• At an exclusive screening of The Big Short in London – the Oscar-nominated film detailing the stories of four Wall Street traders who foresaw the collapse of the sub-prime mortgage market in 2008 – author and journalist Michael Lewis gave his insight on to the state of the markets and what we’ve learnt (or not) since then. The Wharf went along to hear the Q&A conducted by Channel Four News presenter Jon Snow.
How is it that nobody else saw what was going on before the crash?
The fish doesn’t see the water it’s swimming in, people inside the machine don’t have any perspective. I swore I wouldn’t write another book about Wall Street after Liar’s Poker and I was reading about this in the newspapers like everybody else and I was perplexed.
These Wall Street firms had the call on the best and the brightest across the globe all pursuing their self-interest – so why did they collectively commit suicide? That’s the first thing that interested me. I had a way in and I just started to poke and some themes emerged.
Firstly, one told me he lost $10billion for his firm on a bet and it became clear that he had almost no remorse about it. The people on the wrong side of the bet had gotten rich too. The incentives are really screwed up. If you can make really stupid decisions and get rich, you’ll make really stupid decisions.
Secondly, they all said this was like this natural disaster that washed over them, that it wasn’t their fault.
Thirdly, at some point when he’s describing to me how he got into the position of losing the firm $10billion he said ‘you know the only reason we’re having this beer and talking to you is because you’re the reason I’m in the business’. What? ‘Yeah, I read Liar’s Poker when I was in college, I didn’t know what I wanted to do and I realised I wanted to be a bond trader.’
I realised that I created this crisis!
Nothing’s changed. They’re inventing new derivatives, new bonds, new systems that completely outfox the regulator.
From my perspective, the only player on the regulatory side the world over who is making anything like intelligent noises is the Bank of England. They recognised it right from the beginning as a cultural problem and they’ve been pretty loud about it. The response generally has been totally inadequate and it all could happen again.
The problem is incentives. In that world, people really do follow the carrot in front of their nose and if they’re incentivised to do things that are disastrous for the rest of us, they will do them. In this story it’s not clear that anybody broke the law.
That’s more disturbing than if they had broken the law because if they broke the law we could put them in jail. But if you could actually bring down the economy without breaking the law, there’s some new laws we need. The incentives in the system have not been directly addressed.
Why don’t the regulators and people in power bring in disincentives?
You have a tsunami of money that comes from people in the financial industry – political donations, jobs – anybody who is in the conversation about regulation is also a potential hire.
In [his latest book] Flash Boys I describe these characters who figure the US stock market has been rigged and they couldn’t figure out why. When they went to the Securities and Exchange Commission why weren’t they more interested?
So they asked the question ‘how many people from the SEC had gone to work in the places that were rigging the stock market’. They stopped counting at 236.
It’s crazy. If the regulator makes one-tenth of the person they’re regulating, they’ll never regulate them properly. I don’t think they’re corrupt, it’s just they’re aware of where their interests are at some deep level.
You worked at Salomon Brothers. Why didn’t you go native?
I was living here in London I fell into a job in Wall Street that I had no business being in. And I had something else I wanted to do. I was writing for the Spectator, the Economist, the New Republic and getting in all kinds of trouble with my employer.
I was never of that world. I had some luck for a couple of years but I always thought my future was as a writer. The minute I saw I could make a living as a writer I was out.
Is the next stage to take up the cudgels?
These people [in Flash Boys] said ‘We could build a business that puts our business out of business. We’re going to shrink our industry.’ And what’s happening to their application to become a fair stock exchange? It’s being held up by the SEC. It’s so outrageous, it’s breathtaking. My next move would be to organise a march. But I’m not sure I would be any good at it.
So nothing is going to change?
I’m not sure nothing is going to change. I’m not as hopeless as that. What is going to happen next? I don’t know. I didn’t see this coming so I don’t have great faith in my ability to predict the future.
There is a deep behavioural problem in our financial culture that has been created by bad incentives. That is the big, big problem. There are pockets of idealists in the financial sector. People don’t want to be bad people.
There are people who do want to change it but they need help.
About the film
Books are usually better than the films. Did you enjoy the film?
I disagree. Films are often better than the book. This is pretty great. But, to be clear, I had nothing to do with the film.
The filmmakers bought the book and they’d rather not have you around leaning on the process and complaining how they’re screwing up your work of art so I had a relationship with [director] Adam McKay that was completely phony. He pretended to be interested in what I thought and I pretended to believe he was interested.
My fear when the thing got bought was it would land in the hands of some ponderous self important person and it would be boring. When I heard Adam McKay was involved, I thought great, it would be entertaining and it would draw people in.
A comedy? It’s a Shakespearean tragedy.
Humour is being used as a weapon against the problem because if it weren’t funny you wouldn’t sit through it. There’s a moment when it ceases to be funny and it’s totally intentional.
This is the best film about Wall Street I’ve seen. You take something like Wolf Of Wall Street but that’s not about Wall Street that’s about Martin Scorcese’s fantasies and it’s beautifully done but it doesn’t have anything to do with Wall Street. This thing went after Wall Street directly.
How did you get away with it?
I didn’t get away with it, I got sued. (The case got thrown out.)