This book introduced me to a new term, ‘disaster tourism’ . People who visit places where financial disasters occur. Michael Lewis goes on one such tour to Iceland, Greece, Ireland and Germany. This book recounts his experiences of the visits and in turn gives a reader some idea of “What the hell is going on in these countries that is causing stock markets to gyrate wildly, investors to panic and making world leaders increasingly edgy?”
The book starts by talking about Kyle Bass, a successful hedge fund manager from Texas who minted money by shorting during the mortgage crisis. After tasting blood in the mortgage market, he then starts buying CDS on countries from Goldman and other Wall Street firms for as little as $1100 for an insurance of $1 Million Iceland bond. Basically a $700,000 return on investment of $1100 ( assuming that Iceland defaults and pays 70 percent of the bond value). When Michael Lewis goes to interview Kyle Bass during his preparation for the book,`The Big Short’, he is amazed by the hedge fund manager’s strategy. How does a guy who has never gone beyond US know things about Iceland and more importantly how is so sure that he is shorting the entire country ? This makes him curious enough to investigate first hand the situation in these countries. In a sense, this book is a sequel to the book ‘The Big Short’ and talks about the disasters happening in four countries, Iceland, Greece, Ireland and Germany.
A country with 0.3 million population( think of a medium sized town in India) gets in to $140B debt, 8.5 times the GDP of the country. This happened so quickly between 2003 and 2007 that it is really unbelievable. How did a country whose primary occupation was fishing and smelting aluminum become a hedge fund ? Michael Lewis narrative mentions some key turn of events that changed the fate of the country. Firstly, the introduction of fishing quota and fish securitization( I had never heard of such a thing before..Last time I read about it was in some graphic novel that talked about the downfall of a hypothetical economy).This quota made fishing activity concentrated in a few hands and the other people were left exploring for alternatives. Some of them joined smelting aluminum work. The others headed for education and soon Iceland was minting PhDs. With so many PhDs who obviously did not want to fish nor spend time in aluminum factories,the situation was odd.They wanted to work on something new and sadly they latched on to the most hyped up job in US markets and world wide, “The Investment Banker”. They all wanted to do investment banking.
Carrying the traits of fisherman, i.e aggressive risk taking to banking to finance was a disaster. The most profitable trade was the carry trade and every Tom Dick and Harry became traders. Most of these I-bankers created artificial inflation by traded assets amongst themselves. This had to end as all the price inflation and growth was actually a result of a few people who managed to borrow insane amounts of short term foreign capital and infused it in to the country. All the signs of prosperity were bogus. In 2007 Icelanders owned 50 times more foreign assets than in 2002. The emperor was finally naked in Oct 2008 , when the country was declared bankrupt. After the subprime crisis all the hedge funds and FIIs who invested in Iceland to get eye popping returns actually got their eyes popped literally and withdrew all their money. Where is Iceland headed ? God knows. May be they will go back to fishing!
A country with 11 million population( think of one of the Indian cities) gets in to $1.2 T debt. That’s right. It is a T with a capital T…We are talking about Trillions here. Basically it is equivalent to GDP of India in 2008. If you read about the bail out packages that are being doled out, they are paltry compared to the mess Greece is in . So, what made such a small country in to debt ridden country ? Michael Lewis meets with accountants, lawyers , monks , politicians and weaves an interesting narrative exploring the reasons for the current situation. He says the government is the culprit and quotes a few numbers that are insane. For example National Rail Road earns 100M euros and has 800M euros as expenses.Govt employed personnel earn thrice that of a private sector employee. The author’s meeting with accountants and lawyers convinces him that the extent of corruption and malpractices that are practiced by EVERYONE in the country can fill libraries. Tax evasion was rampant and the politicians cooked up numbers to gain in to entry in Euro zone. All numbers quoted by the Govt were fraud numbers. The party goes on for years.
Finally the music stops in Oct 2009 when the then prime minister Kostas Karamanis gets involved in a scandal and the nation goes to polls. The scandal in itself an alarming story that involves Vatopaidi Monastery in Greece. Amazing what simple living monks can do to a country. In a matter of few years these so called simpletons become the real estate emperors in Greece. The political changes in Oct 2009 brought George Papandreou to power. He immediately realized there was nothing in the Govt coffers to spend and everything was a fraud. He had no choice but to come clean about the govt. In the recent past he has taken quite a few measures like job cuts, compensation reductions, etc. applicable to the Govt employees. Obviously this has resulted in massive unrest. From reading this story it is evident that is not a question of whether Greece will default, it is only a question of when will it do so.
