Gregory Zuckerheim’s The Greatest Trade Ever: The Behind-The-Scenes Story of How John Paulson Defied Wall Street and Made Financial History tells of how Paulson “realized something few others suspected—that the housing market and the value of sub-prime mortgages we grossly inflated and headed for a major fall.” But it turns out that “The Greatest Trade Ever” may have been something very akin to a rigged bet. What the book didn’t tell us (because it was unknown at the time) is that Paulson had shaped the portfolio of mortgages—hand-picking the bonds it contained for Goldman Sachs—that he bet against to make his fortune. (This is what is behind the SEC suit being brought against Goldman Sachs we’ve been hearing so much about.)

Instead of explaining this myself (Because I don’t know if I really can), I’ll defer to The New York Times and the authors they’ve had weigh in on the situation this week.

Yesterday, Too Big To Fail author Andrew Ross Sorking wrote about When Wall Street Deals Resemble Casino Wagers:

The Securities and Exchange Commission, in its suit, says that Mr. Paulson asked Goldman to help create a synthetic C.D.O. of lousy mortgage loans that he selected so he could bet that they would go down and then profit on their fall

[...]

This kind of high finance can numb the brain, and the legal questions are murky. But when you strip all of that away, this deal was nothing more than a roll of the dice.

Try this mental exercise: Imagine if, a few years ago, an influential investor like Warren Buffett, bullish on real estate, had asked Goldman to develop a synthetic C.D.O. made up of undervalued mortgages.

Now, imagine if Goldman had found John Paulson to take the opposite side of the trade and, lo and behold, a year later Mr. Buffett turned out to be right and Mr. Paulson lost his shirt. Would you call that fraud? Would you be very upset?

Maybe not, but Mr. Paulson sure would be. And he might be inclined to sue over it, especially if he found out that his bet had been rigged against him from the start.

Today, Roger Lowenstein, author of The End of Wall Street, took his turn explaining Goldman’s Gambling With the Economy:

Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet—like those in a casino—that allowed speculators to increase society’s mortgage wager without financing a single house.

[...]

The government would not look fondly on Caesar’s Palace if it opened a table for wagering on corporate failure. It should not give greater encouragement for Goldman Sachs to do so.

The Return of Depression Economics and the Crisis of 2008 author and Nobel Laureate Paul Krugman, in his Op-Ed piece about Looters in Loafers on Sunday, explained how these bets made the overall recession worse:

So what role did fraud play in the financial crisis? Neither predatory lending nor the selling of mortgages on false pretenses caused the crisis. But they surely made it worse, both by helping to inflate the housing bubble and by creating a pool of assets guaranteed to turn into toxic waste once the bubble burst.

As for the alleged creation of investments designed to fail, these may have magnified losses at the banks that were on the losing side of these deals, deepening the banking crisis that turned the burst housing bubble into an economy-wide catastrophe.

And, though not specifically about Goldman Sachs and the SEC suit being brought against it, William Cohan, the author of House of Cards, took the space allotted him today on the Op-Ed page today to say You’re Welcome, Wall Street.

Michael Lewis’s latest book, The Big Short: Inside the Doomsday Machine, was released this week to a lot of media attention and bestseller lists. We’ll review the book more in depth on this site and elsewhere over the coming weeks, but its very release is what’s giving me hope this week.

You see, for all the doom-and-gloom surrounding publishing these days, publishers themselves have done a quietly masterful job of finding books that put the Great Recession, and what caused it, in focus over the last year and a half—Michael Lewis being but the latest (albeit one of the finest) voices in the choir that publishers have been directing. And I think it is a very important task they’re accomplishing. In a media environment dominated by the 24 hour news-cycle, and inundated with soundbites and tweets that flutter into the crowded cultural ether, soon to be forgotten, it is important that someone documents what went wrong in depth—where, why, when and how—and, dare I say, on paper.

And we need these books and the discussions they raise not only in academic circles, not only in and our intellectual and political culture; we need it in our popular culture. An academic dissection of what exactly went wrong, by the numbers, is important. But we need more than an economist’s dissertation on the situation (though many economist’s have written excellent and accessible books on the crisis). Newspapers and magazines can document the events as they’re happening, and often provide a invaluable insight or angle that sheds light on what’s going on. But the story is ever-changing, always evolving, and their job is to follow it, to report on its latest developments—sometimes at the expense of the larger picture (though some of the best books on the recession have been from journalists that stepped back from it all to distill that picture). Cable news and the echo chamber of the political blogosphere have their place, but we need more than talking points and counterpoints.

