street Journal is a much worse newspaper than it was 20 years ago,’ he asserts, taking aim at the bible of US high finance. ‘The news side of the paper has the fingerprints of the finance industry all over it’.

Lewis broadens his critique to the media as a whole. ‘We are underserved by critical, knowledge-able financial journalists who don’t have any fear whatsoever of what their subjects think of them.’ He winces as he speaks, as if pained by his own words.

Michael Lewis is, by a long way, the most important financial writer alive today — not just in his native America, but worldwide. At a time when public confidence in Wall Street and the City is at rock-bottom, his views pack a mighty punch. Lewis is in London to talk about his 2010 bestseller, The Big Short — a penetrating account of the build-up of the western world’s housing and credit bubble during the 2000s. The Oscar-nominated film version of the book has its UK premiere this week.

Described by Reuters as ‘probably the best single piece of financial journalism ever written’, The Big Short analysed how the international banking system came off the rails, with devastating consequences for the global economy, due to the crass, immoral behaviour of those running some of the world’s biggest banks.

Well aware of the potential cultural and political impact of a Hollywood movie (‘a lot more powerful than a mere book’), Lewis states his views on the financial reforms since the 2008 financial crisis. ‘Not nearly enough has been done — the regulatory response has been totally inadequate,’ he says. ‘The big banks have blocked serious reforms, meddling in the process so incentives haven’t changed enough to attack the heart of the problem — which is why it could happen again.’

Lewis wrote his first book, Liar’s Poker, in 1989 after a four-year stint as a fresh-from-the-Ivy-League New York bond dealer at the now defunct firm Salomon Brothers. A true insider’s account, it brilliantly lampooned the macho, aggressive behaviour of the ‘big swinging dicks’ who paced the carpet–tiled trading floors of Wall Street in the go-go, testosterone-fuelled 1980s. It went from instant bestseller to modern classic.

He had another hit in 2003 with Money-ball, confirming his knack of conveying complex non-fiction subjects through crystal-clear writing and larger-than-life characters. Describing how major league baseball coaches were picking teams based on highly detailed performance data, eschewing traditional attributes like athleticism and character, Moneyball revealed how poorer teams were beating the big boys by buying cheaper yet more effective players. A riveting David versus Goliath tale, it led to a spin-off movie starring Brad Pitt.

But it was when he returned his gaze to Wall Street with The Big Short that Lewis transformed himself into the revered chronicler of contemporary America that he is today. At the heart of the story are four sets of Wall Street ‘outsiders’ — from an eccentric doctor turned hedge-fund manager with a glass eye, to a couple of college-aged kids operating out of a parental garage who spotted the early warning signs of the US housing crash — signs everyone else wanted to ignore.

Set up as anti-heroes, they all took the audacious step of using complex financial instruments to bet against (or ‘short’) the market, pitching themselves against the banking titans of Wall Street. Until, that is, the big banks joined them, pulling the market down and the global economy with it, ruining millions of lives and livelihoods in the knowledge they’d ultimately be bailed out at taxpayers’ expense.

When he talks about this episode, Lewis shows real contempt for bankers and the politicians who have ‘utterly failed’ to regulate them. ‘We still have the same short-term-oriented compensation, the same big bonuses at year-end, as opposed to stakes in a firm that might become valuable if you build something over 20 or 30 years,’ he says. ‘Everyone is looking for quick kills — and people will find very crafty ways which, even if they’re not quite illegal, are just plain bad.’

Both the book and the film name names, aiming directly at some of America’s banking thoroughbreds. ‘I’ve never gotten over the feeling when I learnt Goldman Sachs had designed securities that would fail, so they could then short them,’ Lewis says. ‘It’s just shocking, like pollution in the system — yet it wasn’t, and still isn’t illegal.’

The 1997 repeal of the Glass-Steagall Act was ‘part of the problem’, he observes. Having long kept the savings of ordinary firms and households away from risky investment-banking activity, the removal of this Depression-era legislation by President Clinton, at the behest of various former and future bankers in his government, entrenched ‘too big to fail’ and put the broader economy at risk.

