When the head dick's a dickhead

It was great to read Michael Lewis’s book Liar’s Poker. 

Michael Lewis: Liars Poker  is a great read, if slightly mystifying to me

The book tells the story of Lewis’s brief passage through the world of the financial markets, and describes the ludicrous amounts of money to be made there (even by him, and he was at the bottom of the pile). The trouble is that the financial transactions he talks about are so opaque to me that I remember almost nothing about them. That means that the book has left me with a sense of having half grasped the story as I read and enjoyed it, though today I have little understanding of the strange transactions it described. 

One thing, however, that has stuck with me was the term Lewis popularised in this book, “big swinging dick”. He used it for the most successful traders. These were the men who found people prepared to sell bonds or shares at a little below what they were worth, and then sell them on to others who paid a little more, so that from marginal differences, over huge volumes, a “big swinging dick” could make a fortune, for his firm and for himself.

Note that at each end of the transaction, was someone who had lost out, by accepting too little or paying too much. In between, a dick who made a lot of money by doing absolutely nothing valuable at all.

What attracted me about the “big swinging dick” idea was firstly that it perfectly expressed the almost wholly male nature of this world. Not just male but assertively so, revealed in its highest accolade being a metaphor based on genitalia.

Next, it felt exactly right because if there’s one things you can be sure of with a dick, it’s that it isn’t the seat of man’s intellect. That doesn’t mean that men don’t think with their dicks. On the contrary, they certainly do, as Bill Clinton can testify and Donald Trump can deny.

I’ve never worked in the world of finance. I’d like to claim that this is for moral reasons, that I refuse to play those particular and profoundly unethical games. Sadly, that’s not the case. I don’t think I would every even have been considered for a position in that exalted world of high earnings and low morals. In any case, I found the environment nothing short of scary.

On the other hand, even in my somewhat gentler world, I’ve worked with plenty of dicks. In fact, some of them seemed to have adopted forms of behaviour which I could only describe as being designed to make them feel better about their dicks. In some cases, it was a matter of the cars they drove (the most spectacular was, in fact, driven by a woman, but she was just as dick-oriented, in my mind as most of the men).

One of the most striking aspects of the behaviour of these men was that they seemed to measure their significance in business by their behaviour towards subordinates. They would treat them as heroes until things turned bitter, at which point they would become the objects of their wrath. Sometimes, it would be disciplinary action – minor offences would be dealt with final warnings of dismissals – sometimes it would be actual dismissals, in the form of redundancies, for failures which ought much more properly to be put at the doors of the dicks themselves.

A common feature of these characters is that they would always say how dismissing employees in these circumstances was the most difficult decision a businessman could take. They suffered at letting these fine people go. Not quite as much as the people who been let go. Nor quite as much as if they were to admit that they’d screwed up themselves. But still, they suffered.

Or so they claimed. Because the way they told me about the pain they underwent over firing people always left me unconvinced. It sounded much more to me as though, in truth, their suffering was considerably mitigated by the sense it gave them of their power over others.

And power is what turns these people on. A big swinging dick wants above all to get his way. Indeed, even the money he makes is about being able to do what he chooses – to get the restaurant tables he likes, buy the wine off the bottom right-hand side of the list where the prices are highest, wear the suits that aspiring dicks can only envy him for.

That’s why it isn’t just in business that you find dicks at the top of organisations. They’re right up there at the top of politics too. Exercising power to make themselves feel that they have huger dicks than anyone else.

Although, as Trump and Boris show, the reality is that they’re just huger dickheads.

Big swinging dickhead. And our Prime Minister now...

Opening our eyes to how we got where we are... and where we may be heading

Every now and then one reads a book that opens your eyes to what’s going on around us.

It was the case for me with Thomas Piketty’s book Capital in the Twenty-First Century. He shows how the era of reduced inequality between the First World War and the 1980s was historically exceptional, and that since that time the process has gone into reverse, with inequality growing rapidly and reaching dangerous levels.

It was the case again with Michael Lewis’s The Big Short. This is a far shorter book, which has its appeal, and it’s also a great deal more entertaining – I found myself repeatedly irritating my wife as I chuckled over certain passages and insisted on reading them out to her. But it was also an extraordinary eye-opener.

