'Panic: The Story of Modern Financial Insanity' edited by Michael Lewis
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After the markets closed, the financial district of Chicago was eerily quiet. On LaSalle Street, journalists Scott McMurray and Robert Rose reported, the brokerage sign that usually illuminates the Dow Jones Industrial Average "blinked incomprehensibly when the drop passed the two-digit mark, then simply flashed zero."
Edited by Michael Lewis
The plunge, financial experts predicted, marked the end of "yuppiedom" and the free-spending ways that endeared them to real estate agents, car dealers, jewelers and custom-made clothes.
That was 1987. But, as Michael Lewis, the author of "Liar's Poker," reminds us, Black Monday did not have the disastrous consequences so many financial experts predicted.
Neither did the bursting of the Internet bubble, the Asian currency crisis, the Russian government bond default and the collapse of the hedge fund, Long Term Capital Management.
Or did they? In "Panic," Lewis has collected more than 50 contemporary accounts of the crashes that punctuated -- and punctured -- the two-decade (Green)span of "irrational exuberance."
With exquisite timing, the anthology ends with detailed and depressing essays on the subprime mortgage crisis and the bundling of debt by American financial institutions, and the theory behind those actions.
Portfolio insurance, Lewis writes, allowed Wall Street marketers to grotesquely underestimate the risk of catastrophes and conspire with human nature to create them.
Since Lewis does not update the essays, which were written in medias res, "Panic" sheds little light on the aftermath of each meltdown.
The book is at its best when it X-rays the housing bubble. The anthology demonstrates that market watchers noticed that when Alan Greenspan's Federal Reserve encouraged lenders to develop and sell exotic subprime loan packages, the Fed was increasing short-term interest rates.
Some homeowners, John Cassidy wrote in 2002, "might be tempted to put their properties on the market while they still can." Those who thought they could flip real estate as easily as pancakes "may soon discover new meaning in the phrase 'safe as houses.' "
The Ponzi scheme, it's now clear, was masked and magnified by the bundling of debt. Mortgage securities were pooled and peddled from financial institution to financial institution, with no one able to separate good loans from dogs.
Ratings agencies, such as Moody's, gave the packages their seal of approval. And de-regulation (or, more precisely, non-regulation) permitted hedge funds to "leverage" these "assets" and invest as much as 35 times the capital they had available to them. It worked until it didn't work, and then investors exited in droves.
This time, alas, it isn't deja vu all over again. "Not only does financial history seldom repeat itself," Lewis jokes, with tears in his eyes, "it seldom even rhymes."
Unlike many of its predecessors, this panic is a rational one. Homeowners owe more than their houses are worth. Lenders are crushed with bad debt. And liquidity has dried up.
The crisis won't end until real estate prices bottom out, financial institutions recover, Main Street gets mugged and taxpayers bleed billions and maybe trillions.
Until then, Wall Street and the Olympics will have one thing in common: Synchronized diving.
First Published November 23, 2008 12:00 am