The Big Short

The Big Short: Inside the Doomsday Machine
Michael Lewis (2010, W.W. Norton)

Michael Lewis is the perfect person to explain to us just what happened when, in the fall of 2008, Wall Street brokers and bankers went down in an avalanche of credit default swaps; he can also explain what in the world credit default swaps are, and why people wanted to bet on them, one way or the other. Lewis, the author of Liar’s Poker (1989), about his own experience in the bond trading business--a business that brought us the financial crises of the nineteen-eighties (on a substantially smaller scale, though it felt sufficiently catastrophic at the time.) His Moneyball (on baseball) and The Blind Side (football) made the market forces in American sports delightfully clear, while keeping an eye on how those forces affect individual people.
Now he’s got the inside track on the biggest financial story of the past decade, how the sub-prime mortgage industry took on a life of its own, giving rise to a spectacularly large and long-lived housing bubble. The collapse of that bubble in 2008 took billions of dollars of value out of the worldwide financial system--where did that value go, and what did it consist of in the first place?
The Big Short is a high-resolution, super-slow-motion picture of the Wall Street avalanche at its critical moments. As you might imagine, it’s a story about greed, arrogance, ignorance, and stupidity; it’s also about a handful of people who saw the housing bubble for what it was, and put themselves in a position to profit from its implosion.
These mavericks at the heart of Lewis’s story are a quirky bunch: “All of them were, almost by definition, odd. But they were not all odd in the same way. John Paulson was oddly interested in betting against dodgy loans, and oddly persuasive in talking others into doing it with him. Mike Burry was odd in his desire to remain insulated from public opinion, and even direct human contact, and to focus instead on hard data and the incentives that guide future human financial behavior. Steve Eisman was odd in his conviction that the leveraging of middle-class America was a corrupt and corrupting event, and that the subprime mortgage market in particular was an engine of exploitation and, ultimately, destruction. Each filled a hole; each supplied a missing insight, an attitude to risk which, if more prevalent, might have prevented the catastrophe.”
These characters, and a few others, saw something all the other actors did not see, or refused to believe. Why? Was it greed? was it fraud? Was it a herd mentality, or willful obtuseness? Yes, yes, and yes. There’s a school of political thought that would have us believe that markets are always smarter than individuals, (to say nothing of the questions of whether they are fairer, kinder, or more honest; sometimes, maybe, but you shouldn’t count on it.) The Big Short shows us some ways markets can be seriously dumb, as well as opaque and fraudulent, or, of course, all three at the same time.
Lewis writes, “The subprime mortgage market had a special talent for obscuring what needed to be clarified.” A dazzling array of abbreviations and acronyms sprang up around the business of turning loans, especially mortgage loans, into bonds. The razzle-dazzle was partly aimed at investors, and partly at bond-rating agencies like Moody’s and Standard & Poors. It’s profitable to own the stream of income represented by other people’s debt--but only if those people are actually going to keep making payments. This is one thing if you’re talking about a government entity like a county or a state, and something else entirely if the debt is a mortgage, or collection of them, that are made with teaser rates, to people who had no money for a down payment.
Somehow--and Lewis actually knows how--some of the latter kinds of bonds, and bonds created from them by sleight of hand, received AAA ratings of quality from the rating agencies, (which had, to put it mildly, a conflict of interest); the salesmen of Goldman Sachs and its confreres made so much money selling the bonds that they caused dumber and dumber mortgage loans to be made, out there in the real world; and a form of bond insurance created by AIG Financial Products became a way to place bets on financial events. He writes, ”Financial markets are a collection of arguments. The less transparent the market and the more complicated the securities, the more money the tradings desks at big Wall Street firms can make from the argument.” In the end, because some bond dealers got confused by their own obscurity, they wound up mis-pricing the risks, and laying some enormous, terrible bets; the resulting avalanche is still playing out.
The lucidity with which Lewis presents all this is truly a joy. Because this is a popular new book, my library has some copies marked as Speed Reads, due back in one week rather than three. That won't be the problem--just don’t start it at bedtime.
Cheers--
CTR

Levittown

Levittown: Two Families, One Tycoon, and the Fight for Civil Rights in America’s Legendary Suburb.
David Kushner (2009, Walker & Company)

The 1950s saw hundreds of battles over desegregation across the United States. The battles over lunch counters, buses, and schools were famously fought in the streets, in the press, and in the courts; all these venues were also significant in the story of housing desegregation. David Kushner’s Levittown tells the story of one such battle on an intimate scale: what happened when, in 1957, a black family moved into previously all-white Levittown, Pennsylvania. Without attempting to cover the entire history of the era, Kushner also casts a useful light on the larger economic, governmental, and social forces at work.

