I sat down last week with Michael Lewis, author of Liar's Poker, Moneyball, The Blind Side, The Big Short, and Flash Boys. We talked about everything from Wall Street culture to college football. Check it out. (A full transcript follows the audio):
HOUSEL: Hi, I'm Morgan Housel. Joining me today is the author of Liar's Poker, Moneyball, The Blind Side, The Big Short, and Flash Boys. Michael Lewis, thanks for being here.
LEWIS: Thanks for having me, Morgan.
HOUSEL: We were just talking. It's been 25 years since Liar's Poker came out. Not many books -- especially business books -- have that much influence or longevity to last 25 years where it's still being sold quite a bit and still has an influence on the people reading it. What Do you think about that? Did you have any idea that that was going to occur when you wrote it?
LEWIS: It must be really good.
HOUSEL: It is really good.
LEWIS: No, I'm just teasing you. You know, the thing that surprises me is when I hear that people still read it. I mean, it does still sell and the question is why. If you had told me when I wrote it that it was going to have that kind of shelf life, I would have said no way, because I thought that was just a moment in financial culture that was going to pass. You know, like a moment of insanity.
And instead, inadvertently, I happened to describe the beginning of a whole financial era. The phenomenon of the kids going from the top of the class of the best schools on to Wall Street for obscene sums of money right away. The growing complexity of the business. The turning of the old partnerships into corporations. All that happened then. So it's dated in some ways, but the business hasn't changed that much.
And I think the audience for it is usually young guys -- sometimes young women, too -- who are going into the business and someone senior hands it to them and says if you want to know what this place is like, read this.
HOUSEL: You've talked before that maybe when you wrote it, it was exposing the dark side of the culture of Wall Street, but so many young people who read it used it almost as a sales manual, or as a how-to guide to get into Wall Street.
LEWIS: I never thought about it as really exposing anything, and I really didn't think of it as a dark side. To the extent I had any kind of trouble with Wall Street, the only thing that really irked me was that all sorts of people in my peer group were going into it mindlessly, as opposed to doing something they really wanted to do, simply because the money seemed so good.
It gave you an answer to the question of what you are doing for a living, and if you said Goldman Sachs, everybody said you're a success, just like they said you're a success if you happened to be at Princeton. So it slightened an anxiety cheaply that should not be cheaply slight.
I just thought the book might demystify it. Make it seem more ordinary and cause people who had some other passion to say, "Well, now I kind of see what that is. I don't need to go do that now." And it had the opposite effect. Every now and then, someone says to me, "Thank you. I read the book and I went and became an oceanographer." But usually what they say is, "You're the reason I'm working on Wall Street. I read that book and I really wanted to get into that."
HOUSEL: Has that changed, at all, since the 2008 financial crisis when Wall Street became looked down upon across the whole nation? Has the allure to young people changed at all?
LEWIS: It seems to have a bit, but we're going through a little period. I mean, the allure to young people seems to be inversely correlated with the price of tech stocks. The more bubbly Silicon Valley is, the more young people discover entrepreneurship as opposed to Wall Street. And they did this in the very late 90s. There was this moment where everybody said, "Ah! Wall Street's no longer the place young people want to go." You're seeing stories like that, and the numbers are actually there to back up the stories.
I saw a piece the other day that the graduating class of Harvard Business School is much less likely to go into finance than it was five or 10 years ago. But having said that, it is still kind of the default career for an awful lot of bright young people, and it doesn't feel to me like the era has ended.
HOUSEL: It seems to be the default career because, of course, you can make a tremendous amount of money, more so than other professions. And something a lot of people who aren't familiar with Wall Street will ask why these people make so much money. From the outside it looks like they're not creating that much social value. Maybe a lot of times they're basically rolling the dice.
But you have huge sums of money and compensation generated from it to where a 26-year-old at Goldman Sachs can earn as much as a brain surgeon somewhere else. Why do people on Wall Street, do you think, make what looks like outsized money and why hasn't competition whittled that down?
LEWIS: It's like that's the question that no one can answer...
LEWIS: ... but I can tell you it is generally true that if you can be present when large sums of money are changing hands, you can take a little for yourself and no one notices because it's such a huge sum of money. And you add up those little pieces of big pieces of money and all of a sudden you've got a big piece of money. That's kind of what's going on when you sit in the middle of financial transactions.
The other answer is it's a question of cultural norms. Let's leave to one side why this started -- why, all of a sudden, thousands and thousands of young people would be paid hundreds of thousands of dollars, millions of dollars a year. But once it starts, it becomes accepted and normal. It's sort of like that's what you're supposed to be paid.