‘But it goes back even before that,’ says Lewis. ‘The earlier transformation of investment banks into public corporations was a big mistake — with bankers using shareholders’ money to bet, rather than their own.’ When asked why we haven’t seen more meaningful reform, Lewis points to the ‘massive’ influence of the financial services industry over politicians and regulators, not least in the US.

‘It isn’t just the big campaign contributions,’ he says. ‘Anyone at the table talking about financial reform is a potential hire and likely to end up working in the financial sector for huge sums, so they get captured.’

Lewis becomes most animated when he talks about Flashboys, his 2014 book, yet to be made into a film. This contains the jaw-dropping revelation that so-called ‘high-frequency’ trading firms on Wall Street and elsewhere pay intermediaries to ‘flash’ early access to information signalling the trading intention of large underlying customers — often pension funds and insurance companies managing the money of ordinary savers.

This allows computer-driven trading robots to nip in and buy just ahead of the original purchaser (we’re talking milliseconds), before selling the shares on to them at a slightly inflated price. Tiny gains on big volumes, of course, multiplied over many millions of trades daily, generate vast profits for the high-frequency firms — at the expense of everyone else. Maybe that’s why this galling practice, despite Lewis’s exposé, remains entirely legal.

‘Why were The Big Short and Flashboys available to me to be written?’ he asks. ‘These stories should have been gobbled up by newspaper and magazine journalists.’

Lewis also recounts that one group of financial innovators — featured in Flashboys — are trying to make US financial markets fairer by introducing a ‘fibre-optic speed-bump’ that levels out price transmission times, so foiling the high-frequency houses. Their efforts have so far met a barrage of obstructive regulation.Lewis then draws a chilling parallel between the dilemmas facing regulators and financial writers. ‘Journalists are often financially insecure, just as politicians and regulators are often financially insecure — and I’m talking about personally financially insecure,’ he says. ‘It seems journalists feel they have to, one way or another, accommodate the existing financial interests in their work — and that’s wrong.’

‘The US stock market is now very clearly rigged in favour of high-frequency traders,’ says Lewis. Not only has the SEC [the main US regulatory body] done nothing about the problems I discuss in Flashboys, it’s also holding up the guys who are trying to solve those problems — and that’s an outrage.’

We talk about the rising anger across the western world towards the financial elite, those winning handsomely from growing inequality, the so-called ‘1 per cent’ — and, conversely, the sense of economic insecurity that is increasingly felt even among previously comfortable middle classes. ‘You’d like to think democracy could translate those signals into reform,’ Lewis says. ‘But the financial sector is very good at batting away reforms and anger ends up being expressed in other ways — such as Donald Trump.’

The controversial Trump — who has outraged liberal Americans by pledging to build a wall to discourage immigrants — won’t get the Republican presidential nomination, predicts Lewis. ‘People think he’s a winner, yet his business record is very patchy,’ he says, while highlighting that Trump’s current electorate, Republican primary voters, ‘make up only a tiny slice of the population’. As the pool of voters gets wider, and encompasses the broader US population, ‘the less appeal Trump has’.

Conversations with Lewis, an intellectual omnivore, range widely. The European single currency ‘can’t last’ and ‘will eventually break up’, in his view. When it comes to geopolitics, he points to a ‘decline in American prestige’ caused by the financial crisis. ‘One day, when the history of this era is written, people will say financiers really cost my country — we’ve lost a lot of our ability to be a force for good because people don’t trust us in the same way.’

So what does Michael Lewis think of the film version of The Big Short? ‘I love the movie — Adam [McKay, the director] has seduced the audience with entertainment, so they watch something that would otherwise be hard to watch.’

A lot like Lewis’s books, the film focuses on intriguing and amusing characters, whose actions point to a broader, more serious truth. ‘There is laughter but it’s not a comedy — more of a tragedy, really,’ he observes.

I can confirm that the film is, as Lewis describes it, ‘very funny’. But, as he also observes, ‘humour is used as a weapon — you laugh, but at some point you stop laughing’.

