Michael Lewis recently wrote an article appearing in Conde Nast’s Portfolio.com titled The End which details the root cause of the credit crisis and the ensuing collapse of Wall Street firms like Morgan Stanley and Merrill Lynch. It is a must read by all. When I shorted financials starting in April of ’07, I did not realize how bad things really were, I just knew that whatever the investment banks were doing was not sustainable. I had no idea how the mortgage/CDO market became so enormous and so out of whack. This article does a remarkable job of explaining how such a massive dislocation happened and why. You can read The End of Wall Street’s Boom by clicking on the link.
Michael Lewis is one of my all-time favorite authors. I think the world would be a far better place if more people saw things through his perspective. Lewis is most famous for writing Liar’s Poker which details events that occurred at Salomon Brothers during his stint there in the late 80’s. I believe that Lewis’ book with the most to offer investors is Moneyball despite the subject matter being baseball. I have read it at least a half dozen times and I think any one playing in the capital markets could learn far more from Lewis’s account of Billy Beane’s success with the Oakland A’s then he could from any one of the large investment banks. One of my favorite quotes is one that I paraphrase from Moneyball, which is, “Irrationality creates enormous opportunities for those who have the ability to resist it.”
(My favorite book by Lewis is Coach which is a short account of his high school baseball coach who was a hero to Lewis and all his teammates yet has been recently shunned by overprotective parents at his alma mater. My grandfather was a hall of fame football and wrestling coach and my father, although never financially compensated for it, has coached me in all sports throughout my life and is a Coach at heart which endears this story to me.)
The article is an especially good read for any individual who is allowing a large investment bank, like Goldman Sachs, Morgan Stanley or Merrill Lynch, to manage their money. In Liar’s Poker and in this article, Lewis does an amazing job of communicating the unbridled greed of these firms. When I started in this financial services business, I interviewed with many of these firms and was given handsome offers by each, but it was painfully clear to me the pecking order of profits. The firm made their money first, then the broker was allowed to take his cut and if there was anything left, the client might get a piece. They advertise providing “wealth management services” because they know that they will never be in the business of “wealth creation”.
The article details some of the more significant blown calls by Merrill Lynch like the Orange County bankruptcy and the Internet bubble. Lewis doesn’t even mentioned Merrill’s most recent train wreck decisions, most notably getting rid of their commodity trading desk in 1999 right before the onset of an eight year commodity bull market or buying up sub-prime lender First Franklin Financial near the absolute peak of the sub-prime market. I encourage everyone to read this article, maybe a few times if necessary, in order to gain a proper perspective on Wall Street. Remember that the guys who created the current crisis are the ones we’ve spent nearly $8T bailing out. Many banks haven’t even cut their dividends yet. None have returned bonuses. Many of the 26 year olds that Lewis talks about in the article made more in a few years than a GM factory worker will make in several lifetimes. Remember that next time we go to the polls to re-elect politicians who approved these bailouts. Remember that next time your broker calls with a recommendation or your Merrill Lynch financial advisor pitches you some solution by a firm that has incorrectly called practically every macro development in the capital markets over the past 20 years.