And I think that's a very powerful force. It sounds silly, but it's sort of like there's something arbitrary in what percentage of the revenues of Goldman Sachs or [Morgan] Stanley or one of the foreign banks gets devoted to the staff as opposed to the shareholders. And no one wants to test the proposition -- or feels inclined, because it would violate the norms -- that you could pay everybody a lot less and get the same results.
It's amazing to me that there isn't a Moneyball for banks. That there isn't an Oakland A's for banks, where someone comes along and says, "Look. We can do what Goldman Sachs does even better than Goldman Sachs, and we're going to pay people a quarter." And the response to that is, "Well if you do that, you're not going to get the best people."
LEWIS: But I don't think that you need the best people to do the job well. I don't think you need people who are rocket scientists to do the job well. For a lot of the job.
HOUSEL: Because so much of it relies on luck, to an extent?
LEWIS: Well, a lot of it relies on luck. A lot of it is very routine. A lot of it should be kind of mundane, service sort of stuff. Anyway, I do think that cultural norms play a huge role in compensation on Wall Street. It's become normal and no one wants to test the proposition.
HOUSEL: There are some areas of finance -- maybe like Vanguard -- that have come in and said, "We're going to charge way less than anyone else." Their employees -- certainly their directors -- will earn less than other people. It's different with Vanguard, because they have a different shareholder structure. They're owned by the funds. But have you seen, in the last 20 years, a movement toward something that is more rational from a shareholder and client perspective?
LEWIS: Yes, absolutely. Vanguard is one example. Charles Schwab's another. Look at the typical broker-service person on a Schwab account and compare them to what the typical person on a Merrill Lynch account does. I've had both experiences and the people who are the middlemen at Schwab are much more service-oriented and there's much less of an idea they're supposed to get rich in the job than the old broker.
So you can see sense slowly coming to the financial services industry, but not so much at the top. The questions that I would love to get good answers to are questions like, "Company X, you want to do a stock offering. You want to do a merger and acquisition. Why don't you challenge the fees of the investment bank that you hired to do it?"
And the answer is that they don't do it because they don't do it. It's not a really good reason. The sums of money they are paying seem trivial in the context of large transactions, and so it's more of an afterthought. But there should be more price competition throughout the industry, basically.
HOUSEL: Is it too cynical to say that companies will want to pay a high investment banking fee so that down the road they can have more favorable stock coverage from the analysts at Goldman Sachs?
LEWIS: No, that's not too cynical. People are nervous about what happens if they don't belong to the club. If they don't pay the club admission fees. It seems risky. I think that has a lot to do with it. I think that has a lot to do with it.
HOUSEL: In Flash Boys, which is recently out in paperback, you tell the story of Brad Katsuyama. It's a fascinating story about an industry -- high-frequency trading -- that was exploitive to a certain extent. Brad was one of the people we were talking about who took a different approach, challenged the norms, and created this new structure of trading. What do you think about that, and are there other people out there in high finance that really are challenging those norms to do things a better way that makes sense?
LEWIS: I think Brad Katsuyama is sort of a transformative figure in that he was an insider, in the system, who figured out something had become deeply broken in the system. The thing that was broken he could have exploited and made a lot of money from, but he said he decided, in a very Silicon Valley way, that he was going to create a company and repair the problem and disrupt the industry.
He's been successful, so far. I mean, it looks like he could be really successful. I wouldn't bet, five years from now, against IEX being the first or second-biggest stock exchange in the country. It feels like it's on that trajectory.
So once you set the example, if they do succeed, venture capital dollars are going to be looking for other disruptive opportunities. Entrepreneurs are going to think this is possible. It will become more normal in the financial sector to disrupt the status quo. It's ripe for happening.
You've got, basically, an old-fashioned intermediary in a world that has been wiping out intermediaries because of technology. Technology has displaced a lot of the functions -- or should be replacing a lot of the functions -- that Wall Street historically has served, and Wall Street has been very good at resisting change. So I think this is a really big deal and it's one path to reform -- sort of market-based reform.
HOUSEL: Tell me why I'm wrong about this. I'm a long-term investor. I dollar-cost average. I don't trade very much. I buy here and there. When I look at high-frequency trading, I think, "Sure. These guys are skimming off an infinitesimally small slice of money. Maybe they're taking a half of a penny or a fifth of a penny." For me when I look at that for my own investments, I kind of shrug my shoulders and say, "Well, that looks wrong, but how is this affecting me?"