This is the story of a country which went from a budget surplus in 2007 to Budget Deficit of 32% of GDP, from an unemployment rate of 4% in 2006 to 14% in 2010. Real estate bubble meant $106B dollars of losses for the three biggest banks in Ireland. As recently as 1980s the country was one of the poorest countries in the world and it became one of the richest countries by 2007 . How did this miracle happen ? Michael Lewis answers this question and in turn gets an answer to his question, `What the hell is wrong with Ireland’ Till 2007 if you had asked any academic, he would give amazing explanations for turn around of Ireland which were good as sound bytes in the media but were actually shallow arguments. So, How did Ireland become rich? Well, as the author finds out from the eyes of a skeptical Dublin University professor , Morgan Kelly, that there was no miracle in the first place. People just went berserk. 20% of the workforce was employed in building houses. 25% of the GDP came from construction industry. Basically the Irelanders followed this philosophy,
“We are going to get rich by building houses for each other”.
Alas! the housing bubble crashed and so too the banks that lent money in pursuit of higher growth rates. They were a few people who alarmed everybody about it, for example a research analyst in Morgan Stanley wrote a scathing report on Ireland Banks. However since the banks were clients of Morgan Stanley, the report was thoroughly massaged, or in the other words fabricated to death so that the fee keeps coming from these banks. It was elaborate Ponzi Scheme played by banks,government at the cost of Irelanders. As of today, the situation is : the government that has bailed out the banks , are living on life line , i.e , the short term loans from European Central Bank. When the lifeline stops, Ireland will collapse ? Since the time most of Poles( People emigrated from Poland in large numbers to Ireland ) have left Ireland, people have lost faith and are silently witnessing the failure of the government, Where will growth come from ? After spending time with academics, politicians, lawyers, banker, the author seems to be saying, “Nobody Knows’”
Germany had no real estate bubble in the country. Prices were very much in line. There were no crappy domestic loans. So, why did Germany get affected by the subprime crisis ? The author weaves a nice spin on the German culture saying that Germans are a bunch of people who are obsessed about combination of clean & dirty , i.e clean exterior-dirty interior, clean form-dirty content. They are actually mirror images of Greece, Iceland, Ireland stories. Other countries used foreign money to fuel various forms of insanity. The Germans, through their bankers , used their own money to enable foreigners to behave insanely. They were on buy side of all the crappy subprime mortgages issued on wall street by Goldman, Morgan Stanley etc. Though they kept their external image clean, their internals were crappy. They bought bonds like crazy always trusting the ratings that were assigned to the mortgages.
With the bubble bursting ,their banks have taken a beating. However there is a crucial difference between the cultures here. Unlike US banking CEOs who are handed hefty bonus despite the crisis, some of the German CEOs were imprisoned. They were looked down upon the society. All said and done, Germany has a crucial role to play in Europe’s future mainly because of its relationship with ECB. If the struggling European Nations are downgraded to Junk, then there will be a serious problem with ECB and there is a chance that ECB might itself default. Can Germany suck up all the losses of its neighbors ? Economically the best solution but Politically it won’t fly. So where does this lead to ? Will there be Euro Currency at all, if all the countries fall like nine pins? It’s a very uncertain future in Europe and I guess these stories mentioned in the book makes any reader shudder at the question ,”What’s future for European Finance ?” It looks like it just a matter of time when things will apart ?
Michael Lewis focuses on California to bring out the systemic issue in various cultures that is causing problems. Even though he talks about various countries and their financial problems, he is pointing towards a larger malaise afflicting various countries, i.e the problem of failing to self regulate.
The situation facing various countries and California is summarized by the author using a nice analogy.
Entire countries were told,”The lights are out. You can do whatever you want and no will ever know.” What they wanted to with the money in the dark varied. Americans wanted to own homes far larger than they can afford.Islanders wanted to stop fishing and become investment bankers. Germans wanted to be more German, the Irish wanted to stop being Irish. Greeks wanted to turn their government in to a stuffed animal with fantastic sums so that the Govt can give it to as many citizens as possible.
In all the cases, there is a pattern here. Self regulation is thrown to the winds and in the longer term every one suffers. The story about California was new to me as I had never known that Vallejo, a city in California has gone bankrupt.Based on what the situation is right now, it is predicted that many more cities are going to be bankrupt. The most affected state as such is supposed to be California. The author starts off describing the situation in California by narrating an incident relating to Meredith Whitney where she predicts that municipal markets are going to be next victim of the subprime crisis. Indeed as the situation unfolds, as Vallejo’s bankruptcy makes it clear that there is a systemic problem lurking here and if things don’t change, it is probably only a matter of time before there would be many more cities going bankrupt.
The book gives cultural, economic, political reasons for the bleak situation in Iceland, Greece, Ireland, Germany and California state . Its a real page turner and probably gives a better picture of Europe’s situation than what one can infer from various confusing articles in the media.