My current airplane book is not my normal fare. The Big Short by Michael Lewis is an exposé of the American bond and mortgage industry of the last few years. The language of the book is coarse and some issues are opaque to someone like me who lives outside Manhattan, yet the story is compelling. I was appalled by all I read; yet I’m happy to recommend it.
Lewis offers a narrative of Wall Street firms that used defective (“subprime”) loans to bulk up the international bond market with fools fodder. The defective loans were blended with better (“prime”) loans and then given more credit than they deserved. Major investors then bought the bonds assuming that they were “triple A” assets that would pay a steady return for decades to come, all based on homeowners paying their monthly premiums. Poor people weren’t required to show clear evidence of income because as home prices kept climbing their property would build instant equity they could use for making future payments. Everyone assumed that housing values can only increase.
Yet some in Wall Street actually did some homework in checking out the value of the bonds being sold. They found that most bonds—even the triple A assets—were too fragile to stand any bit of bad financial weather. But no one listened to them.
In a short time the all but worthless subprime loans were so widely distributed that the bonds in which they were bundled were certain to collapse. The trigger would come when homeowners quit making payments on their low cost arrangements that came with widespread two-year “teaser” deals. After two years the devil would come for a visit. And so he did.
These mortgage bonds became the “toxic assets” of the TARP bailout program that the US government, with other governments, finally had to secure at taxpayers’ expense. The agencies that were assigned to guard bond buyers from all this failed miserably: those who appraised the bond values were wildly wrong. And when warnings were raised by some, the US Securities and Exchange Commission looked away.
The book, as I noted, was a narrative: a story rather than an analytical summary. It tracked a number of investment specialists—Steve, Michael, Charlie, Jamie, and Vince, among a few others—who recognized what was happening as it happened. They not only predicted the market meltdown accurately . . . they did it years beforehand. And even more, they invested money in that confidence by selling “short.” That is, they sold financial insurance policies that assumed the coming collapse. As a result they and their relatively few investors earned millions of dollars while the US and world monetary systems—and those who lived in those settings—lost more than a trillion dollars.
These men weren’t tightly linked—some didn’t even know about the others. They just read the same data and reached the same conclusions. But almost no one believed them. Not the other investors, nor the protective agencies, nor, in some cases, even their friends. They were loners, treated as obnoxious, stupid naysayers by the brilliant, powerful, and self-confident Wall Street bankers. Only after the fact do they seem brilliant and their critics stupid.
The story of the emerging crisis is offered in personal terms from interviews Lewis had with the naysayers. They become real people with distinct personalities. The leaders in the subprime marketing schemes also have real names and are described in action, regularly making stupid and often venal decisions. They were power brokers who despised all who were under them. Intellectually they were usually brilliant people, able to intimidate others with their conspicuous gifts. And they were in charge of their own worlds. In matters of money, they touched ours as well.
In a final chapter Lewis describes a lunch with his former boss. They discussed the underlying cause of the meltdown: greed. In particular, an appetite for massive annual bonuses ruled the system. Lewis noted “the growing misalignment of interests between the people who trafficked in financial risk and the wider culture. The surface rippled [with superficial reforms after an earlier crisis in the 80’s], but down below, in the depths, the bonus pool remained undisturbed” [p.254].
That is, in the bonus system, investors were seen as a resource to be milked in order to support bonuses. This biased Wall Street leadership to the point that, despite clear evidence, the investment firms ignored mounting evidence of a looming crisis. They were committed to their wholly undeserved yet mind-boggling rewards. Claiming to be wise, they had become fools because of what they loved: money.
What should we make of this true and truly sad story? Certainly it underscores the relationship of head and heart and also serves as a cautionary reality report on human depravity. In Lewis’s account he seems amazed at the way brilliant people made terrible choices; and how other people who were bright enough, but usually not prime movers, were able to see things more clearly. In each case Lewis—not recognizing the pattern himself—presents the prophets of doom as those who “didn’t fit”. They were not the socially powerful figures of their place and time, but they did their homework well. And each had some sense of propriety and equity that allowed them to ask, “Is this the right way to go?” Even in the face of social, financial, and professional pressures to conform.
So the question we all must ask is this: what do we love the most? Do we love features of the creation most? Our comfort, perhaps, or our standing in certain communities? Or do we love God and the people he gives us to be with? Are we conformists to pressures in our church communities that aren’t supported biblically? Or are we ready to say, regularly, “Lord, does this please you?”
We may have another time of crisis coming. And it may be time to check out the evidence God offers us about proper priorities—of living out our love for him. Some crowds—with brilliant and powerful leaders on their side—may not have it right when they treat God as a resource to be milked rather than a companion to be loved.