Lewis' Carol on Modern Financial Insanity A Wonderland of Failure

Lewis' Carol on Modern Financial Insanity A Wonderland of Failure

Liar's Poker Author Says TARP Dollars Down a Rabbit Hole

with John Michael Spinelli

Columbus, Ohio: Michael Lewis has one really good question about the use of TARP funds. Why was Treasury Secretary Henry Paulson, and by extension the White House and all the legislators who bought into the panic memo that said America's financial sky was falling, was in such a pell-mell rush to handout $700 billion to banks whose assets were troubled because they made bad loans when the money should have gone to banks, maybe even some small banks, that made good loans?

On a segment of MSNBC's "The Rachel Maddow Show" about how the US and now the worldwide economic meltdown happened and why the TARP program is both not working and secretive, Mr. Lewis said it was a total collapse of the entire system, from the banks to the rating agencies to the Securities and Exchange Commission, the federal regulator he said was an "embarrassment." Out of clear blue skies, Lewis said our current problems were "auto generated by financiers" and aided by federal treasury officials who seem to change their game plan daily and keep their actions secret.

Having earned his pedigree in financial analysis from inside Wall Street and the world of high finance as a bond salesman for Salomon Brothers in London in the late 1980s, Michael Lewis' latest book, Panic: The Story of Modern Financial Insanity, adds another important perspective about the marketplace he knows well and some of the individuals whose fame, fortune and reputations were made and lost there.

Lewis' short answer to how we got into the financial mess we're in, posted in an interview at the money and The Motely Fool, a Web site about money and finance, was the "ability of Wall Street to repackage subprime mortgages as an investment-grade security" that then became worthless when the "casino in side bets" against the subprime mortgages going bad, went bad themselves. An even shorter answer, Lewis says, is the underpricing of risk, a factor he claims is common in many financial panics, especially modern ones. "They have sort of systematically misclassified the nature of the risk that they are dealing with," he says about how Wall Street got its insurance priorities mixed up.

The author of best sellers like Liar's Poker, The New New Thing and Moneyball, among other works, Lewis says finance has become complicated due in part to academic research. Mathematical models were offered up and smart people used them to justify their misguided belief that financial gravity wouldn't apply to them. They then jumped off buildings, financially, of course. Expecting to fly, they instead nosedived to earth, the power of their elaborate assumptions and mathematical schemes having blown off in their cliff dive.

Some investors, generally the first ones ensnared in Ponzi or "pyramid" schemes, oftentimes make money. It's the ones who come later or last who are sucked dry by the vortex of back-paying schemes to make it all look legitimate. Lewis' anthology book comes out just as Wall Street and big investors woke up to the news that Bernard Madoff, a long-time hedge fund manager, made off with $50 billion of their funds. Lewis doesn't specifically equate the meltdown of Wall Street with a Ponzi scheme, but he says it in so many words. Charles Ponzi, whose eponymous scheme to defraud investors is being replicated four score years after the scam on postage stamp speculation he funded with just $30 dollars went bust, is a household name again.

First fault lies with rating agencies like Moody's, 20 percent of which is owned by Warren Buffet, according to Lewis, who said the problem subprime mortgages has wrought on us all could have been nipped in the bud had these firms done their jobs. But with profits big and easy to make, why take the punch bowl from the party.

The Kool-Aid that washed it all down was leverage, borrowing too much, and no one having enough skin in the game to care what happened.

"If the Wall Street firms had been partnerships instead of corporations, if the people in them had had total long-term engagement with the risks they were taking, they never would have done what they did. If American culture had not evolved to inure people to the risks of leverage, then I don't think nearly so many people would have borrowed money they couldn't repay." [Michael Lewis]

Lewis says TARP funds [Troubled Asset Relief Program] should start at the bottom and trickle up. And that if banks fail after individual homeowners are kept in their home through subsidies or recalculating loans, then so be it.

"I think you let more institutions fail. I think there is no solution that is not a painful solution. I think that this top-down approach of trying to sort of hand over taxpayer dollars to failed banks, hoping that they will become successful banks, is a mug's game ... what they should do is target homeowners in their homes, and use that subsidy to subsidize those people so they stay in their homes, and re-jig the mortgages so they lower principal balances, and so and so ... you start with the level of the crisis, which is the level of the individual homeowner. And if, above that, and while you are doing that, some of these institutions fail, then they fail." [Michael Lewis]

The unintended consequences of handing huge sums of money to failed enterprise are seldom appreciated, Lewis says. "I hope that the Treasury and the Congress has already learned something from the money they have handed out to the banks. It wasn't a smart thing to do."

John Michael Spinelli is an economic development professional and former Ohio Statehouse political reporter and business columnist. To send a tip of comment, email ohionewsbureau@gmail.com