The Big Short: Inside the Doomsday Machine
By Michael Lewis
W.W. Norton & Company, 2010

Review by James Srodes

You have to pay attention when The Washington Post’s superb financial writer Steven Pearlstein insists, “If you read only one book about the causes of the recent financial crisis, let it be Michael Lewis’s The Big Short.”

Taken literally, I would have to agree. If all you are going to do is read just one book on the recent and continuing financial crisis, this is the one.

Ever since he hit in 1989 with Liar’s Poker, Lewis has been doing to Wall Street what Jimmy Breslin did to the Mafia with The Gang That Couldn’t Shoot Straight. Lewis’s target with that book was Salomon Brothers, his employer at the time. He went on to deconstruct Silicon Valley with The New New Thing (2000), major league baseball with Moneyball (2003), and economic theory in one of my favorites, The Real Price of Everything, just two years ago. But the usual focus of the Michael Lewis signature brand is Wall Street’s aberrant culture, which he has chronicled in nine other books and scores, if not hundreds, of magazine articles and columns for outlets as diverse as Vanity Fair or the Bloomberg financial news service.

The Big Short features Lewis at his best—a cheeky narrative style and a convincing ability to explain the complex realities as he pulls off the robes of dignity that clothe the great names of American high finance and reveals the mix of arrogance, cynicism, and just plain stupidity that were the proximate cause of the financial panic we have endured since 2007.

But this book is less an exposé and more of an adventure yarn. Missing here is the overarching villain Lewis made out of John Gutfreund who, in 1981, had turned Salomon Brothers from a private partnership into Wall Street’s first publicly held firm, thereby arguably touching off the rush to high-yield, high-risk vehicles that has brought us to a world of hurt.

Instead we get a cast of most improbable heroes. Each may be a bit personally dysfunctional, but they all proved prescient about the underlying danger that lurked behind the boom in subprime mortgage finance. For a few heady years, this boom sucked so many hundreds of billions of dollars into oblivion that the U.S. government is still printing new money to fill up a hole that appears to have no bottom. Early on—almost too early—these bizarre characters spotted the implausibility of subprime finance and each in isolation began to place incredibly long-shot bets against one of the main legs of American prosperity: the housing market. They go “short” in a very big way against what everyone else from Wall Street to Washington to Geneva is convinced is a bubble that will never burst.

While the tale Lewis gives us has the ring of a classic Hollywood little-guys-take-on-the-Establishment whacky comedy, he makes a sobering and even troubling point: when an entire community is doing something it is convinced can never fail, a person has to be a little bit crazy to challenge that conviction because the community can ruin you before you are proved right. The palpable tension in the tale is the impending doom that hangs over these heroes, who ultimately are denied the kind of triumph commensurate with the breath-taking risks they took.

And what a cast of contrarians. My favorite is an untidy, rude, confrontational analyst named Steve Eisman who identifies with comic book action heroes a little too closely for comfort. Eisman had watched the first iteration of the subprime mortgage scam balloon and bust in the early 1990s when they were marketed by short-lived firms like The Money Store, Green Tree Financial Corporation, and Aames Financial Corporation as a way for consumers to reduce their high-interest credit card debt by moving into allegedly lower-rate mortgages that could even be secured against mobile homes. In those days, Eisman had been an early fan of subprime and a lead marketer of the packaged bundles of pooled mortgages for Oppenheimer & Co. Inc.

But by the middle of the decade, Eisman and some colleagues were appalled by the dodgy accounting practices and the catastrophic rates of defaults among the subprime borrowers that were being masked by the mortgage firms, which booked profits they would never see. He went public in September 1997 with a report that systematically trashed most of the major subprime players and had the satisfaction, if not the rewards, of seeing his prophecy of collapse proved within the year when, first, Long-Term Capital Management went belly-up and was quickly joined by the rest of the industry.

That should have been the end of any attempt by Wall Street to package subprime mortgage products, but it wasn’t to be. Indeed, if the market died at all, it sprang back to life with a frightening vigor, or at least it frightened Eisman and his tiny band of helpers who were like Talmudic scholars obsessing over obscure data sets, much of which was obtained outside the normal channels of financial disclosure. Even more alarming to their eyes, the subprime scam had moved into the once staid bond market.

As Lewis notes, “Thirty billion dollars was a big year for subprime lending in the mid-1990s. In 2000 there had been $130 billion in subprime mortgage lending, and 55 billion dollars’ worth of those loans had been repackaged as mortgage bonds. In 2005 there would be $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Half a trillion dollars in subprime mortgage-backed bonds in a single year. Subprime lending was booming even as interest rates were rising—which made no sense at all.”