So does he believe that this latest film adaptation of one of his books — which also stars Brad Pitt among its stellar cast — will generate such clamour for financial reform that it finally provokes the changes he so desperately wants?

‘I don’t think so,’ Lewis says. ‘The reality is that a major restructuring of the financial services industry will only ever happen if we get another really big crisis.’

Got something to add? Join the discussion and comment below.

Liam Halligan is an economist, financial journalist and broadcaster and a former Moscow Times columnist.

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Show comments
  • King Kibbutz

    Well if they don’t do it, who will?

  • Jonathan Tedd

    This next crash may prove to so devastating (social unrest) that reform will happen. They will however be done by the very people who are in the pay of the banks. The reforms will be to us the little people. Expect cash withdrawal controls at your bank soon.

    Alas our political system is controlled by big finance and lobbying. Blair works for Goldman or some such? As will George, Dave when they leave office.

    The important thing to remember is that all this so-called growth is a mirage enabled by credit expansion.

    Visit Tim Morgan’s blog called Surplus Energy Economics. he’s an ex oil analyst and once worked for no-nonsense fund man Terry Smith.

    • Todd Unctious

      Blair works for JP Morgan and Zurich Financial. Plus UI Energy. His main income e is from the advising the Kazakh dictator on damage limitation when shooting to death 15 protestors. Blair has amassed over £90 million since leaving office . He is an utter narcissist and a total disgrace.

      • GuyFawkesIsAlive

        Did Scotland Yard ever figure out who killed Gabriel Magee?

  • MrJones

    The media are owned by the banking mafia so they don’t report the disaster their masters have set in motion.

    • davidshort10

      This parish is of course owned by tax exiles so little chance of the Spectator crusading against tax havens.

      • WFB56

        Where in this article did tax havens enter the discussion?

        • Todd Unctious

          If you ever read any Michael Lewis he is a massive enemy of the 1% and their shabby tax arrangements

    • Todd Unctious

      A good example is the failure to report the recent collapse in the Baltic Dry Index. The best barometer of World trade has fallen 73% in 5 months. But none of the child journalists or finance midgets picks up on it. Surprise ,surprise the stock market is tanking.

      • Gilbert White

        Surely more than this when a joke financial paper can be valued and sold to the Japanese for nearly a billion. The trash bond is in everything from MPs pensions to twenty million pound refugee camps consisting of old shipping containers.

        • Fraser Bailey

          The FT is indeed a disgrace. It has been for years. And it has been wrong about everything during those years.

  • davidshort10

    Journalists in the UK are underpaid and untalented plus they are chained to their desks and have no money for investigations.

    • Todd Unctious

      UK journalism is at an all time low. Lacking in I telkect and integrity. Staffed by the callow children of the 1% and those incapable of even checking facts or grammar. The concept of an editor is replaced by spell checker and politically motivated moderators who censor debate.

      • Fraser Bailey

        Yes, the nepotism that is rampant in the UK press is a scandal. One of the many reasons I have stopped buying newspapers except in extremis.

    • Adam Carter

      Untalented maybe, but underpaid?
      When so much of their job involves attending briefings and re-writing press releases I think few of them are underpaid.

  • Frank

    One could simplify the current situation by saying that the heads of the major financial institutions / hedge funds / banks / investment houses / trading houses all lack any sense of ethics, or fair play. It is quite astonishing how entire groups of individuals can be so utterly without a normal sense of morality (eg Goldman Sachs creating securities to fail) and profoundly depressing that our law enforcement agencies (eg the Serious Fraud Office, the FCA and the City of London Fraud Squad) are unwilling / unable to take on these crooks.

    • Todd Unctious

      It is mainly unwilling. The CoLC ensures the regulators are only staffed with poachers turned gamekeeper.

      • Jab

        Completely agree.That is why the politicians get away with being so bad .No journalists means they cant be held to account

  • WFB56

    While Lewis may be right that the Wall Street Journal is less than it was 20 years ago – its still miles ahead of the FT and other so-called business publications.