LEWIS: It doesn't bother you.
HOUSEL: How is this affecting me?
LEWIS: You're right. I'd say you'd feel differently if you were a massive mutual fund and realized that the slippage in the stock caused by high-frequency trading anticipating your orders is costing you a third of a percent of assets. I mean, that's a big deal, and those sorts of numbers are being realized. That kind of cost is being realized by the big funds.
But if you're you, trading exactly the way you say you trade, your concern really isn't about the sums of money you're losing. It's pennies. It's just not much. But your concern should be, "Do I want to invest in a market that's more prone to flash crashes and outages and so on and so forth? Do I want to endorse or turn a blind eye to the heightened risk of instability caused by this rigged system?"
I mean, the system has been rigged for the benefit of intermediaries. It's been made unnecessarily complicated and unnecessarily unstable for that purpose. So if you were going to get exercised about it, that's why you would. But I can completely understand someone like you just saying this is not worth my time or trouble to worry about. I can understand that. It's still interesting, though.
HOUSEL: Oh, it's fascinating. But even something like the flash crash in May of 2010 -- which is one of the big examples of what can happen with high-frequency trading -- was, from start to finish, more or less over before it started, and most people, including myself, didn't really know what happened until it was all over. So if we look at that as the downside and ask who this really harmed -- it harmed the high-frequency traders themselves.
LEWIS: Well, they got out, actually. They harmed people who traded way off market prices. I mean, that's obvious. And there's this whole question about how much instability or how many technical glitches can the market endure before people just don't trust it. What is the price to the economy, overall, of radical decline in trust in the financial sector, which is what we have right now?
I mean, it's a holdover from the financial crisis. You have this very weird situation where we've been in this raging bull market for seven years -- six years or seven years -- and there's actually been a decline in household participation in the stock market. That's probably not good for your investments. It's probably not good for the economy. It raises the cost of capital.
So there are broad sort of macro effects that, in the end, touch the investor. Maybe deeply affect the investor. But I can even understand if you say, "Oh, flash crashes every now and then. I'll live with it." But I think a lot of people won't. I think that if you have a few more of them -- or maybe one more of them -- you see it raises the cost of capital. A decline in trust raises the cost of capital.
My interest in it is not as an investor, because I invest like you. I know that it's not costing me a lot of money. What bothers me, and what I find offensive, is essentially the regressive tax. It's essentially a transfer from middle-class savings to a handful of rich people. It's totally unfair and totally unnecessary and it's become a model for how you structure a market.
We're talking about the future structure of electronic markets, and the U.S. stock market is kind of a model for how other markets might be structured. And I think it's insidious to adopt that kind of structure. It's just like a bad metaphor for society that these markets should feel fair. It creates a kind of instability in society if people think that the markets are unfair.
So you might say, actually, to me, "Well, then why write a book telling them how unfair it is? If they never know, maybe no one will notice it." But I think eventually people are going to find out, anyway. So that's what bothers me about it. I think the last thing we need in this period of our country's economic history, where inequality is clearly a big problem and a growing problem, is to introduce systematic inequality into the financial markets.
HOUSEL: If you look at the long arc of history -- going back to the Joseph Kennedy days in the 1920s to the bucket shop stock brokers in the 1990s -- where do we stand today in terms of fairness in the market and how well the little guy is served?
LEWIS: This is like a grotesque, broad generalization that I probably couldn't support if I had to sit down and support it in writing, but it seems to me that the electronic markets are better for the ordinary investor than the old-fashioned, lot-of-people-in-the-middle markets. It's costing less to trade. The technology has been hugely beneficial. But the nature of the unfairness is more offensive.
One hedge fund manager was comparing the unfairness that exists now with the unfairness that he thought existed back in the old specialist days of the stock exchange when specialists were kind of sitting in the middle (sometimes doing squirrely things, but not all the time).
He said, "Well one, we now have a system where the incentives of the supposed market makers are worse, because at least back in the old days, the guys who were sitting in the middle market had some obligation to buy in a falling market and sell in a rising one. The high-frequency traders are out. They have the opposite incentive. They actually benefit from volatility. They want volatility. The old specialists preferred a kind of calm market. So that's a problem."
But this guy said to me, "You know, my problem used to be there was this guy named Vinnie on the stock exchange who would make hundreds of thousands of dollars a year. He'd drive on the weekends, in his Cadillac, out to his second home on the beach, and I was paying for that." He said, "Now there's this guy named Sergei who has a private jet and a $20 million home in Aspen who seems like a much bigger problem."