The tale starts with Abe Levitt and his sons, Bill and Alfred, who started building housing developments on Long Island during the Depression. Levitt & Sons went on to build housing on military bases in World War II, and they were primed for bigger things in the postwar housing boom. On thirty-five hundred acres of nematode-ravaged potato fields, they constructed an entire town, complete with parks and shopping centers. Under the influence of Bill Levitt’s considerable ego, the town of Island Trees was renamed Levittown. Veterans swarmed to rent, then to buy, and move in with their families.

White veterans, that is. In addition to Abe Levitt’s strictures about landscaping, about which he was something of a martinet, the rules of the new community excluded ‘any person other than members of the Caucasian race.’ Such a clause was permitted, indeed encouraged, by Federal Housing Administration regulations that had, from the FHA’s founding in 1934, specified that ‘business and industrial uses, lower-class occupancy, and inharmonious racial groups’ all qualified as adverse influences that would lower property values.

The Supreme Court overturned such explicit restrictive covenants in 1948, calling the clause “unenforceable as law and contrary to public policy.” But the policy was still in effect in many places, including the second Levittown development, outside of Philadelphia, where Lew and Bea Wechsler lived with their daughter and son. The house next door to them had been up for sale for two years when the Wechslers met Bill and Daisy Myers, who were living in nearby Bloomsdale Gardens, and looking for a house. What the Myerses wanted in the spring of 1957 was a three-bedroom house for their growing family, with a garage for Bill to use as a workshop; 43 Deepgreen Lane fit the bill perfectly.

Kushner’s book is partly based on memoirs written by Lew Wechsler and Daisy Myers, based in turn on the journals they kept, so he can give us a day by day record of the mayhem that ensued in August, 1957, when Bill and Daisy Myers took possession of their charming pink house. A vociferous group of neighbors dedicated themselves to a campaign of harassment and intimidation that included rock-throwing, name-calling, cross-burning, and harassing phone calls, without any particular hindrance from various contingents of police who were ostensibly there to protect the newcomers. The Levittown Shopping Center sold Confedarate flags, and one faction of the neighborhood mob made inquiries about joining the Ku Klux Klan.

The story was catnip to the press, both because of its resonance with the integration of the Little Rock schools, which took place the same autumn, and because of the iconic nature of Levittown: “Papers from Moscow to London covered the standoff in what had long been viewed as America’s quintessential suburban dreamland. Life magazine had just run a long spread on the story that week, including dramatic photos of the Myerses and Wechslers under siege in their homes.”

Other neighbors supported the Myerses, repairing the damage done by vandals, bringing food, and sitting up nights in the Wechslers’ kitchen, standing guard. In October, Thomas McBride, the Attorney General of Pennsylvania filed an injunction to stop the “unlawful, malicious and evil consparacy...to force the said Myers family to leave Levittown;” McBride himself took part in the trial, two months later, and the transcript, which Kushner quotes liberally, is gripping.

The injunction served its purpose, and the Myerses remained safely in Levittown till they moved to York, Pennsylvania, a few years later, but-- how did this crisis happen? There’s plenty of blame to go around: certainly a few of the neighbors were unreconstructed racists, and the local police response was a failure. The court records show that Levitt and Sons made promises to buyers that Levittown would be whites-only. Bill Levitt claimed that he was just giving the buying public what it wanted, and that any other policy would have put him at a disadvantage to competing developers. Or perhaps it was the banks, the realtors, the FHA, Congress--it’s turtles all the way down. Be that as it may, the upshot, as Kushner says, is stunning:“... from 1934 through 1960, less than 2 percent of the $120 billion in new housing underwritten by the U.S. government went to minorities.”

Kushner’s writing style is a little too breezy for me in places, but the scope of the book is beautifully judged. Within the broader story of the great migration to the suburbs, he makes the Levitts, the Myerses, and the Wechslers distinct personalities and consequential actors. He can’t quite make me understand why some of the people of Levittown thought they had a legal right to deny other people their right to live there peacefully, but that kind of thing goes on today, and I don’t understand it yet.

Another thing that’s important to remember, because it now seems so strange to those of us who didn’t experience it, is the Red-baiting that was attached to civil rights activism. The Wechslers, as it happened, had actually met through the National Student League, a group with ties to the Communist Party, though their faith was severely damaged by Krushchev’s 1956 revelations about the Stalin era. To hear Senator Joseph McCarthy tell it, anyone who opposed racial discrimination was a Communist. Really? Communists were the only people who were fighting to extend the promises of America to all Americans? Where were the Christians?
I guess that’s a story for another time.


Email, July 2010