Monday, April 05, 2010

Fun and profit

You wouldn't think you could write a delightful, engaging book about worldwide economic havoc, but Michael Lewis has done just that in The Big Short. His account of Wall Street follies that bilked most investors has two great virtues. First, it does a good job at explaining just what all the complex banking innovations these guys trade in really are. (Gillian Tett also does a terrific, if more sober-sided, job of this.) Second, he delves into what sort of person it required to notice that the emperor had no clothes and to bet against the housing bubble and its financial offshoots.

A very few people did make that bet and won, making millions when the house of cards went down; Lewis's portraits of these winners feature folks who to the more conventional world looked simply odd. One of my favorites was Michael Burry who turned out to have Asperger's syndrome. It was his good fortune that the extraordinary ability to concentrate on narrow interests that goes with this condition happened, in his case, to be turned to the workings of the subprime mortgage market. Lewis reproduces some of Burry's thoughts on getting his diagnosis:

People with Asperger's couldn’t control what they were interested in. It was a stroke of luck that his special interest was financial markets and not, say, collecting lawn-mower catalogues. When he thought of it that way, he realized that complex modern financial markets were as good as designed to reward a person with Asperger's who took an interest in them. "Only someone who has Asperger's would read a subprime-mortgage-bond prospectus," he said.

Unfortunately, understanding the potential to bet against the subprime market didn't give Burry the social skills to manage the big investors whose money he had attracted to his hedge fund. Though he made them a mint of money, they abandoned their abrasive manager and he came out of an unimaginable success embittered by the human problems he encountered amid success. Lewis found a great story in this guy's experience.

Even though events vindicated Burry, he's still hammering on the empowered experts, especially Alan Greenspan who couldn't see what he saw so clearly and whose job it was to to see it. Burry makes a good case.

The former Fed chairman responded that my insights had been a "statistical illusion." Perhaps, he suggested, I was just a supremely lucky flipper of coins.

Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan's logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.

As a nation, we cannot afford to live with Mr. Greenspan's way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning.

New York Times, April 4, 2010

What if the Econalypse was just a case of testosterone poisoning? Michael Lewis doesn't go there, but others have. The thesis has plausibility.

Positioning himself as a sort of endocrine whisperer of the financial system, [John] Coates, [a senior research fellow in neuroscience and finance at the University of Cambridge,] argues that if women made up 50 percent of the financial world, "I don’t think you'd see the volatile swings that we're seeing." Bubbles, he believes, may be "a male phenomenon."

His colleague, neuroscientist Joe Herbert, agrees. "The banking crisis was caused by doing what no society ever allows, permitting young males to behave in an unregulated way,”"he says. "Anyone who studied neurobiology would have predicted disaster." ...

When Coates first suggested that men on trading floors might be at the mercy of a swirling cocktail of hormones, he expected traders to be offended. "But every trader knows, when you're on a winning streak you act like a dickhead, and then you end up giving back all the money you made on the way up," he says. "I actually got a lot of e-mails from traders saying it was good to know where this odd behavior comes from."

"What If Women Ran Wall Street?" New York Magazine,

Wall Street and wars ... that fits.


Nance said...

Well, there you go. Finally, a plausible explanation for why I am forever predicting disaster: it's my femininity. If only that same trait set had provided the will to resist the advice of my testosterone-ruled financial advisors. Unfortunately, my way was to go along while silently predicting disaster all the way.

Thomas Nephew said...

What a coinkadink, I'm reading the book right now too, and like you I'm loving the "oddballs were right, normals were crazy" theme of the book. I liked Steve Eisman, who went from staunch Republican to populist as time went on. Wish Bill Moyers or someone like him would have Lewis and Eisman on.

Hadn't really thought about it but great point about the possible-to-likely testosterone effect in all of this.

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