Saturday, November 22, 2008

Watching U.S.'s Growing Insanity

(WSJ) Michael Lewis is probably best known on Wall Street for "Liar's Poker," his first-person account of trading bonds at Salomon Brothers during the 1980s. He also is the author of one of the most influential baseball books in many years, "Moneyball," a tale of how statistical analysis enabled the Oakland Athletics to compete successfully despite a modest payroll.

[Michael Lewis] W. W. Norton & Company

Michael Lewis

Now Mr. Lewis, 48 years old, has taken a turn at editing. The result, "Panic: The Story of Modern Financial Insanity," examines five recent downturns, starting with the crash of 1987 and ending with today's economic crisis.

The timing appears particularly apt because the global economy continues to dominate headlines. Of course, if bookstore sales collapse this holiday season, "Panic" may end up as one more victim of the crisis it partially chronicles. In addition to including some of his own published work, Mr. Lewis picked articles from some of the country's leading financial journalists, including some at this newspaper.

Mr. Lewis, who lives in Berkeley, Calif., is now at work on a Wall Street nonfiction book. Here are excerpts from a recent phone interview:

The Wall Street Journal: What prompted this book?

Michael Lewis: A pal of mine, Dave Eggers (author of "A Heartbreaking Work of Staggering Genius"), came to lunch and asked if I'd put together an anthology for him, with the author's proceeds going to charity. This was in February 2007. I said that I was intrigued by the series of recent cataclysmic financial panics, starting in 1987, that seemed not to have any significant consequences. None of them ended capitalism as we knew it. The last piece in the book was written earlier this year during the subprime collapse.

WSJ: But doesn't the current crisis spoil your original thesis that there were no serious consequences to those earlier collapses?

Mr. Lewis: Yes. I was wrong. I'd become inured to these panics and originally thought we were simply undergoing another one. What I didn't know was how big the problem was. That's the difference. The sums squandered are so outsized compared to anything that's happened before. But it's not inappropriate to have this crisis in the same book. This is an era that began in the early 1980s and ends now.

WSJ: Somebody once said they enjoyed reading the sports pages because they chronicled the day's achievements. Any concerns that this book is basically an extended obituary?

Mr. Lewis: Well, there are some great journalistic triumphs here, some amazing writing. Look at Roger Lowenstein's piece about ratings agencies. And some of the real-time Q&As are priceless. Jim Cramer on page 238 tells a Fortune reporter after the Internet bust that he'd decided to give up material things forever.

WSJ: What was the biggest surprise?

Mr. Lewis: How little there was worth reprinting. I had six interns digging up all kinds of stuff, and I looked at 20 times the amount of material that appeared in the book. I assumed there would be lots of stories predicting each panic before the panics actually struck. But there was very little. Afterwards you'd have a flurry of literary activity, and then everybody was on to the next thing. Still, there was a common thread: You were watching America's growing financial insanity.

WSJ: How did you try to frame this book?

Mr. Lewis: I wanted to first re-create something of the feelings in the air. If someone was anticipating the bad times, I tried to get that in. Or if people had a sense of euphoria before a panic, I tried to show that, too. I wanted readers to see how culture digested specific events, how blame was distributed and understood, and how people came to terms with it so that they could move on.

WSJ: Early on, you note that Main Street is just as culpable for the current economic crisis as Wall Street. Did you look for a piece that discussed all the borrowers who asked for loans they knew they would never be able to repay?

Mr. Lewis: A compelling one never landed on my desk. This event required the complicity of the entire society, and then, when it was over, everybody blamed Wall Street. The housing bubble was similar. There was a total collapse of personal financial responsibility by the typical home buyer. He then had to be indulged by the system at large. But Main Street was an accomplice.

WSJ: What happened to the Wall Street conceit that financial risk could be reduced by spreading it out among many?

Mr. Lewis: It got turned on its head. By spreading it out, it infected everybody. Also, nobody believed that anyone would be so insane as to buy so much that, if it all went bad, they'd go down, too. But they did. It shocked me to find out the extent to which people exposed themselves to so much risk.

WSJ: One thing this book makes clear is that investors never seem to lose hope. When does the market bounce back, and what will be the next quick-buck scheme that we have to watch for?

Mr. Lewis: We have entered a period of risk aversion unlike anything we've seen in our lifetime. Investors will be too wary for a while. You'll read stories about people who got rich betting against subprime mortgages and then about people who combed through the wreckage and found bargains. The next rich wave will be those who figure out where the value is. As for the average American investor, he'll be a deer in the headlights for years. It will be a while until greed gets comfortable again.

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