Video: From tonight's 60 Minutes broadcast -- Michael Lewis writes about a handful of Wall Street outsiders who realized the subprime mortgage business was a house of cards and found a way to bet against it -- March 14, 2010
I always wondered what happened to Tabitha Soren.
-----
Video Part 2: Michael Lewis talks about the current situation on Wall Street, the large bonuses still being paid and his predictions for the future of the industry.
-----
Extra clips that weren't broadcast can be found here >>
-----
Read the complete transcript at CBS >>
(CBS) If you had to pick someone to write the autopsy report on the Wall Street financial collapse 18 months ago, you couldn't do any better than Michael Lewis. He is one of the country's preeminent non-fiction writers with a knack for turning complicated, mind numbing material into fascinating yarns.
He wrote his first bestseller, "Liar's Poker," about his experiences as a young Wall Street bond trader when he was still in his 20s and has since followed up with seven more bestsellers on subjects ranging from Silicon Valley in "The New New Thing" to big time sports in "Money Ball" and "The Blind Side."
His new book, called "The Big Short: Inside the Doomsday Machine," comes out later this week and it explains how some of Wall Street's finest minds managed to destroy $1.75 trillion of wealth in the subprime mortgage markets.
"60 Minutes" and correspondent Steve Kroft spent two days debriefing Lewis at his home in California.
"This was an episode where capitalism was almost destroyed, just by the capitalists. And, in the most sensational way, they were sort of destroyed by their own folly," Lewis told Kroft.
Asked what happened, Lewis said, "The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests."
Lewis, a one-time wonder boy on Wall Street, is about to turn 50 now, ensconced in a hillside compound in Berkeley, Calif. The property has a main house and three cottages and he is much happier writing about business than actually conducting it.
Asked which book produced the money to buy the home, Lewis said, "This would've been 'The New, New Thing,' that bought this place."
Lewis estimates he has sold "some millions" of books. "I don't know how many millions. Not John Grisham millions, but millions," he said.
He lives in Berkeley with his wife, former MTV News correspondent Tabitha Soren and their three children - a three-year-old son and two young daughters who he takes to all of Cal Berkley women's basketball games.
It's one of the few breaks that Lewis allowed himself over the past 18-months as he dug into the idiocy and negligence that produced the worst financial crisis since the Great Depression.
"I'm afraid that our culture will come to the conclusion, 'cause it's always the easy conclusion, that everybody was just a bunch of criminals. I think the story is much more interesting than that. I think it's a story of mass delusion," Lewis said.
-----
Read Felix Salmon's review of The Big Short >>
-----
Lewis' forte has always been discovering little-known facts and characters that change people's perception about a story. So when he finally sat down at his computer with sacks full of research to write about this calamity, he had no interest in Treasury Secretary Hank Paulson, or Ben Bernanke, or the CEOs of Wall Street's big investment banks, who he believes had no clue what was going on while it was going on.
He wanted to tell the story through the eyes of people who were paying attention and who knew that a financial disaster was inevitable.
"There are a handful of characters who actually had seen it coming and made a fortune off of it. And there were so few of them, and there were so many people who had been on the other side that I thought that I kind of wondered who they were and why they got themselves into that position," Lewis said. "What they saw. Almost more how they saw."
Asked how many people he thinks were in the world who understood what was going on, Lewis told Kroft, "Between 10 and 20 investors at most and this is from the universe of tens of thousands of people who could have conceivably made that bet."
"Michael Burry's advantage was he wasn't part of the collective. That he was just this guy in a T-shirt and shorts with a glass eyeball and Asperger's Syndrome, looking at the numbers, and when nobody else really was," Lewis said.
"How can they not look at the numbers? I mean, how can Wall Street be buying all of these mortgages and repackaging them, and not realizing that they're not very good mortgages?" Kroft asked.
"Wall Street is able to delude itself because it's paid to delude itself. I mean one of the lessons of this story is that people see what they're incentivized to see. If you pay someone not to see the truth, they will not see the truth. And, Wall Street organized itself so people were paid to see something other than the truth. And that's one of the central messages of this story. You have to be very careful how you incentivize people, 'cause they will respond to the incentives," Lewis explained.
And all of the incentives in Wall Street's largely unregulated bond market were geared toward keeping the subprime money machine humming. Shortly after Burry decided the people there had lost their minds, Wall Street's most influential investment bank convinced the financial products division of insurance giant AIG insurance to join the party, a decision that would destroy the company.
