Money balled up U.S. financial system, says Michael Lewis

When an author is viewed as the foremost expert on the financial crisis, we're all doomed, according to Michael Lewis, author of “The Big Short: Inside the Doomsday Machine (W.W. Norton & Co., 2010). Speaking in Orlando at the Investment Management Consultants Association's annual conference, Mr. Lewis said he's starting to notice that both laws and lawsuits are based on the index of his newly released book. “I've been told that some of the lawmakers have introduced various bills because they've read my book,” he said. “And when I look at some of the lawsuits that have been filed related to the financial crisis, I can tell by the details of the lawsuit what chapter they're on.” That particular statement to an audience of more than 1,600 financial services industry representatives ignited roaring laughter. But Mr. Lewis, whose earlier best-sellers include 'Liar's Poker' and 'Moneyball', emphasized that, when Congress is turning to him for answers, we all should be scared. His latest book traces the origins of the financial collapse to the “collision of computer technologies with finance,” which involved the aggressive trading activities of about a dozen individuals. Mr. Lewis, who is scheduled to meet later this week with congressional Democrats to share his insights, spread the blame for the financial crisis far and wide. He gave particular credit, however, to extravagant incentive programs, proprietary trading desks inside brokerage firms, inept ratings agencies and lenders that did not do their jobs. “In order to reform the financial system you need a system that encourages good behavior,” he said. “And you could start by forcing the black-box proprietary trading outside of the brokerage firms and into private partnerships, where they belong.” Such a change would mean bringing back aspects of the Glass-Steagall Act of 1933, which prevented bank holding companies from owning other financial companies. Much of Glass-Steagall was repealed through the 1999 passage of the Gramm-Leach-Bliley Act. “If you cracked down on the prop trading operations, Goldman Sachs would immediately become two firms,” he said. “You would have the side of the business that works with clients existing as a public company, and the prop trading would become a private partnership or hedge fund.” By enabling banks to maintain proprietary trading operations in-house, Mr. Lewis said the companies are able to create products to be traded between the bank's clients and its own professionals traders. In packaging subprime mortgages for sale to investors, for example, Mr. Lewis said the industry strategy was to “find the idiot who will do the stupid thing that they could take the other side of.” When asked if individuals should own some of the responsibility in the mortgage meltdown for borrowing more than they could afford, Mr. Lewis said the fault for the bad loans belongs mostly to the lenders. “There were plenty of Las Vegas strippers who took out subprime mortgages that they couldn't afford just because that's what all the other strippers were doing,” he said. “But the lenders have to be the break in the system, and the lenders abandoned their role.” So what should financial intermediaries take away from the financial crisis? Compensating people excessively — and for the wrong reasons — can make people do irresponsible things, Mr. Lewis said. “Rather than worry about Wall Street's global reputation,” he advised, “worry about your own reputation. That will go a long way.”