And this is what publishers have been so good at: finding authors and books that can inform and influence all of those discussions (and, at the same time, transcend them) and then getting them out there to do so. The are capturing the larger narratives by finding authors that can write them. They have told many stories, by many authors, from many different angles, exposing the different elements and individuals involved in the crisis. The books they’ve put out are, generally, well-researched and written well enough to hold serious intellectual weight, but not so obscure that the general public can’t understand what’s going on. The stories in these books are complicated, and often insane, but these authors are making them accessible, and publishers are making them available.

It may sound like hyperbole, but I think these books can help better not only the business and financial worlds, but the world itself. They tell a story we’ll need to hear before we can correct the course our economy has been on. I sincerely hope those with their hands on the levers of power are listening to (and reading) them as they’re discussing how to do so.

Here is a quick list of some of the books that I’d suggest (if you have some, please add them in the comments section):

• The Big Short: Inside the Doomsday Machine by Michael Lewis, W.W. Norton & Company
• Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — And Themselves by Andrew Ross Sorkin, Viking
• House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D Cohan, Doubleday Books
• Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly, Portfolio
• Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph Stiglitz, W.W. Norton & Company
• In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel, Crown Business
• On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry Paulson, Business Plus
• Hoodwinked: An Economic Hit Man Reveals Why the World Financial Markets Imploded–And What We Need to Do to Remake Them by John Perkins, Broadway
• The Greatest Trade Ever: The Behind-The-Scenes Story of How John Paulson Defied Wall Street and Made Financial History by Gregory Zuckerman, Broadway
• The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson, Crown Business
• A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G McDonald with Patrick Robinson, Crown Business

That’s just a start, and I know I’m missing a lot… probably some big ones. And that’s not even getting into those books that focus more on how we recover, reset and reform our financial system (and individual companies) now that all the damage has occurred—books like Anna Bernasek’s The Economics of Integrity that discuss solutions on a macro level and the Boston Consulting Group’s Accelerating Out of the Great Recession that do so on a micro level.

Andrew Ross Sorkin concluded his book, Too Big to Fail, with a great story:

When the post-bailout debate was still at its highest pitch, Jamie Dimon sent Hank Paulson a note with a quote from a speech that Theodore Roosevelt delivered at the Sorbonne in April 1910 entitled “Citizenship of the Republic.” It reads:

“It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.”

It was a remarkable quote for Dimon to have chosen. While Roosevelt’s words described a hero, they were deeply ambiguous about whether that hero succeeded or failed. And so it is with Paulson, Geithner, Bernanke, and the dozens of public- and private-sector figures who populate this drama. It will be left to history to judge how they fared during their own time “in the arena.”

In my opinion, publishers are doing a wonderful job of documenting “the arena” for us all (and hopefully those inside the arena) to consider… and for history to judge.

Back in Liar’s Poker, Michael Lewis wrote of the deceit behind Wall Street’s. How firms got away with hiring 24-year-olds fresh out of college as advisers to large corporations and for large sums of money.
The time frame: the 1980s.
Lewis thought the happenings on Wall Street were an anomaly; a period of time that would meet its demise when the American youth planted their stakes in the ground and rebelled against greed; when the youth abandoned Wall Street ideals and overturned the system. Lewis waited and instead of rebellion found that:

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.
In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

This October that changed. The economy brought us all to our knees. Wall Street’s pockets of air came crashing down and much of the world stopped.
Is this is the the end of Wall Street? Probably not. But perhaps its the end of this period of anomalies.
Lewis’ latest book Panic! The Story of Modern Financial Insanity is a compilation of articles on what lead to present-day Wall Street, beginning with the crash of 1987.
In an interview with the Wall Street Journal, he’s asked what the next get-rich-quick scheme will be. He speculates:

Mr. Lewis: We have entered a period of risk aversion unlike anything we’ve seen in our lifetime. Investors will be too wary for a while. You’ll read stories about people who got rich betting against subprime mortgages and then about people who combed through the wreckage and found bargains. The next rich wave will be those who figure out where the value is. As for the average American investor, he’ll be a deer in the headlights for years. It will be a while until greed gets comfortable again.

Let’s hope greed doesn’t get too comfortable anytime soon.