Executive Summary
(Editor's Note: For those of you who missed it, see our highlights of the Neel Kashkari opening keynote session, and the Day 1 NorCal conference highlights.)
MichaelKitces: Day 2 of #FPANorCal starting shortly. First up: Michael Lewis, author of "The Big Short" - the room is PACKED.
MichaelKitces: "I never thought Wall Street would never become more preposterous than it was when it paid me to give financial advice." -Lewis #FPANorCal
MichaelKitces: Lewis was fascinated when big banks started having huge prop trading losses in 2007-8. Why was the smart money suddenly losing? #FPANorCal
jbrentburns: The purpose of Liar's Poker was to demystify Wall Street. Michael Lewis #FPANorCal
MichaelKitces: When kids are told "give fin advice & make 100s of thousands of $$, you convince yourself it's why you were put on earth." -Lewis #FPANorCal
MichaelKitces: Lewis says irony of why people on Wall Street spoke to him for Big Short is that they were inspired 20 yrs ago by Liar's Poker! #FPANorCal
MichaelKitces: Number of people/firms who were taking the CDS bet against Wall Street with "real" life changing money was only 15-20. -Lewis #FPANorCal
mkcorbin: Of Liars Poker: "That's the book I thought I wrote, but it became clear to me that's not the book people read." Lewis, #FPANorCal
MortgageNudge: Wall Street was too certain it could accurately price probability of catastrophe. Lewis #FPANorCal
jbrentburns: Firm that tried to warn of mortgage bond fraud was turned away by SEC WSJ. Lewis #FPANorCal
MichaelKitces: Got to a point where the only people doing real analysis on mortgage bonds were the ones shorting them. Isn't that weird?! -Lewis #FPANorCal
MortgageNudge: Original concern of mortgage bonds - as investor you might be paid back too soon. Lewis #FPANorCal
jbrentburns: One manager who saw sub-prime catastrophe coming simply read the bond prospectuses. Disclosed, but no one read it. Lewis #FPANorCal
MichaelKitces: It's amazing what people won't see when you pay and incentivize them not to see it. -Lewis #FPANorCal
jbrentburns: Perverse incentives lead Wall Street to ignore clear risks in sub-prime. Those who called out the risks were fired. Lewis #FPANorCal
MichaelKitces: Who's to blame? You expect gov't to screw up. It's fascinating when the private sector takes itself off the deep end. -Lewis #FPANorCal
MichaelKitces: Necessary condition for crisis was the ratings agencies. If they hadn't failed, money wouldn't have gone where it did. -Lewis #FPANorCal
MichaelKitces: Ratings agencies had incentive conflicts. But they also were always 3 steps behind Wall Street firms gaming them. -Lewis #FPANorCal
MichaelKitces: When Wall Street is compensated SO much more than ratings agencies & regulators, it's inevitable they'll gain control. -Lewis #FPANorCal
jbrentburns: Wall Street created sub prime securities just so they can bet against them. Should be illegal. Lewis #FPANorCal
MichaelKitces: You're a gov't driven institution (& should be regulated as such) when your losses are going to be backed by taxpayers. -Lewis #FPANorCal
mkcorbin: If you want to render something invisible, give it an AAA rating and people will take it on faith. Lewis #FPANorCal
MichaelKitces: I never thought Wall Street would commit suicide - I thought they were too self-interested. But system is too distorted. -Lewis #FPANorCal
jbrentburns: The best place on Wall Street is the middle of the scandal but not the one who goes to jail. Then you get paid to clean up Lewis #FPANorCal
MortgageNudge: Interests of the individual not aligned with interest of the collaborative - still. Lewis #FPANorCal
MichaelKitces: Focus of Wall Street fix was to stabilize the patient. But when patient woke up, went right back to its former behavior. -Lewis #FPANorCal
MichaelKitces: We're living on house built on sand. I think it means at some point it'll collapse again. Then maybe we'll do something. -Lewis #FPANorCal
mkcorbin: There's a difference between knowing something and being able to respond to what you know. Lewis #FPANorCal
MichaelKitces: Current solution to Wall Street prop trading won't work - details were left to regulators who don't think it's necessary. -Lewis #FPANorCal
MichaelKitces: Any sensible person can see the system is messed up. But it's Quixotic for someone to try to reform it from the inside. -Lewis #FPANorCal
MortgageNudge: Individually, people on Wall Street are not bad. It's the system that's screwed up. Lewis #FPANorCal
mkcorbin: The incentives have not been changed. The incentives have not been changed. The incentive must be changed.Lewis #FPANorCal
jbrentburns: John Mack said the industry needs regulation because incentives lead firms to get into profitable but destructive business-Lewis #FPANorCal
mkcorbin: Lewis is incredibly articulate and insightful. So glad to be hearing him. #FPANorCal
MichaelKitces: Dealing with bad debts by making new bad debts doesn't work. -Lewis #FPANorCal
MichaelKitces: The next crisis starts when Greece or Ireland comes forth and says we're defaulting. And it may not be far off. -Lewis #FPANorCal
mkcorbin: There are Germans right now calling for Greeks to sell their islands. This does not please the Greeks. Lewis #FPANorCal
MichaelKitces: Our problem has Greek parallels - will WE take on the civic duty to pay our country's debts? -Lewis #FPANorCal
jbrentburns: Europe is probably where the next crisis is starting. Maybe Greece. Could start a domino effect. Lewis #FPANorCal
MichaelKitces: The history of the markets is the history of booms & busts. This one was no ordinary bust though. -Lewis #FPANorCal
mkcorbin: I'm very boring with money. I was very exciting with other people's money. Lewis #FPANorCal
MichaelKitces: When I managed other people's money I could find all sorts of creative ways to lose it. With my own money I'm very boring. -Lewis #FPANorCal
jbrentburns: This crisis is a bigger one than we have seen. There was no catalyst. Financial markets melted down out of clear blue. Lewis #FPANorCal
MichaelKitces: Nature of our financial system is to seek out people who seem to have predicted the future & ask them what's coming next. -Lewis #FPANorCal
mkcorbin: I find it interesting that the only thing the SEC seems to know how to do is prosecute insider trading.Lewis #FPANorCal
MichaelKitces: There will always be people who break the law when it pays well enough. The problem is when it's legal but harms society. -Lewis #FPANorCal
mkcorbin: The problem with scapegoats (and perp walks) is that they reduce the pressure for substantive change.Lewis #FPANorCal
jbrentburns: Capitalism now. Problem is people can get rich by doing things that aren't productive or even neutral, but harmful. Lewis #FPANorCal
MichaelKitces: Lewis playing God - break up major institutions into entities that can fail, & forbid from trading in securities they advise on. #FPANorCal
MichaelKitces: Lewis wants to ban at least most CDS. Some uses, but they create perverse incentives to buy insurance & cause disaster. -Lewis #FPANorCal
mkcorbin: It's like if everyone in the room could buy fire insurance on your house, to create an incentive to burn down your house. Lewis #FPANorCal
jbrentburns: If I were God I'd make hedge funds look like partnerships. Lewis #FPANorCal
MichaelKitces: Great session w/ Lewis. My Takeaway: It is ALL about incentives. Period. #FPANorCal
Stay tuned for more highlights from day 2 of the 2011 FPA Norcal conference!
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