The beneficiaries of the unfairness, in the old days, were likely to come from the wrong side of the tracks. I like that. I mean, you know there's something charming about the grift going to people who actually needed the money.
LEWIS: Yeah. Going to Vinnie. That bothers me much less than the grift going to some billionaire.
HOUSEL: You wrote a great book called The Blind Side. It told this incredible story about this young man who grew up on the wrong side of the tracks, so to speak. Became a very successful football player. One of the big stories in college football, right now, is whether athletes should be paid. Do you have any thoughts on that topic?
LEWIS: I wrote an op-ed for The New York Times seven years ago called "Serfs of the Turf," where I argued that they should be paid like professional athletes. That there should just be a market. Because it's a complete charade that they're students.
And this grew out of The Blind Side, because in reporting The Blind Side, I sat in, a bit, on the Ole Miss football program's academic side, and it was so appalling. It was so clear the kids were not going to get what you would think of as a college education and at the same time, they were basically working a full-time job as a football player.
It all seems voluntary, and all that, but actually they're kids who are being exploited. And even worse, even worse, is this artificial barrier between the college football players and basketball players (especially the money-making sports) and the marketplace, which creates a barrier between the poor, black kids, who are often on these college football teams, and the rich, white supporters of the school.
There would be a lot of useful and fertile interaction between those two groups if the poor kid, who enrolled to play football for Alabama, was allowed to have summer jobs at the rich guys' car dealerships. He would have something. He'd build relationships. He'd have something he could go to when he got out.
But the way the rules are written now, that car dealer can't buy the guy lunch, much less give him a job that pays him well in the summer. I think it's a huge opportunity missed. The NCAA, I think, is corrupt on this subject. I mean, it is very corrupt. It's all about preserving the revenues for the institutions and preventing the revenues from leaking out to the players.
The interesting question, then, in this piece I wrote, is I tried to quantify what players might be paid, and it's hard. They probably wouldn't be paid quite like professional football players. I mean, even the best ones would probably be getting hundreds of thousands of dollars a year rather than millions. But it would be a much more honest arrangement and much fairer to the people involved.
HOUSEL: We're talking about being paid by the school or from outsiders?
LEWIS: Well, I wouldn't mind if they do whatever they want. If the outsiders want to give a whole bunch of money to whoever some hot prospect is to go to this school rather than that, why not? I mean, it would be interesting to see what those numbers were. Anyway, I think the whole situation has gotten so grotesque that I would just like to see it all commercialized.
HOUSEL: Do you have any hope for that changing or do you think it's too established?
LEWIS: Well, there are a bunch of things going on at once. So football has got other problems. I mean, the whole question of whether Princeton, Harvard, or Yale should have a football team, I think, is a battle that's going to be fought sooner rather than later. Chris Borland leaving the NFL because he doesn't want to be addled when he's 45 years old.
I think 20 years from now, people will look back on college football a bit like they look back on, say, smoking. They look back on smoking in the 90s. How could people have allowed those sort of health risks to be run by kids who had no ability to evaluate the risk? And I think then they'll say, and at the same time, exploit them financially for running the risk.
So I do think a transformation is coming. It probably won't be as clean as we're just going to professionalize college football and college basketball and let the free market determine what they're paid. There will probably be some negotiated settlement where some pool of money is set aside for the players. But I do think it's going to change. I don't know exactly how. I think it's going to change.
HOUSEL: Six weeks from now, there will be tens of thousands of young Americans graduating from college. What's your best advice for them as they head out into the real world?
LEWIS: Well, everybody's circumstances are different. If you've got a huge pile of college loans and people to support, you've got one set of problems. And if you don't, you have another set of problems.
My advice to people who are worrying about what they're going to do for a living when they're in school -- what I always say to them is don't let money totally drive the decision. If you're doing what you're doing just for money, you're probably going to end up unhappy doing it. And in the end, the money side of things doesn't even work when you're unhappy doing something.
So it sounds trite to say follow your passion. I'd put it a little differently. I'd say if there's something that really interests you, and it seems useful in the world to do, see if you can figure out how to make that pay rather than just take whatever pays and follow that. Create your own little economy. I think, even from a pure financial standpoint, there's enormous fuel in being genuinely engaged in what you're doing. So just be very careful to be genuinely engaged in what you're doing.
HOUSEL: Michael Lewis. Thank you very much.