The Motley Fool Previous Page

Michael Lewis on Fixing Wall Street

Jennifer Schonberger
March 23, 2010

On a sunny day last week at Fool HQ, best-selling author Michael Lewis recounted his experience selling bonds at the former brokerage firm Salomon Brothers:

"When I became the salesperson, I was in an unpleasant situation that kept me up at night. I found the people evaluating me inside Salomon Brothers to be uncooperative and unhelpful if I wasn’t trying to screw the customer on behalf of the trader. Nobody has really explained to me why a single financial firm should be allowed to trade for its own book in securities that it’s advising customers to buy and sell. It creates a naturally poisoned relationship, and worse, it creates an incentive for a Wall Street firm to design securities that will explode, because they can take the other side."

Lewis’s experience took place in the 1980s, but the flawed incentive system and structure he describes continue to rule Wall Street to this day, as anyone who witnessed the recent crash can surely attest.

Lewis made a splash in the financial world with his first best-selling book, Liar’s Poker, which exposed the greed, corruption and excesses on Wall Street. Since then, he has written several more best-sellers, including Moneyball and The Blind Side. Unless you’ve been living under a rock, you know Sandra Bullock won a Best Actress Oscar for her role in the movie version of The Blind Side this year. And Moneyball is being made into a movie starring Brad Pitt due out next year.

Lewis’s latest book, The Big Short: Inside the Doomsday Machine, tells the story of the few who saw the subprime mortgage crisis coming and bet against it, or shorted it, to become millionaires. They saw the problems AIG (NYSE: AIG  ) and Citigroup (NYSE: C  ) did not.

Though Lewis admits he’s been receiving angry messages on his Bloomberg terminal since the release of his new book, he also says he has a lot of friends who work on Wall Street and that he doesn’t know of any who disagree with him. “Inside the financial world, there is a [mind-set of] ‘please stop us before we kill again,’” Lewis said. He recounted Morgan Stanley (NYSE: MS  ) Chairman John Mack’s quote: “Regulators have to be much more involved. We cannot control ourselves.”

Lewis added, “So I don’t think Wall Street is uniformly opposed to reform or opposed to a negative interpretation of what’s happened over the last few years. I think they have a hard time ignoring it.”

If Lewis were God ...
Lewis said he thinks we should separate entities like Charles Schwab (NYSE: SCHW  ) , which offer advice on different levels, from entities like hedge funds that trade their own book. “People who are making the bets don’t have direct contact with the end investor,” he said.

 The Volcker rule, which works toward that goal, is a good idea in Lewis’ view, but is only one example of position-taking by firms. (The rule channels a lighter Glass-Steagall-like separation of commercial banking operations from investment banking operations by -- among other stipulations -- proposing a ban on proprietary trading from commercial bank operations.) “True, it would probably result in some minor increase in inefficiency,” Lewis said, “because there’s an extra step between the investor and the trader of the securities. But I think it would be more than compensated for by the added level of trust in the marketplace.”

Indeed, if Le