Even more shocking was that the terms of the loans were changing from fixed rate debt to a bastardized deal, where the mortgage rate was fixed for two years and then allowed to float thereafter, almost guaranteeing a high default rate when the reset came. In the 1990s two-thirds of subprime loans had been fixed rate; by 2005, 75 percent of them were fixed at the start but with an upward float thereafter. Having made such nutty loans, the lender now had a strong motive to get them off the books. Thus the industry created the “originate and sell” concept: the loans were sold off to the fixed-income departments of the big (now publicly held, remember) Wall Street investment banks that, in turn, packaged them into bonds that were passed on with higher promised yields to institutional investors, from county teacher pension funds to Swiss banks, to Norwegian village councils to Korean farmer co-ops.

Eisman instinctively began to search for a way to “short” this doomed bubble, that is, to find an investment bet that undisclosed high rate of defaults would lead to a collapse, which would require other people to pay him a great deal of money. He was not alone. We watch as Dr. Michael Burry, a one-eyed neurologist with Asperger syndrome, becomes the first to make that “short” bet when he takes his tiny hedge fund into the now notorious credit default swaps on the subprime bonds. And we find ourselves also rooting for three Berkeley neo-hippies who set up their own short fund in a Greenwich Village art studio. But this is not some Nerds Triumph Over the Frat Guys comedy.

Lewis skillfully builds serious suspense since even though all three sets of skeptics were dead right in spotting the collapse that started in 2007 and gathered speed into 2008, Wall Street’s mighty investment houses did not roll over right away; most of the big players kept the price of their bogus securities artificially high in hopes the short sellers would blink first. Our heroes pay a painful price for being right, as it turns out. This, after all, is a cautionary tale Lewis takes us through.

And while I heartily agree this is a book you should read, it is not the only book you will need if you are to get a handle on how we got into the mess we are in. Unfortunately, Lewis leaves a key character out of this narrative, akin to producing Hamlet but leaving the Prince of Denmark out of the script.

That character is Washington. Leave out Washington’s role as a prime mover in changing the rules of the financial services game and we miss an important point: even when public policy changes are well-intentioned and well-founded, Wall Street will always try to find maximum advantage whenever the rules are changed. Successive Congresses and presidents (Republican and Democrat) have tweaked and nudged the financial markets over the last 30 years without really considering the unintended consequences of their acts, let alone policing them.

Just track the Rake’s Progress that befell Fannie Mae and Freddie Mac from the 1970s onward as mortgage lenders were ordered into low-income mortgages and the two agencies began to back increasing volumes of conventional housing, then condominiums, and even rental property, shifting to mortgage-backed securities packaging that ground out a trillion dollars’ worth of subprime debt between 2005 and 2007, all mistakenly believed to be backed by the U.S. Treasury.

Sadly, that book has yet to be written. In the meantime, The Big Short is a ripping yarn that will help your understanding even as it appalls you.

James Srodes has written on finance for Business Week, Forbes, Barron’s, and Euromoney magazines. He can be reached at srodesnews@msn.com.

Lyndon B. Johnson
By Charles Peters
Times Books, 2010

Review By Ronald Goldfarb

Veteran Washington, D.C., editor Charles Peters has written about Lyndon Baines Johnson in this slim volume, which is part of The American Presidents Series, co-edited by two eminent historians—the late Arthur M. Schlesinger Jr. and Sean Wilentz. The series aims “to present the grand panorama of our chief executives in volumes compact enough [161 pages in this case] for the busy reader, lucid enough for the student, authoritative enough for the scholar,” Schlesinger wrote in the foreword. Presidents have shaped the destiny of our country while operating in a tripartite system of shared government power. The best and worst have exhibited frailties and flaws as well as virtues and vices, Schlesinger wrote, while confronting the republic’s greatest crises. As a subject, Johnson surely fits that profile in this 33rd of a planned 42 volumes.

Peters is a perfect chronicler of Johnson’s presidency, having served as a young man in the Kennedy and Johnson administrations, and later as founding editor of the well-regarded Washington Monthly magazine for 32 years. The combination is a natural: a consummate Washington insider and editor describing a larger-than-life president who was a master of the Senate and a politician who reached Shakespearean levels of remarkable success, but also made profoundly critical errors in world affairs while in the White House.

Peters’ panoramic treatment of Johnson’s abbreviated and dramatic presidency includes both profane and profound elements, some personal details already known, others new. For example, Peters (himself involved in the West Virginia primary campaign) tells some of the inside details about that critical primary when John F. Kennedy defeated Minnesota Senator Hubert Humphrey. Johnson supported Humphrey, hoping to tie up the convention, which then might turn to him. He also expands on the known contretemps at the 1960 convention where Johnson was finally eliminated from presidential contention, but surprisingly and clumsily chosen as Kennedy’s running mate (deeply antagonizing the relationship between Kennedy and Johnson forevermore).