    However, he is right to be outraged that nothing got fixed after the financial crisis but look at who was charged to do the fixing; Obama, Summers, Dodd, Frank, etc. The outcome can’t really be a surprise.

    • Todd Unctious

      Yellen must now be contemplating further QE. To add to the £7 trillion Obama added to their spending power.

    • Don Kenner

      I’m not sure you’re allowed to mention the words “Dodd” or “Frank” around Michael Lewis. He seems to be allergic to those particular letter combinations.

  • Xsaunder

    You forgot big guv’ment, the enabler and designer of “everyone should be able to buy a house; we’ll help” and guv’ment apparatchiks, i.e. those regulators that didn’t regulate. If you want to leave out the designers, enablers and cheer leaders, stop writing because you’re irrelevant. Oh, and a reform minded movie starring Brad Pitt. Please. Of course all the financial mavens like Leonardo deCaprio are in Davos holding forth on income inequality (oh he who was paid $22 million to learn his last set of lines) and instruct, scientifically no doubt, on fossil fuel and the fantasy of “you must let guv’ment save us from global warming by giving them more power. It would be great humor if it weren’t such a tragedy…

    • Don Kenner

      ^^^This! A thousand times this. WHY don’t people like Michael Lewis even mention that this all began as a government scheme to increase home ownership among the “needy”? That this could not have occurred without government enablers? God forbid anyone question his solution to a government-created problem — More government. And can I just say that any society that takes moral/economic advise from Hollywood does not deserve an economy.

    • jb1907

      Just because someone tells you that you should own a house, doesn’t mean you should. People could finance a BMW for 8 years, but it doesn’t make it right. Banks and real estate agents all got greedy, but it wasn’t illegal to sell a house to someone that was on the bubble. They all ran the prices up and someone got left without a chair.

  • seangrainger

    Liam, much as I love you from Sun Tel days with Fred all those books are required reading elsewise you don’t deserve to be a Spectator reader. And there was nothing new so don’t see how you sneaked this past the news editor. (And the sketcher for your “pic” byline had an off day innit.)

    • GuyFawkesIsAlive

      Seangrainger, as much as you would like to actually make a point, you don’t.

      • Sean Grainger

        I made four points and if you didn’t understand them or like them or both get lost sport

  • Gilbert White

    It is the entrepreneurs like Tony Blair and Arfur Daley who made this great country wot it is today, with financial acumen and crazy sister in laws?

  • Hayekian

    The issue here is a bit like the one with Saudi Arabia. Surely all governments know that this toxic arrangement is dangerous and will probably lead to disaster but on the other hand they need the oil. Similarly, in banking, governments and individuals need the debt and don’t want to upset the applecart.
    I think there will be another crisis and the consequences will be devastating but at the heart of all these problems is a preference for short term fixes, a naive belief that consequences of large misallocations of capital can be managed painlessly and that intervention will not dangerously skew incentives to make the next crisis larger and more difficult to contain. The gods of the copybook headings with terror and slaughter will return.

  • walstir

    One of the counterparties in a derivative wins and the other loses depending on the outcome of some attribute – they are a zero sum game where one counterparty’s losses are the other counterparty’s gains. All derivatives are designed to fail on one outcome or the other. In housing related derivatives, one of the counterparties only makes money if the housing market fails. If there was no possibility of failure; why would any counterparty be interested in taking the other side of the transaction? They function in the same manner as insurance – if there was no possibility that people were going to die; then there would be no life insurance for sale. If there was no possibility that houses were going to burn down; then there would be no fire insurance.

  • Cobbett

    Iran hangs it’s banksters…maybe we should start doing the same.

    • Don Kenner

      Yes, Iran is a good model. Idiot.

      • Cobbett

        OK tough guy.

    • GuyFawkesIsAlive

      I wholeheartedly agree.
      And the “Don Kennar’s” of the world? They listen to propaganda. Ignore them.

    • GuyFawkesIsAlive

      I agree. Lynch ’em.

      • Cobbett

        They still haven’t changed their ways(neither would I)….grab it while you can.

    • 9sqn

      Yeah, all except the ones who made me a small fortune.

