Language served a different purpose inside the bond market than it did in the outside world. Bond market terminology was designed less to convey meaning than to bewilder outsiders. Overpriced bonds were not “expensive”; overpriced bonds were “rich,” which almost made them sound like something you should buy. The floors of sub-prime mortgage bonds were not called floors — or anything else that might lead the bond buyer to form any sort of concrete image in his mind — but tranches. The bottom tranche — the risky ground floor — was not called the ground floor but the mezzanine, or the mezz, which made it sound less like a dangerous investment and more like a highly prized seat in a domed stadium.
— Michael Lewis, from The Big Short
The backlog of books I’ve eagerly purchased but haven’t yet found time to read is so lengthy that I can always divert myself long enough for a title to come out in paperback. But I heard Ira Glass rave about The Big Short on This American Life shortly before I happened past a Borders, so I wound up splurging, allowed the book to queue jump, and guiltily read it in three sittings despite having lots of other work to do. If you liked The Giant Pool of Money, this is one to buy in hardcover.
Steve Eisman was one of my favorite characters. Early on, he concluded that Wall Street’s biggest firms were engaged in financially and morally indefensible behavior. So he did his utmost to find a way to bet against them. He spent millions of dollars on credit default swaps, a sort of insurance policy on mortgage backed securities that would pay off only if a lot of Americans suddenly found themselves unable to make the monthly payments on their home loans. He did so at a time when all the major Wall Street players were going gangbusters feeding the housing bubble and the explosion of cheap credit available to working class Americans. In my favorite parts of the book, Eisman would go into a meeting with Wall Street bigwigs who were, in effect, long on the sub-prime market. He’d try his best to determine if they were stupid, crooked, or lying to themselves, having figured out that these were the only options.
My other favorite characters were a few friends who started a small hedge fund in Berkeley, California, and independently figured out that they’d better short mortgage backed securities. They bought credit default swaps on the CDOs that Wall Street firms were using to launder toxic assets into misleadingly rated investment products. The best part of their story is when they go around trying to find someone, anyone, who can show them the error in their thinking. After all, they thought, if we’re right, the entire American financial system is based on a fraud — via stunning negligence, blinkered thinking, and outright mendacity, respected Wall Street insiders are misleading an entire country about reality, and gambling away its future on their behalf! Even after they had proved that proposition to themselves, it seemed too crazy to be true, especially when, despite all the hard evidence to the contrary, everyone else was acting like things were fine.
The bemusement of these characters reminds me of how I feel sometimes interacting with the conservative movement. Across America, the rank and file is trying its utmost, through the Tea Party and other venues, to fulfill their civic role in the nation’s political market. But the middlemen they rely on as supposedly trustworthy information brokers — the talk radio hosts and Fox News personalities and Heritage Foundation scholars and Human Events advertising editors — have found a way to enrich themselves participating in the process whether or not the common investor sees actual returns.
As they do so, they’re misleading their audiences about reality in the most egregious ways on a daily basis. When you think about it, this is morally outrageous and strategically shortsighted. But inside the larger right-of-center political world they inhabit, this reality is basically ignored, because who wants to be short the whole system? Everyone is so invested in it, especially the millionaires in the movement establishment, which never uses that name for itself. Even some firms that should no better are playing along.
I mean, I want to be short! In my Inbox, I’ve recently gotten some delicious “you were right about Mark Levin all along” emails from folks that surprised me by coming around, and I wish like hell I could’ve bought credit default swaps on his professional reputation, rather than merely being rhetorically short. But maybe that was just a lucky pick, and I’m wrong about the larger system being corrupt.
In a way, I hope so.
My fear is that the Republican Party isn’t going to emerge as the credible voice for grownup foreign policy and limited government that I want it to be until its base stops relying on thought leaders like Sarah Palin, Rush Limbaugh, Sean Hannity, and Glenn Beck, whose specialty is laundering sub-prime arguments into confusing bundles meant to obfuscate their unsoundness. In this analogy, the poorly incentivized ratings agency is played by people like Jonah Goldberg, who trades on his deserved stature as way more intellectually honest than the talk radio guys, but for some reason gives Glenn Beck an overall AAA rating for a nightly program that packages a bunch of toxic assets with Hayek. (”…if Beck wasn’t a libertarian, I would find his populism terrifying.”) As “Giant Pool of Money” fans know, Moody’s rated tranches of mortgage backed securities in a similar fashion that made no more sense.
If I’m right about all this, it’s awful. I’d put it this way: on television and radio, none of the most popular movement conservative entertainers can get through a single week of their respective shows without egregiously misleading their audience about something. They’re also consistently debasing political argument on the right by substituting ad hominem and purity tests for reason, weakening all subsequent ideas that emerge. On the right’s equivalent of Wall Street everyone either knows this or is stunningly blinded by their ideological alliances. The customers on Main Street, doing their best to follow this market from the outside in their limited free time, aren’t in on the joke — officially they’re clients, but more often they’re treated like rubes and means to an end.
Like I said, the balance sheets I’ve delved into make this seem pretty clear. But almost everyone else is acting like this isn’t actually what’s going on, or else that it isn’t a problem. So I’m asking folks on the other side of this bet to show me the error of my ways. Why am I wrong to short these people, and to mistrust their system? Could anyone defend being long on them if there actually were a market that cleared when the true level of intellectual value was discovered? Has everyone convinced themselves that the fundamentals don’t actually matter? If not, would anyone like to join my hedge fund? We could diversify with positions against the drug war, diamond engagement rings, prison guard unions, and the intellectual value added of University of Phoenix Masters in Education degrees.