Peters provides saucy examples of Johnson’s “womanizing,” a dated term to mean repeated and widely known but overlooked adultery throughout his public life that makes modern sexual meanderings by public officials seem modest. He also documents Johnson’s crude and abusive behavior toward his staff.

Peters’ telling of Johnson’s rise from humble beginnings to power in Texas—and later in the highest haunts of the U.S. government—is a familiar but interesting example of the power of ambition, guile, and the roll-of-dice nature of the political success. One example Peters reports is how an early (1941) Senate campaign in Texas, which Johnson lost through questionable political shenanigans with local vote-counting, taught him the Machiavellian lesson he later (1948) used to steal one of his own. That later campaign to attain U.S. Supreme Court approval of his contested election is a story that probably would not happen in this era of heightened scrutiny.

Peters’ account also demonstrates the novelistic differences between Johnson and Kennedy, which dominated Johnson’s ascendency to and descent from the presidency. Kennedy was the cool, smooth, handsome, and entitled intellectual who gained power easily and used it elegantly. (He also was a flagrant and risky adulterer who was shielded by the press and colleagues). Johnson was the wheeler-dealer, indefatigable hustler, sycophant, and power broker who could be cajoling and menacing, who scratched and hustled to increase his power and wealth. Each had dream wives who could not have been more different, but who complemented their straying spouses and enabled them to gain power. Johnson had mentors, Kennedy had family. The contrasts were remarkable and had a profound, eventually tragic, effect on the Johnson presidency.

Johnson’s hard living, chain smoking, extensive drinking (a fifth of whiskey a day), extracurricular “socializing,” and compulsive politicking resulted in a heart attack from which he recovered, and continued his quest for the presidency. His power as master legislator was remarkable, but it was not enough for Johnson who would accept the historically impotent and ceremonial vice presidency rather than continue as the immensely powerful Senate majority leader.

Peters’ story of the Kennedy assassination and Johnson’s ascendency to the presidency rehashes an over-reported saga and concludes, I think incorrectly, that “investigations of the two murders [Kennedy and Oswald] have cast doubt on the thoroughness of the [Warren] commission’s effort but not on the validity of its conclusion.” But that’s a special story, too digressive to explore here.

All the gossip and political dish is secondary to and background for the two major parts of the Johnson presidency: his historic success in fashioning civil rights legislation and his catastrophic continuation and expansion of the Vietnam War. The former earned Johnson the admiration of progressives. He “proceeded to get more liberal legislation passed by the Congress than any president in American history other than Franklin Roosevelt,” Peters concludes. The latter led to his downfall and despair, and the useless death and injury of countless Americans.

Peters demonstrates the gravitational pull Kennedy (and his potential successor, Robert F. Kennedy) had on Johnson’s five year presidency—the good and the bad. The New Frontier became the Great Society, whose two emblematic legislative successes were the Civil Rights Act of 1964 and the War on Poverty, leading to the establishment of the Office of Economic Opportunity (OEO). The civil rights movement, to which Kennedy came late but powerfully, was in high gear on the streets and in the media. Johnson staked his political power on promoting legislation to give the movement legitimacy, at the risk of losing the south to the Republicans, which happened. He assigned the OEO program to Sarge Shriver, a visible Kennedy family in-law but a popular and effective civil servant.

If those major programs were follow-ups to Kennedy plans, Johnson added landmark domestic social legislation of his personal creation. In devising and pushing through Congress federal aid to education, Medicare, the Voting Rights Act, the Immigration Act, and the Fair Housing Act, Johnson created his own proud legacy. Peters believes that Johnson ranks “just below the top tier” of American presidents, and that Johnson did more for civil rights than any president except Lincoln.

In his leadership in foreign affairs, however, Johnson took a road to tragedy by expanding, prolonging, and making Vietnam his war, even if Kennedy started it. The influences upon Johnson of former Kennedy foreign affairs officials, his fear of appearing weak while he ran against the super conservative Barry Goldwater for election, and his constant concern that Robert Kennedy was out to supplant and replace him, led Johnson astray. He won a decisive election in 1964, kept half of the southern states, and solidified the civil rights reforms. But he also expanded and extended a specious and prolonged war with major commitments that tore the country apart. For this egregious and costly mistake, he will be judged harshly in the history books even while his civil rights accomplishments will shine an admirable light on his presidency.

