Michael Lewis' anthology of boom-and-bust writing examines two decades' worth of market crashes
The Story of Modern Financial Insanity
By Michael Lewis
Norton; 391 pp.; $27.95
For Michael Lewis, the current financial meltdown is "the people's panic." "The striking thing" about it, he writes, "is how egalitarian it has been." Today's crunch involves millions of oblivious souls "who have never heard of the Black-Scholes options-pricing models"—the financial theory that Lewis believes prodded investors to take more risks than they should have, precisely by leading them to think they understood complicated financial risks and could price them accurately, when in fact they could not. Ignorance has not proven to be bliss.
At such a moment, it's hard to imagine a more timely book than Lewis' clamorously titled anthology, Panic! The Story of Modern Financial Insanity. The author of such best-sellers as Liar's Poker, The New New Thing, and Moneyball has put together more than 50 pieces—drawn from daily papers, magazines, books, interviews, and congressional testimony—on the four major panics of the past two decades: the 1987 stock market crash, the East Asian financial crisis of 1997-1998, the collapse of the dot-com bubble in 2000, and the current mortgage meltdown and credit crisis. The volume offers a wicked romp through bygone days. However, in the end it proves somewhat unsatisfying, offering neither up-to-the-minute information nor the depth one looks for in a book.
It is Lewis' intention to draw parallels between the four seemingly disparate cycles of euphoria and meltdown. He also means to offer perspective on what he considers a new era of panic, which he says has been "brought about not by real or even perceived problems but by the complexity of financial products."
That idea receives brilliant treatment in the book's introduction. There, Lewis rips Black-Scholes, the model that won the Nobel Prize in economics for Myron Scholes and Robert Merton, and which underlies portfolio insurance, employee stock options, mortgage bonds, and a vast variety of derivatives valued at trillions of dollars. "The very theory underlying all insurance against financial panic," Lewis writes, "falls apart in the face of an actual panic." Unfortunately, in this format, Lewis has too little space for elaboration.
Although the author is not the primary writer, the volume does reflect the sensibility he exhibited in his memoir of life at Salomon Brothers in the 1980s, Liar's Poker (1989). The new book combines the perceptive (there are pieces by economists Joseph Stiglitz, Paul Krugman, and Robert Shiller); the deeply reported (financial writer Roger Lowenstein on the ratings game, and chapters from Tim Metz's Black Monday, on the 1987 crash); and the witty (a laugh-out-loud take on housing by Dave Barry). The eight pieces by Lewis—most notably, one on the 1998 collapse of Long-Term Capital Management, "How the Eggheads Cracked"—are well worth reading, or re-reading, years after the fact. Full disclosure: The collection also includes an article by BusinessWeek writers David Henry and Matthew Goldstein on the 2007 collapse of two Bear Stearns hedge funds.
Some of the material, however, seems a tad dated. The most recent sampling in Panic! was written last spring, well before the Lehman Brothers bankruptcy, the precipitous drop of the stock market, and the official announcement of a recession. As a result, there's little new insight into the unfolding financial catastrophe.
Moreover, there's a good deal of hard-slogging. Do we still care today about Internet entrepreneur Jim Clark's Healtheon, a dot-com with grand plans to remake health care? Program trading, anyone? Especially when describing past booms and busts, the reader would benefit from more context—the stuff that only a book-length narrative, not a collection of articles, can offer.
In the wake of the 1987 crash, the author reminds us, the government set out to prevent crashes from ever happening again. Instead, he observes, the cycles of boom-and-bust seem to have become more common. Asks Lewis: "Could this be because the financial system was built on an idea that badly underestimates the risk of catastrophes—and so conspires with human nature to create them?" It's a question we will likely be pondering for some time to come.