Lewis, whose Liar’s Poker did an excellent job exposing the seamy and ultimately worthless work that was being done on Wall Street in the 1980s, generating huge fortunes without creating any value, has an extraordinary talent for describing the underbelly of finance and doing it with clear, compelling writing.

What he shows in The Big Short is that the entire market that grew out of dealings in sub-prime mortgage bonds in the first decade of this century was based on essentially a lie. An increasing proportion of the financial instruments traded were based on worthless loans, far too many of which never had the slightest chance of being repaid. But while huge, and inadequately regulated, Wall Street firms could continue to be astronomical paper sums of money from them, the incentives were on to keep making the loans, issuing the instruments, and trading them.

This was part of the trend towards inequality so well analysed by Piketty. It was also a direct consequence of the Reagan-Thatcher years of active deregulation of the finance world in particular, and of industry more generally. As Michael Lewis points out, it wasn’t so much the greed of the firms that was to blame – the greed was always there. It’s that they were allowed to engage in business that they simply didn’t understand: not the people who were producing the instruments, not the traders trading them, not the executives who were paid eye-watering salaries to keep them in control.

The firms they led also put pressure on the ratings agencies to keep rating the bonds highly – triple-A, the top value – even though they were based on junk loans. The ratings agencies, the last line of regulation, proved completely inadequate to the task. But then they too are private companies, and subject to the blackmail that if they failed to provide a top rating, they’d lose the client to someone who would. Though it’s unlikely they had any understanding of the instruments they were rating.

No one understood.

Well, that’s not quite true. A handful of people did, and that’s the core of Lewis’s story. He tells the story of that handful and of the way they bet against the sub-prime mortgage market. When people claim today to have known what was happening then, check that they were part of that tiny group – if they weren’t, they’re lying.

Michael Burry: perhaps the first to have foreseen the 2007 Crash
And he made a packet by betting against it...

The book’s well worth reading, if you want a pacy, exciting, amusing and clear description of how the biggest financial crash the world has seen since 1929 took place. They got it right, and they made a packet out of betting they were right – betting, in fact, that the sub-prime mortgage market would fail. That's the ‘Big Short’ of Lewis’s title: this handful of clear-sighted individuals made a lot of money by shorting, betting against, the certainties that dominated Wall Street and banking around the world. 

In passing, the charge made by many British Conservatives that the 2007 crash was in any way attributable to the Labour government, in power at the time, is of course self-serving rubbish. If any political force is to blame, it’s the conservatives on both sides of the Atlantic, who so enthusiastically pursued deregulation all those years ago. As Piketty points out, they’re creating a world in which the  top 0.1% or 0.01% endlessly enrich themselves at the cost of all the others, and 2008 was merely a pothole on that road.

At most, one can accuse Labour and others on the Centre-Left of having done too little to roll back Conservative laxness towards the finance sector.

The saddest lesson from the experience? The journey on that road continues. Trump is an enthusiastic driver in that direction; it’s not clear that Clinton would do little more than moderate the speed of travel. In Britain, we have a new leadership of the Labour Party that might be able to force a change in course, but while the Conservatives cling on to power, we too will go that way. And the picture around Europe, or in Russia, China or India, is hardly more encouraging.

So read The Big Short for its qualities as a book and for the lessons it teaches. Then, once you’ve learned what it tells you about the recent past, ask yourself whether you’re prepared to see us heading for something similar in the future.

Because there’s only ourselves who can stop that happening…

A sorry Kindle story. And a joke to sharpen the irony

There are times when going on holiday isn’t a luxury, but a vital necessity.

Getting back to work, after an involuntary nearly eight-month break last year, is a bit of a shock to the system. Especially as it involves commuting into London, a joy I’d been deprived of for the previous four years. Especially as that involves frequent 5:15 a.m. starts to the day.

The worst effect of tiredness, I find, is to undermine judgement. I make mistakes, try to fix them and end up compounding them with worse errors still.