We keep learning that it is harder to get out of wars than it is to get into them. Johnson became a victim of images and past errors in escalating the war in Vietnam. Military leaders naive about “unconventional wars” pressed for escalation. Hawks were louder and more influential than doves in Johnson’s circle of advisors. Johnson feared “the domino effect” in Asia if he withdrew from Vietnam, knowing as he did that our ally there was weak and corrupt. He feared being labeled a capitulating Chamberlain rather than a brave Churchill, and of being crucified by political enemies as Truman was when China fell to the Communists. He knew a political solution was the wise course, but could not bring his enemy to the negotiating table.

As costs and casualties mounted, Johnson became tormented. He did not want to be remembered for “losing” a war, but ironically lost his presidency as a result. The cultural revolution, race riots sparked by the assassination of Martin Luther King, and the growing, very visible antiwar movement drove Johnson from office and back to his ranch in Texas. He died there of a heart attack at 64, depressed, some say crazed, by the place he found himself, his power and prominence displaced by events.

Peters’ take on some subsidiary events—the reasons for Nelson Rockefeller’s defeat in his quest for the Republican party’s nomination, the impact of Kennedy’s role in the Cuban missile crisis on Johnson’s later Tonkin Gulf fiasco—are questionable, but do not diminish the overall accuracy of his portrayal of this “flawed giant” of a president, to use biographer Robert Dallek’s phrase.

Peters’ book is no Robert Caro tour de force. It is, as intended, a fast read that touches all the bases in the long career of our 36th president. One who is unfamiliar with Johnson’s presidency can read this book in a gulp and come away with a panoramic sense of the man and his times. Those of us who lived through the tumultuous years of the Johnson presidency will be reminded what an extraordinary time it was.

Ronald Goldfarb is a Washington, D.C., attorney, author, and literary agent whose reviews appear regularly in Washington Lawyer. Reach him by e-mail at rglawlit@aol.com.

Necessary Secrets: National Security, the Media, and the Rule of Law
Gabriel Schoenfeld,
W. W. Norton & Company

Review By Joseph C. Goulden

In December 2005 the hierarchy of The New York Times, led by publisher Arthur Sulzberger Jr. and executive editor Bill Keller, met at the White House with the hierarchy of the government intelligence establishment at the time, a contingent that included national intelligence director John Negroponte, national security adviser Stephen Hadley, and General Michael Hayden, director of the National Security Agency (NSA).

A year earlier, the Times had informed the administration of its plans to publish an article exposing the existence of a highly classified NSA program designed to tap al-Qaeda phone calls and e-mails. Government warnings and a stated need for “further reporting” made the paper back away, but the Times now had decided to proceed, despite an admonition from President Bush that if the paper exposed the program, and another terrorist attack ensued, “there’ll be blood on your hands.” Eleven days later, the Times published the story on the front page under the bylines of national security reporters James Risen and Etic Lichtblau.

Such is the platform that Gabriel Schoenfeld of the Hudson Institute uses to explore more than two centuries of acrimony between the American government and the media. The conflict is one on which discerning citizens can have two minds (although few in the media or national security establishments are willing to cede any ground). For the most part, Schoenfeld’s book is carefully objective and dispassionate. But after laying out both sides, he agrees with the famous observation of Justice Robert H. Jackson that the U. S. Constitution is not a suicide pact, and that a government has the obligation to ensure its survival.

Schoenfeld contends that the modern press has a dangerously inflated concept of its role in a democratic society. Under current media thinking, the press regards itself “not merely as the Fourth Branch or the Fourth Estate—a checking and balancing force supplementing the three branches of the U.S. government—but as the sovereign power, above the three branches, and free to violate their democratically enacted laws in pursuit of its commission.” He continues, “In entering the realm of national security, it has bestowed upon itself the role of final arbiter of what government secrets can and cannot be published, regardless of what is at stake.”

Concerning the Times’ NSA story, Schoenfeld notes that the Bush administration program was approved by the Foreign Intelligence Surveillance Court, a panel of federal judges empowered by Congress to oversee electronic intercepts, and all members of the so-called “Gang of Eight,” the ranking members of the congressional intelligence oversight committees. Among the persons urging the Times not to publish the story were the chair and vice chair, respectively, of the National Commission on Terrorist Attacks Upon the United States, former New Jersey governor Thomas Kean and former U.S. Representative Lee Hamilton (one a Republican, the other a Democrat).

