In the book, Lewis explores the financial crisis from the perspective of a precious few who predicted the collapse of the subprime mortgage market.I watched him talk to Charlie Rose on Bloomberg TV and explain how these few investors made millions betting against the system. They tried to get other fund managers to understand, to see the insanity of the so-called smart money, but no one would listen.
Rose: “Now, why wouldn’t they listen?” Lewis: “Well, here’s where we get into this strange psychological component to the story. I mean, I think that people believe what they’re paid to believe. People see what they’re paid to see... The people on Wall Street were paid so much money not to see what was under their nose, they didn’t see what was under their nose.”
In 2005 I went to a conference on mortgage finance and heard an executive from the US government mortgage finance corporation Fannie Mae extol the glories of the securitization of mortgage assets. The woman showed a chart outlining the chain of value and risk sharing, an insurance web wherein one individual bank would be liable for only a small fraction of its own mortgage portfolio. The trouble lay in many banks holding the same wide basket of worthless assets, which would indeed spread the risk far and wide.
Years ago, in the bad old days, I wrote an article on Turkish banking in which I posed the industry as a mental patient. My imaginary psychiatrist restricted access to sharp objects like derivatives, but I had no idea that those same sharp objects would turn on their creators and cut them to pieces. Little did I know that Turkey’s lack of exposure to the slop bucket would redound to its glory a few years later, that the president of the United States would visit İstanbul in 2009 and say how Turkish commercial banks were much sounder than their American counterparts.
Lewis said that big money distorted people’s vision, that fund managers and brokerage executives could not perceive the obvious. Albert Einstein said that rays of light would bend when passing by a huge object like the sun, that the immense gravitational pull would affect even something without discernible mass. A big, multi-million dollar bonus is like the sun: It has a force of gravity that distorts human intelligence.
It’s important to remember that Turkey’s financial services industry escaped the carnage not through its own wisdom, but by a happy accident of timing. After reporting another quarter of record profits, it would only be natural for the head of a large Turkish bank to think, gee, I must be one of the smartest bankers on the planet.
But what are we doing now in Turkey? A recent global survey ranked Turkey 51st in terms of innovation, a bad sign for the world’s 17th largest economy. Are we fostering innovation? No, we are getting lost in corruption, bickering and arguing over how to run the country.
Imagine you plant trees on your property and then 20 years later the Forestry Ministry comes and says they may have to confiscate the land. Imagine you own a house on a few hectares of land, that your family has lived there for generations. Suddenly a reactivated Ottoman-era foundation claims a share of ownership and you have to pay 10 percent of the market value of the property to settle the claim.
Rose closed his interview of Lewis with a quote from Leo Tolstoy: “The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already. But the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already without a shadow of doubt what is laid before him.”
Let’s not make the mistake of thinking we know it all. The height of enlightenment is to understand how little we know and with humility try to do better tomorrow and the next day and the day after.
