“Boomerang” – Michael Lewis – A Book Review


“Lehman’s was a world investment bank. They had testicles everywhere.”Bertie Ahern, Irish Prime Minister

After re-reading “Liar’s Poker” recently, I thought I would take a look at the latest offering from Michael Lewis, his exquisitely timed and just released “Boomerang, Travels in the New Third World.” While entertaining and written in the same style, I don’t think this book is destined to become a classic as it is more of a short collection of stories of Lewis wandering around Iceland, Greece, Ireland, Germany and Vallejo, California, of all places, or a “tour of the ruins,” as he puts it. “Boomerang” lacks cohesion and the message is repeated, often using the exact same phrases and analogies in each tale. The ending is shallow and the story just kind of stops, as if Lewis had something better to get to. But there are moments of hilarity, so read on.

Cold hearted orb that rules the night,
Removes the colours from our sight,
Red is gray and yellow white,
But we decide which is right.
And which is an illusion.  – The Moody Blues, 1967

Planet Earth has had a truly global meltdown which has clearly shown how connected we are economically no matter where we call home. Most people thought they were doing well before the financial crisis and many thought they were getting rich. It is a shock to find out all was fantasy, just an illusion of prosperity and we don’t know who to blame. Lewis tries to cram a big story with broad moral implications down into a Whitmans Sampler chocolate box (the small one, as the book is only 200 pages long) so we can understand it, maybe without taking the whole thing too seriously. Shame. It was a good crisis. Let’s tag along and watch him scribble.

Iceland

Iceland was basically a poorly run hedge fund masquerading as a country. It is fair to say Lewis is not a huge fan of Iceland. After a few days there he describes them as “mousy-haired and lumpy.” Iceland’s rise to financial heights and eventual infamy fooled Europeans because they thought the Icelanders were a gentle, law-abiding people like Scandinavians. Lewis notes, “They are not. They have a feral streak in them.” I guess he has no plans to go back.

Icelandic banks borrowed short term money abroad and lent, or gave it to their buddies back home on the rock to piss it away buying mispriced assets around the globe at the top of the market. As one senior British banker described them before the meltdown, “Everyone there was incredibly young. And they had no idea what they were doing.” But they thought they knew and they thought they were just cleverer than everyone else. Lewis asks a pointed question here:

If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years?

Yeah, he’s not going back.

Greece

Yes, Greece is a third world country and has been one for more centuries than I have toes and fingers. Only with the adoption of the Euro were the Greeks given the ability to borrow money at low, low German rates of interest. Just like throwing the keys of the Ferrari to a 9 year old, this has to end badly. Let’s be honest, expanding the Euro zone to include basket cases like Greece was just a dumb idea. To get into the big boys club the Greeks lied about how low their inflation and fiscal debt levels really were. The gov’t froze prices for electricity and water and even removed expensive tomatoes from the CPI the day inflation was measured so as to slip under the door. But to really help them squeeze in they needed Goldman Sachs which helpfully designed derivatives to hide the country’s true level of debt. The dirty laundry flew out the open window when the winds of 2008 came blowing.

“How in the hell is it possible for a member of the euro area to say the deficit was 3% of GDP when it was really 15%?” a senior IMF official asks. “How could you possible do something like that?”

Ireland

We don’t have a liquidity problem, we just lost two-thirds of GDP! Ireland grabbed as much cheap money as it could not to buy trophy assets around the world like Iceland, but to build houses in Ireland and sell them to each other. Eventually, the Irish banks accumulated property-related losses of over 100 bn euros, or in US terms, given the size of their economy: $10 trillion!

Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers had set some kind of record for destruction.”

As we now know, Ireland was destroyed the moment the politicians decided not to just guarantee the deposits in the Irish banking system but to guarantee all the debt of the banks as well. The promise to keep private bondholders whole instantly shifted the burden of repaying all that money to the unsuspecting taxpayer. Bondholders owned 80 bn euros worth of Irish bank bonds, how much is that? 50% of Irelands GDP! Jumping Jesus, Joseph and Mary. Note to Mrs. O’Flaherty: Pay it off, bitch.

Germany

Cheap credit flooded the global economy and each country responded in its own peculiar way to get itself in deep doo doo. Germans, however, didn’t acquire assets or buy houses, there was no credit boom in Germany. To do something like that is “un-German” and therefore, unthinkable. They just lent out the money to foreigners to do crazy things. But the Germans were willing customers of a lot of crap paper. Remember when John Paulson helped choose the junk securities in the CMO that Goldman built for him so he could short it? (Wait, Goldman Sachs appears again, front and center of every crisis? Talk about coincidences!) Who did Goldie sell it too – the Germans!

“No one is going to buy this crap. Oh. Wait. The Landesbanks will!”

Free money gushing around the globe from 2002 – 2008 was a global phenomenon and a temptation too great for mere mortals to ignore. The common dream was to get rich and the way to get there now was through leverage. Lenders abandoned all principle for short term gain. Borrowers greedily took the low interest loans on offer to pimp their ride. Who do you blame? See that woman in high heels and fishnet stockings walking slowly down the street? She’s not a hooker unless she has a John and he’s not a John without a hooker. They need each other to be guilty. In Michael Lewis’ “Boomerang,” both sides find that willing partner.

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