Schoenfeld does note that there was fierce—and legitimate—debate in the U.S. Department of Justice and elsewhere in government about the legality of the NSA and other post-9/11 programs. Indeed, the guidelines were revised several times. Yet differences persisted. In the instance of the NSA intercept program, a relatively low-level Justice Department lawyer named Thomas W. Tamm decided to take the debate out of secret government councils and leak details to the Times. Only when the inevitable investigation began did Tamm reveal himself as the source. According to Schoenfeld, “[Tamm] acted not only because he objected to the program itself, but because he was ‘pissed off’ at the Bush administration for a range of other positions and was hoping that the appearance of a story in the Times would damage Bush’s 2004 reelection prospects.”

In the end, Schoenfeld details, some reportorial “blackmail” caused the Times to change its mind about publication. In late 2005 reporter Risen let it be known that he had included the NSA episode in a book he had written for Simon & Schuster. Schoenfeld writes, “Risen’s threat was unmistakable, and he possessed the means to carry it out. Either put the story into print, or it will come out in my book and you will be forced either to fire me—the move, he recognized, was a potential ‘career-ender’ at the paper—or be scooped by a member of your own staff.” The Times published.

In defending the Times’ decision to publish, executive editor Keller spoke of the “freedom that our founders gave to the press … [as] an essential ingredient for self–government.” Keller needs some refresher reading. One of the preeminent Founding Fathers, Benjamin Franklin, did extol freedom of the press as something “every Pennsylvanian would fight and die for.” But he also spoke of the “liberty of the cudgel.” If an impudent writer attacked the reputation of a citizen, he wrote, “you may go to him as openly and break his head.” In case of a government being libeled, “I would not advise proceeding immediately to these extremities, but that we should in moderation content ourselves with tarring and feathering.”

Ironically, despite the ultimate adoption of the First Amendment, the Founding Fathers were preoccupied with secrecy. Participants in the First Continental Congress, and later the Constitutional Convention, took oaths not to reveal their deliberations outside the meeting hall. Even Patrick Henry, the leading defender of a free press, had his limits. He was “not an advocate of divulging indiscriminately all the operations of government.” Military matters and “affairs of great consequence” were entitled to secrecy. And the authors of the First Amendment also wrote what Schoenfeld terms “the most extensive infringements on freedom of the press” in American history, the Alien and Sedition Acts.

Schoenfeld’s sprightly narrative relates continuing government efforts to deal with the press over the years. Some Civil War generals simply would not permit reporters in their camps, and President Lincoln strongly urged censorship of military dispatches. Modern espionage laws date to the World War I era. The media voluntarily submitted to censorship during World War II, under an office run by a former head of The Associated Press.

The protection of communications—still one of the most closely guarded dark corners of the intelligence world—became a factor in the 1930s because of the activities of Herbert O. Yardley, the father of American cryptology. Briefly, working as a U.S. State Department code clerk in the 1920s, Yardley discovered he could break codes used in the cables of most foreign governments, a talent he put to very effective use in negotiations over the size of naval fleets of the major powers. He then wrote a book, The American Black Chamber, which alerted the Japanese that their codes were no longer secure.

And here another precedent: prosecuting Yardley risked exposing even more secrets, so he went free. So, too, for the outcome of two notorious breaches of confidentiality by The Chicago Tribune—the revelation of plans for what the United States would do should it be drawn into World War II, and a story about the breaking of Japanese naval codes in the Pacific War. Thus, the government is left in a Catch-22 situation: prosecution raises subsidiary risks that are best avoided and, as the Nixon administration learned in the Pentagon Papers case, suing the media does not sit well with the public.

(Schoenfeld mentions in a footnote that “as of this writing,” Tamm, the Justice Department lawyer who leaked the NSA story to the Times, “has not been formally charged with a crime.” In a more recent “NSA leak case,” former officer Thomas Drake faces indictment on 10 felony charges of giving information about secret programs to a Baltimore Sun reporter.)

In his conclusion, Schoenfeld is careful to stress that most journalists act responsibly on matters pertaining to national security. He writes, “Bill Keller can be taken at his words when he says that the Times will sit on a story when lives are directly in jeopardy. But when lives are indirectly in jeopardy—and indirect jeopardy is the way things almost always are outside the rarefied world of courtroom hypotheticals—the unspoken dictum ‘publish and let others perish’ has become almost axiomatic in the profession.”

What concerns Schoenfeld is that journalists “are claiming unfettered freedom of action with accountability to no one but themselves. What they fail to see or will not acknowledge is that the statutes protecting national security secrets are not just a mechanical system of sanctions, but, like all laws in a democracy, a moral guidepost, a code by which the press can be judged by the public and by which the press can judge and police itself.”

Those last two words, in my view, are the best way the media can keep the government out of our nation’s newsrooms.

Washington, D.C., writer Joseph C. Goulden has spent more than half a century working in various parts of the media.