The Downturnaround Kills Its Idols

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Scroll over chart for Paterson's big moments. Photo: W.W. Norton

"When you create a derivative you don't add to the sum total of risk in the financial world; you merely create a means for redistributing that risk ... the most striking thing about the growing derivatives markets is the stability that has come with them."

This observation was published in January 2007, and you may be wondering what became of the moron who made it. Is an angry mob parading through the streets somewhere with his head on a stick? you ask hopefully, knowing full well that he's probably more gainfully employed than you are.

And you'd be right. Vanity Fair just published a big feature by him, the first in a lucrative new deal. It's about Iceland, which, you may have heard, is not too stable these days. Seems too much risk got distributed there and the whole damn thing blew up.

This writer, however, is actually not a moron.

He's Michael Lewis. Lewis is the author of many well-regarded works of nonfiction; most recently an obituary of Wall Street and a monster, two-part editorial in the Times, co-written with hedge-funder David Einhorn, about how the banking system collapsed and how it should be reformed. Slate's Big Money site recently crowned him "Our Money Laureate." Even the Downturnaround loves him, and knows him a little bit — we recently went to a nice luncheon for his forthcoming book on fatherhood, which we read and found delightful — he's a gentleman, and one of the best journalistic storytellers alive.

But back in his 2007 Bloomberg piece, Lewis was just ... wrong. "Davos Is for Wimps, Ninnies, Pointless Skeptics," as it was called, made sport of kicking around pessimists like Nouriel Roubini. They were armchair QBs, he indicated, who didn't have what it takes to strap on a jock and get out there in the real world. "They have no evidence that financial risk is being redistributed in ways we should all worry about," he wrote. "They're just — worried."

Now, of course, their worrying looks prescient.

The Downturnaround is not trying to make Lewis look like a fool by pointing this out. His excellent body of work would give lie to any attempt to do so. And besides, blame is not the Downturnaround's game.

Our aim here is merely to show that even the brightest among us can be mistaken in their views of the world, and it's extremely important to remember that in times like this when all the smart people seemed to have reached a consensus. In this environment, we should all be wary of anyone with conviction to burn.

Not very long ago, the optimists had the floor; now the pessimists do. What remains constant is the level of ignorant bluster (see "Santelli, Rick"). If you could buy that like a stock, we'd invest everything we had. As a recent essay in the Washington Post put it: The assumption that professionals in finance and economics can be trusted has nosedived along with our 401(k)s.

Our big dilemma now, in fact, is whether it might make sense to do the very opposite of what everyone's saying. Yup, we're looking at that jockstrap sitting unused in our locker and wondering how it works. Because at the end of that Bloomberg column from another age, Lewis doles out this advice to the likes of Roubini:

"If they really believe the markets mispriced risk, or were about to adjust, they must also believe they could make vast sums of money if they quit their day jobs and opened a hedge fund to take the other side of stupid trades. But they don't really believe that, or at least some of them would be off doing it."


So Lewis had the story. He just missed it! The Downturnaround is very seriously considering starting a hedge fund specializing in Icelandic real estate. Who's in?