      • Cobbett

        If you got the money why worr yabout it?

  • Spivy

    if you robbed a bank with a gun you’d get 20 years. These insider criminals get bonuses rather than jail. And they wonder why rage is threatening to put Tramp into the WH.

    • Tamerlane

      You’d get 20 years because it’s illegal, as do bankers when they break the law, indeed a lot more than 20 years very often.

      • FitzND

        Most of the major banks were found guilty of fraud or similar offenses, and given hefty fines (which are, in turn, paid by the shareholders). Some of these included bankers betting against the products they were selling to customers. 0 people of significance saw prison for perpetuating these outrageous frauds. So when you say “as do bankers when they break the law”, you are factually incorrect. In fact you are so far from correct, that I assume you have 0 knowledge of the financial crisis and the aftermath.

        • Tamerlane

          ‘ 0 people of significance saw prison for perpetuating these outrageous frauds’ So in other words people did see prison, their significance being a subjective judgement by you but that’s your problem. Like I said – you get jail time for breaking the law, whether you’re a benefit fraudster or a banker. I see you cam for a battle of wits – next time be sure to arm yourself first. It helps.

          • Zane Zodrow

            The number of bankers sent to prison worldwide over the past 8 years is less than 1/1000th of the number who have committed criminal actions which their employers have paid huge fines and / or settlements for. And other than Iceland, name one banker who has received a 20 year sentence.

            Here is a list of 6,300 + corporate fines / settlements for criminal actions. Each one likely involved between several and thousands of people breaking laws.

          • Tamerlane

            What drivel. ‘Less than 1/1000th’ what does that mean? Who is making this judgement? Based on what? Your subjective opinion? If none of these people have been tried let alone convicted then by definition they’re innocent. The guilty ones go to gaol. Pretty much how it works whether you’re committing banking crimes or robbing a bank.

            You just don’t like bankers, that’s your problem, beyond that you’re nothing but another self-righteous bleat in the wind – like the rest of them.

          • Key

            Well Tamerlane, who is the guilty one, the one betting on peoples misery? The banks who doesn’t have enough control frameworks implemented? The whole board who should know what´s going on, but doesn`t? Or the one person who is found responsible by the bank itself, and then is charged? Your view that ´all the those guilty of breaking the law goes to prison` is extremely naiv. There is massive issues within the stock and trading market, and people that have the same view as you (blindly trusting that the governments control frameworks such as the legislative system works) is adding to this problem. I would seriously recommend you to educate yourself, do some research and see if this is still your opinion.

          • Tamerlane

            Those magic Disqus lines ‘I would educate yourself’, ‘you should get an education’, ‘read this/do some research (what research is never stated because it doesn’t exist) and be educated’ blah blah blah…code for ‘I don’t agree with you but I haven’t got an any evidence to prove you wrong so I’ll randomly tell you to get an education instead’. Seems it’s not me who needs the education Key.

  • Tamerlane

    Very clever people enticed by big, big bucks slip between the sheets of regulation and control, whether it’s banking, trade, welfare or fuel emissions. Meanwhile clunking government agencies with only a wrist watch to reward twenty five years service as inducement stumble asthmatically after them. Way it’s always been. The sharp ones go private and earn mega bucks with the personality to risk it all on the throw of a die, the dullards go state and play it safe for the rest of their lives. Nothing will change, financial crash or not, you can’t change human nature.

  • GuyFawkesIsAlive

    The corruption and collusion between the banking industry and government is seen at the federal, state, city and local levels of government. Right now the City of Seattle is trying to discredit an audit of the land records, which points to massive corruption of the records that are supposed to provide the public evidence of land liens, ownership of loans, etc. The officials of Seattle are trying to sweep the evidence under the rug while at the same time attempting to get money from the federal government because of the skyrocketing numbers of homelessness in our state.

    It is beyond appalling behavior. And the citizens are the ones who suffer.

    When are guillotines going to be erected from sea to shining sea?