The other day I left for work a little later than I usually do. The trouble is that while it’s a luxury to be a little more leisurely about getting ready to go, and the dog gets a slightly longer walk, there’s a price to pay which rather kills the pleasure: I don’t get a seat on the later trains.

That was my first misjudgement.

I’m an enthusiastic convert to the Kindle. Never, since I’ve had a Kindle, have I had a suitcase that’s overweight for air travel. And yet now I travel with dozens, potentially hundreds, of books where in the past I would take just a handful – but that would be enough to tip the scales into eye-watering excess baggage charges.

Great device, great book. A source of pride and joy
And just now a little embarrassment

The Kindle has become my newspaper too. So I was reading the Guardian on the way into work until the sheer discomfort of trying to keep my balance in a crowded aisle became unbearable, and I put my Kindle down on a table in front of me.

That was my second misjudgement.

Because when more people joined the train, I had to move further down the aisle and away from my Kindle. Out of sight, out of mind. A porous mind, at least. As a result, I left the train without the Kindle and didn’t even notice until I decided to read a little more of The Big Short at lunchtime. 

You don’t know The Big Short? It’s a must read. Watch this space for more about this brilliant insight into the sheer stupidity of the people who make the most money, but only for themselves, and lose the most money for the rest of us.

But, of course, I couldn’t read The Big Short that lunchtime. I’d lost my Kindle. Oh, the despair!

The depression over my stupidity was immense. Made worse by the tiredness. I felt driven to do something immediately, to try to remedy the loss. So I bit the bullet and ordered another one. It was a bitter bullet (a bit of a bitter bullet bitten?) as Amazon no longer had a special offer on and I had to pay full price.

That was my third misjudgement, the final error that compounded the others. Because the inevitable happened. The train company got in touch. Instead of being stolen, my Kindle had fallen into the hands of someone honest enough to hand it in, and I could go and collect it. Just, as it happens, as I received the new one.

So I now own two Kindles. Both capable of holding a regular library of books, far more than I could ever read or wish to read. An endless supply, for all practical purposes, which I can never exhaust. And each identical to the other.

That made me think. Firstly, that it was definitely time for a holiday, to get grounded again and have my judgement functioning once more. And secondly of an old Irish joke I’ve always enjoyed.

Seamus is offered three wishes by his fairy godmother. For the first, he asks for a bottle of Guinness that never runs out. She flicks her wand and there, in front of him, is the bottle. He pours out a glass and drinks it, and the bottle is full again.

“Why, that’s magical," he says.

“And what about your other two wishes?” she asks.

“Well, I liked that one so much, I think I’ll have two more of the same.”

At least I now know what it feels like to be Seamus.

How bankers make their money, and why we let them

Liar’s Poker is the first of Michael Lewis’s books I’ve read, but it certainly won’t be the last. It explains something that has always been obscure to me: how bankers can make huge amounts of money without doing anything remotely useful, indeed despite doing a great deal of harm.

Invaluable insights

Liar’s Poker was published in 1989, which means it’s way out of date. But ironically that only makes it all the more interesting, since it describes precisely the practices that would lead to the crash nineteen years later.

Here’s how they work. Somebody takes out a $100,000 mortgage to buy a house. Next the lending organisation gets worried for some reason, and decides it would like someone else to take over the debt. But no one will step up unless there’s something in it for them. So the original lender agrees to take less than the full amount of the debt, say $80,000, perhaps because its immediate need for cash means it prefers taking less now, than hanging on for a larger amount in the future. 

So someone has bought the debt and how holds a piece of paper, a bond, entitling him (it’s almost always a man) to cash in $100,000 for an outlay of $80,000. A good deal even if he has to wait 20 years for the profit.

But he may not even need to wait. Someone else hears of the transaction and says “wow! I missed out. I want a piece of that.” So he offers $90,000 to take over the mortgage himself. Buyer 1 doesn’t hesitate: a $10,000 profit after a few days is highly desirable even at the cost of a larger profit 20 years away.

Now something interesting has happened.

Initially, the transaction was about buying a house. That’s something made of brick and mortar, a solid, tangible asset. It has real value: you can live in it.

Then there was the mortgage. Well, that has value too, if at one remove: it made it possible to buy the house.