"They insured tens of billions of dollars of subprime mortgage loans without even knowing they were doing it," Lewis said. "Goldman Sachs persuaded them to insure these piles of loans without them ever investigating what was in the pile. So, there's an additional level of incompetence. They didn't even know the mistake they were making."
Over a period of just a few months in 2005, Goldman Sachs got AIG to insure $20 billion worth of subprime mortgage securities that the ratings agencies had graded AAA. But in fact, Lewis says, the pools contained some of the worst "drek" on the market.
"Do you think the big banks like Goldman Sachs played AIG for a patsy?" Kroft asked.
"That's exactly what they did," Lewis replied. "I mean, I think even Goldman Sachs would admit that to themselves, which is saying something. Yes. Absolutely. Using the cover of, 'We're all big boys in this market,' the big investment banks have long sought to exploit their customers."
Asked what role the rating agencies played in this, Lewis said, "They were handmaidens to Wall Street. The ratings agencies get paid by Wall Street, by Merrill Lynch, by Citigroup, by Morgan Stanley, by Goldman Sachs, to rate the bonds that Wall Street creates. This creates a certain moral hazard."
"You write in the book that Goldman essentially took the worst stuff that they couldn't sell. They repackaged it and took it to Moody's. And got Moody's to rate it AAA?" Kroft asked. "How did they know that Moody's was gonna rate it AAA?"
"Yes. They had helped design the models I'm sure that Moody's used to rate the bonds. And I've spoken with people at Morgan Stanley and Goldman Sachs who said, 'We helped the ratings agencies understand these things,'" Lewis said.
According to Lewis, they were the educators.
Lewis calls the Goldman Sachs-AIG deal one of the original sins of the looming financial crisis. Other Wall Street firms were so jealous of the Goldman deal they got AIG to insure another $30 billion of what turned out to be worthless securities. But Lewis thinks the fiasco had more to do with Wall Street stupidity than corruption.
He said Wall Street didn't understand these things "well enough."
"I mean, there's a wonderful little vignette in the 'Big Short' about the leading bond trade, subprime mortgage bond trader at Morgan Stanley, a fellow named Howie Hubler, who manages to lose somewhere between, it's hard to know, but seven and $12 billion in a matter of six or eight months, more than any single trader has ever lost in the history of Wall Street, and no one knows his name," Lewis said.
According to Lewis, at the end of 2006 and the beginning of 2007, when the commercial bank J.P. Morgan became the first to recognize the danger and fled the subprime market, Hubler was gobbling up $16 billion worth of subprime mortgage bonds that would be worthless in nine months.
"He did not understand the forces that work in his own market. And he was supposed to be the smart guy. I mean, what were the dumb guys doing? So, I think that it's really clear that the firms themselves did not understand the machine they created," Lewis said.
Asked what happened to Hubler, Lewis said, "He's allowed to resign from Morgan Stanley and he takes with him millions of dollars in back pay, tens of millions of dollars in back pay; it was all hushed up, basically."
According to Lewis, "all" of the people who made these terrible decisions left with a lot of money. "I didn't run across a single character who didn't get rich. Anybody above a certain level in all these firms made huge sums of money by any standard. And the people who were, I mean, this is where it gets a little creepy, the people who were most instrumental in building the subprime mortgage machine also happened to be the ones who had the most detailed understanding now of the securities in the rubble," he told Kroft.
"And they're being paid all over again to sort through the mess because they're the experts. That is an age-old trick on Wall Street, 'cause generally speaking, people who create disasters make a lotta money cleaning up the disaster because they're the ones who know about the disaster," he added.
What about the CEOs?
"Stan O'Neal at Merrill Lynch, and Chuck Prince at Citigroup are the most obvious examples. But they were paid not tens, but into the hundreds of millions of dollars to run their firms into the ground," Lewis said.
By the fall of 2008, with AIG and all of the big investment banks at some risk of going under, the government stepped in to bail out the very firms that had caused the crisis. A decision was made that AIG was too big to let fail, and that its gambling debts would be paid off 100 cents on the dollar and the company that benefited the most was Goldman Sachs.
"Do you believe it had anything to do with their political connections?" Kroft asked.
"It's hard to know. There's no proof. But it certainly didn't hurt. It certainly didn't hurt that the secretary of the Treasury was a former Goldman CEO. It certainly didn't hurt that a lot of the people at the table were former Goldman employees. It certainly didn't hurt that the air that everybody breathed contained the assumption that we can never do anything to harm Goldman Sachs. So sure, I mean, I can't really see how their political influence didn't have anything to do with it," Lewis said.
---
-----
(Screenshot...only email subscribers should click photo)