  • Paul

    Michael Lewis brilliantly dissected the causes of the housing crash. Exotic dancers owning 5 houses. Ratings agencies S&P and Moody’s rating junk Mortgage Backed Securities as AAA. Where were the federal regulators charged with keeping WS and the banks in check? And the TBTF Banksters…living in a bubble where ethics was relative to greed.

    Regarding his comments on the WSJ and the missing check and balance, Gretchen Morgenson of the NY a Times also covered it here. Worth reading as she calls out “access journalists”. With the media being concentrated and controlled by a few corporations, the validity of everything fed to the public must be suspected. https://www.minnpost.com/business/2015/05/journalist-gretchen-morgensons-remarks-2015-spj-page-one-awards

    She followed this up with a scathing article on the revolving door between Wall Street and government, where wolves of WS are farmed out to government to help create policy that benefits Wall Street. http://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html?_r=0

    Finally, the largest coverup in America involves the hostile takeover of Fannie Mae and Freddie Mac in what is known as FannieGate. Government Nationalization, expropriation and massive coverup goes mostly unreported by the press but is at the center of a major struggle for the soul of America. The business of democracy is controlled by TBTF and Wall Street.

    • jb1907

      It isn’t Wall Streets fault a stripper bought 5 houses. The blame goes to the banks, the real estate agents and the appraisers as well. WS just packaged loans they thought were good.

  • greensachs

    — Michael Lewis is, by a long way, the most important financial writer alive today — EEEIINT…WRONG!

    Yves Smith (Naked Capitalism), David Dayen, (NC/The Intercept), William (Bill) k. Black (New Economic Perspectives), Ellen Brown (Web of Debt), Michael Hudson, Joe Firestone (NEP), James Kwak (Baseline Scenario) are principled Independent journalists whom all have used financial forensic evidence to lay bare the truth in an era of unaccountable, NON-PRODUCTIVE, predatory corruption, together with the political & media myth making…truly exhilaration and hopeful to follow along with journalism as it was meant to be…

    …exposing abusive, hush-mouthed (close-doored) power to the light of day.

  • Sue Smith

    “Timid journalists”? I think you’ll find most of them just don’t get it when it comes to the economy and financial matters. Way too much ideology, not enough investigative analysis.

  • Lainey Hashorva

    I wish that more would write from the middle class perspective and the entire fraud perpetrated by these banks onto homeowners by bastardizing the HAMP program into the same ponzi scheme and paying fines that are tax deductible. It’s the biggest land grab in history and the corruption is staggering let alone the piling on to the court system that just passes it all through. It’s sick. I’ve written several pieces regarding the plight of the American Homeowner, the voiceless caught in the spider and fly game of trying to save their homes while being induced to default and raped financially again and again by the big banks like #WellsFargo and #Chase, #BofA and #USBank. You fail to mention Bill Black. He is a fantastic authority on all of this and articulates it to the powers that be – NON fiction.
    One of my articles is called “Homeowner Hunger Games” and that is what it is, tho no one talks about it. Also credit goes to Matt Taibbi for covering this for years!

    • jb1907

      People getting a house bigger than they could afford isn’t the fault of the banks. Not paying the mortgage was the problem.

  • sidor

    The entire occupation of “financial journalism” doesn’t make any sense. The financial journalists are supposed to convey to the readers some relevant news about financial markets that the readers cannot get otherwise and which are supposed to be relevant. The only relevant point of these reports could be their assumed predictive significance with regard of the future market’s behaviour. But this assumption is obviously absurd. Indeed, if a journalist happened to be in possession of such an information, it would be much wiser to use it for his/her personal benefit by privately participating in the speculations than making it public. Such an information is entirely useless for making profit if known to every player. For that reason, it is entirely useless for the players to read any published report of a financial journalist predicting the market behaviour since the very fact of publication affects that behaviour thereby making the prediction invalid.

    • jb1907

      the markets don’t make any sense anymore with volatility based on a few dollar swings in oil or other ‘catastrophic” news that is over in a day or two. Up 300, down 400….why isn’t WS just more patient. They are ‘supposed’ to be the pros.

  • greensachs