Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Michael Lewis, Wall Street’s Smart Aleck Apologist

I was in the Salomon Brothers’ 1985 training class that Michael Lewis lampooned in his amusing book, Liar’s Poker. Imagine my surprise to see him billed as a trader on 60 Minutes, since he was actually a junior salesman. Well-heeled male peacocks strutted the trading floor, and junior salesmen were girlie-men, mere eunuchs serving their pashas.

Michael hit the roof when I ribbed him about the mischaracterization.* Yet, in January 2007 he didn’t spare the “wimps, ninnies, and pointless skeptics” at Davos. I wasn’t at Davos (Michael wasn’t either), but he derided people who staked their reputations–as I staked mine–on the fact that the financial system was in peril. One might think he’d have a thicker skin, when turnabout was fair play and truth was his casualty.

Clueless Lewis Ridicules Accurate Analysis

Michael had asserted “Davos Man…will brood about virtually anything, no matter how little he knows about it.” He ridiculed their concern of a pending crisis due to the surge in derivatives demand and called it “this year’s case in point.” Then Michael showed how dangerous it is to be a brilliant writer with a poor command of facts and their true meaning:

“None of them seemed to understand that when you create a derivative you don’t add to the sum of total risk in the financial world; you merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about.”

Actually, there was a lot of evidence that risk was being “redistributed” in ways we should all worry about. Predatory lending was a national scandal. I was well-published on phony securitizations, phony AAA ratings, phony accounting–and the mother of all risk–excessive leverage on securities that could only plummet in value.

Other serious people also spoke and wrote eloquently and accurately about the risks. They were often ridiculed by mainstream media girlie-men and intimidated by their bosses. Some–like my friend, Arturo Cifuentes–stood their ground and were maliciously fired for it.** Meanwhile, Michael was still cheerleading Wall Street:

“But the most striking thing about the growing derivatives markets is the stability that has come with them.”

Derivatives had destabilized the global financial system, albeit Michael was clueless. Leverage was much more dangerous than at the time of Long Term Capital Management‘s implosion. Then Michael gave us the payoff:

“If they really believe the markets mispriced risk…they must also believe they could make vast sums of money if they quit their day jobs and opened a hedge fund to take the other side of stupid trades.”

Exactly. That is what I wrote to risk managers at the same time Michael was penning his Davos screed. I told them to get out of investment banks and short those trades, since bank managers had their boots on the necks of risk managers, as regulators and the media licked the managers’ boots.

Not “Mispricing,” It Was Malfeasance

Michael had it wrong in more than one profound way. The markets weren’t just “mispricing risk,” those in-the-know were manipulating prices–covering up malfeasance and losses. Meanwhile, some members of the fourth estate used their pernicious pens as pawns in the cover-up.

All of the legacy investment banks enabled predatory lending, yet they now perpetrate what Elizabeth Warren calls the “myth of the immoral debtor.” Wall Street banks were the key architects of the financial meltdown. The Fed provided cheap money, but irresponsible financiers exploited it. Banks massively over-borrowed, their agents extracted billions in bonuses, and now they blame hard-working taxpayers. These predators call this “God’s work,” while most of the media covers-up for them.

Michael Lewis is Wrong Again: Not “Mass Delusion,” but Fraud

Michael wrote me that he read my book on structured finance while he was working on his book, because “it inspired one of the main characters” of The Big Short. *** Yet, Lewis mangled the facts in his eagerness to create a story, since it is again fashionable–and profitable–for Michael to bash Wall Street.

Michael told 60 Minutes (March 14, 2010) the financial crisis is a story of “mass delusion,” but he’s only deluding himself. It takes courage to tell the real story. This is actually a story of Wall Street’s massive, wide-spread, multi-year fraud, including accounting fraud.

I appeared on 60 Minutes (February 14, 2010) and said Wall Street’s dealings with mortgage lenders, securitizations, derivatives, and investors were a massive Ponzi scheme, the biggest crime ever against the American economy. Wall Street and Washington hope you are gullible enough to believe otherwise.

“Same Smart-Alecky Michael Lewis”

The Washington Post says The Big Short reads like the “same smart-alecky Michael Lewis,” a biased account of industry players “whom he holds up to ridicule for their arrogance.” I’m sure I’ll enjoy it for the irony.


* We are not colleagues but have exchanged the occasional email.

** Arturo Cifuentes, Ph.D., later joined R.W. Pressprich & Co. and is currently a professor at the University of Chile (Business School en Universidad Adolfo Ibanez) and a member of the Investment Committee of the Chilean Sovereign Fund. As a Sr. V.P. at Moody’s, he developed early CDO technology (where his ratings had meaning) from 1996-1999. Upon my recommendation, Dr. Cifuentes testified before the Senate Committee on Banking, Housing and Urban Affairs in April 2008 about subsequent unsound practices and the role of the credit rating agencies in the global financial turmoil.

*** Lewis was referring to Michael Burry who later testified to Congress, and confirmed to me via email, that he was inspired to do the trade in part by my books: Credit Derivatives (Wiley, 1998, 2001), and Collateralized Debt Obligations & Structured Finance (Wiley, 2003).

The boxed quotes are from “Davos is for Wimps, Ninnies, Pointless Skeptics,” Bloomberg News, January 30, 2007, by Michael Lewis.

Janet Tavakoli’s book on the causes of the global financial meltdown and how to fix it is Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.

See also:

Why POTUS Allowed Bailouts without Indictments” – TSF – September 10, 2013

Alan Greenspan Played Daily Show’s Jon Stewart” – TSF – October 28, 2013

Financial Journalism: Sometimes Being Responsible Means Pissing People Off,” TSF – July 3, 2012

Gasparino’s Glass Jaw Is No Audience Draw,” – TSF – July 22, 2009

Where Were the Drama Pundits [Gasparino, Meredith Whitney, Nassim Taleb] When It Mattered?” – July 29, 2009

Share This Post