What a fool believes

Twenty years ago this spring, I had the second-best vacation of my life (best was Italy in ’97) in the kind of place where, if I had my druthers, I’d spend all my domestic vacations: a beach where there’s not much to do outdoors except lie in the sun, read and drink. And while on this vacation, among the things I read was Liar’s Poker, Michael Lewis’s combination of memoir and journalism about New York investment banking in the 1980s. I picked up the title because the PR agency I worked for in New York back in the day had had investment banks among its clients, and I was curious to learn a little more about the culture than I’d been able to at the time.

(Lewis, as it happens, has a new book out and was on “60 Minutes” Sunday night. I hope that segment is online.)

If there’s one thing you take away from Liar’s Poker, it is the massive, overwhelming sense of entitlement that pervades the industry. To hear Lewis tell it, these people, many of whom — like Lewis — fell into the industry almost by accident, really do believe that they are the Masters of the Universe (to use the phrase from Tom Wolfe’s novel about i-bankers, Bonfire of the Vanities). They really think that they make the economy possible and that they are, if anything, sadly underpaid.

If you wonder how America’s finance industry could have screwed the pooch so thoroughly for the past couple of decades, how it is even possible, then read Liar’s Poker. You will come face to face with people who not only have a grossly overinflated sense of their own competence but also an utter inability to recognize, let alone learn from, their mistakes.

And so it is that we learn that the Masters of the Universe at AIG think they deserve way more money than they’ve gotten for blowing up the economy:

During the national furor that erupted last year after American International Group paid more than $165 million in bonuses, the voices of those vilified for receiving the payments remained silent, at least in public.

But behind closed doors, employees at AIG’s Financial Products division — the very unit whose trading had hastened the insurance giant’s collapse — were defiant, saying they were merely getting what they were due, recoiling at public accusations that they were behind their capitalizing on the company’s massive taxpayer bailout.

“I will stand behind every action I have taken in this company from Day One,” one employee said, according to a newly obtained transcript of a conference call the division’s head held last March with some of his staff. …

But when another employee asked whether the staff would be getting a second round of bonuses promised for March 2010, his colleagues burst into laughter, apparently considering this a preposterous notion amid the public outrage.

Yet they did see that money, at least most of it. Last month, under a deal in which employees agreed to take a cut in their upcoming retention bonuses in return for an accelerated payment, AIG paid out about $100 million to employees at the firm. AIG is scheduled to pay the last of the bonuses this month.

Even so, neither time nor money has softened the employees’ feelings of wrongful persecution and their anger over becoming the subjects of scorn and ridicule. Seldom was that sense of victimhood more clear or more visceral than in the conference call of March 23, 2009. …

The employees said that the corporate leaders who had driven the firm into the ground were already gone from the company. Those who had remained behind to help clean up the mess and repay the taxpayer bailout were due their compensation, they told Pasciucco.

“You made a commitment to us, and we made a commitment to you. And for anybody to look beyond that, as the politics and the media are at the moment, is missing the point,” said an employee. “You can’t expect us to just roll over and ignore that commitment because there is a bunch of immoral bigots that intend us to do something different. It’s not going to happen.”

Another was even more irate, lashing out at the public for scapegoating AIG employees. “To be honest with you, I really hope it blows up. I think the U.S. taxpayer deserves to lose a trillion dollars over this thing for the way they have behaved.”

So let me get this straight. You turned a full third of my retirement savings and about 30% of my kids’ college money into vapor, and yet I’m an “immoral bigot” who “deserves to lose a trillion dollars”?

My response to this mindset isn’t printable on a PG-13 blog. Fortunately, Brad at Sadly, No! speaks for me:

My general reaction: Just quit, you [expletives]. Try taking around your résumés to other firms if you’re so convinced in your own inflated sense of self-worth. But this is just a guess — when you go in for an interview with another company, having five years’ experience of selling credit default swaps in AIG’s Financial Products division isn’t going to help you get a job. … I wouldn’t hire you to vacuum my rugs or take out my garbage.

I wouldn’t hire you to wipe my ass.

Fact-checking

Michael Lewis corrects some misimpressions about Goldman Sachs. It’d be funny if, well …

Less amusingly, Matt Taibbi and New York magazine discuss Goldman’s near-death experience this past fall … an experience it appears to have survived only because of an injection of tax money, separate and apart from the tax money funneled to it through AIG, which makes the company’s current compensation plan even less justifiable than it already was (if you can get less justifiable than “completely unjustifiable”).

“Wall Street had built a doomsday machine”

Michael Lewis, the author of the Wall Street classic “Liar’s Poker” (which was so entertaining I read it on my honeymoon), has written an article that ought to be required reading for anyone interested in knowing how the economy got to where it is today, i.e., in a helluva mess. It looks through the eyes of people who not only foresaw the disaster but also placed their financial bets accordingly. The money they’ve made on this will be legendary — they went way short on a bunch of stocks that, because of the mortgage fiasco, are gone or next to worthless today. But I get the feeling they’d trade most of it for a healthy economy:

FrontPoint was net short the market, so this total collapse should have given [Danny] Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he’d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. “I spent my morning trying to control all this energy and all this information,” he says, “and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don’t get headaches. At first, I thought I was having an aneurysm.” …

“Look,” [Steve Eisman] said. “I’m short. I don’t want the country to go into a depression. I just want it to f—–g deleverage.”

The article also shows, among other things, that the problems went far worse than bad mortgages. The problem also included, essentially, imaginary ones:

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with s—-y credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all.

And the Masters of the Universe couldn’t figure out that these securities had nothing behind them.

One of the big lessons we take from this is one that the screenwriter William Goldman has often used about Hollywood: Nobody knows anything.

Either that, or a whole lot of people ought to be going to prison.

Maybe both.

Which is bad enough. What’s worse is that China, which holds the second biggest chunk of our debt behind Japan last I checked, sees an opportunity in our troubles that ought to have us shaking. One of its leading economists is saying, “Hey, trillion-dollar-deficit guy! You want me to keep buying your debt? Then we’re gonna go all IMF on your butt.” (That might not be a direct quote.)