But then we started trading the mortgage itself, the bond. It’s two moves from reality. It has little value itself, but it does now have a price, since it can be traded.

The reality is that a bond won’t cover just a single mortgage, because that’s too open to risk: the borrower might default leaving the bond without value. Instead bonds cover a thousand loans, as the chances are that there will be defaults on only a small number, leaving enough to generate a healthy profit.

The really clever bit is what the broker does. He charges a fee, which means he makes money on each trade, whether the buyer or the seller does well or not.

My examples involve large percentages: $20,000 out of $100,000, for instance. What Lewis explains is that traders in bonds look for gains as small as one eighth of a percentage point. They might themselves charge one-eighth of a percent in fees. However, one-eighth of a percent of $100 million is $125,000, which is not to be sneezed at. And if the broker sells bonds to one buyer, and then persuades that buyer to sell them two or three days later to another, he’ll double that to over $250,000 for his firm, just by judicious use of a phone.

Not one person will have been fed, educated, housed, clothed, transported or cared for as a result of his actions. The trader will have moved a number from one account to another and then to a third, and generated in days the equivalent of six people’s average yearly earnings. That will doubtless be reflected in his annual bonus.

Remember that this is based on the price of the bond, not what was paid for the house or the size of the mortgage. As long as someone will pay a little more for the bond, the broker keeps making money. Where it all goes pear-shaped is when people stop feeling it’s worth paying a higher price than the last guy. Then someone is left holding a bond he can’t sell.

Imagine what happens if, to satisfy the demand for this kind of bond, people have been out there offering mortgages on properties that simply aren’t worth enough, to people who’ll never be able to pay them off?

Then the person left with the bond when the bottom falls out of the market – the bond market, mind, not the housing market – has only one way of cutting his losses. He forecloses on the mortgage holders, forcing them to sell their properties. And if it turns out that the properties aren’t worth enough to cover the debts, then both the homeowner and the bondholder are in serious trouble, with only one difference between them: if the bondholder is a large bank, the taxpayer will bail it out, but the now homeless borrower gets no help at all and is even blamed for the failure.

Lewis explains that what his company, Salomon Brothers, did with mortgage debt was done with corporate debt on a scale hundreds of times greater, by Michael Milken. He was the innovator in “junk bonds”, the debt of companies regarded as a bad risk. He found that many of these debts were undervalued, and Lewis explains why: “investors shunned [such companies] out of a fear of seeming imprudent.”

Michael Milken: pocketed half a billion while he had the chance

Milken persuaded banks to throw prudence to the wind and buy the debts of dodgy corporations. While the value of the bonds kept climbing, everybody prospered. In particular the brokers who traded these bonds made a fortune: at the height of his powers, Milken paid himself $550 million in a single year, according to Lewis. 

Since then, and since his release from gaol (he eventually spent a couple of years inside), Milken has made himself a name as a charitable donor, funding medical research in particular. That’s very commendable, though we ought to remember that he only made the money by awarding himself astronomical pay for contributing next to nothing to society – and arguably stoking the disaster that engulfed us all in 2008.

Lewis tells us that as a child he learned from his father to believe “that the amount of money one earns is a rough guide to one’s contribution to the welfare and prosperity of our society.” But Lewis himself had to abandon that comforting belief: “when you sit, as I did, at the centre of what has been possibly the most absurd money game ever, and benefit out of all proportion to your value to society...; when hundreds of equally undeserving people around you are all raking it in faster than they can count it; what happens to the money belief?”

He got out of banking, but the belief still pervades society. As Thomas Piketty points out, “modern meritocratic society, especially in the United States, is much harder [than the nineteenth century] on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom.”

It may be the belief that if you’re not making much money, you’re not worth as much as the Milkens of this world, that explains why we treat them with so much deference, allowing them to buy our politicians and helping them protect their privilege and power, even from the consequences of their own fecklessness.

There are a lot more of us than of them, and we all have votes. If we could overcome our obsequiousness towards money and those who control it, we could free ourselves of some particularly unpleasant parasites. What a great step forward in justice that would be. 

To say nothing of the of the damage we could stop them inflicting on us.