Michael Lewis on the True Depth of the Crisis in Europe
January 24, 2012
by Larry Siegel
Michael Lewis is a financial writer and author, most recently of Boomerang: Travels in the New Third World, in which he reported on the European debt crisis from several of the affected countries. His previous books include The Big Short, Liar’s Poker, Moneyball and The Blind Side. He is a contributing editor to Vanity Fair and a columnist for Bloomberg and The New York Times.
I spoke to Lewis on January 17.
I want to ask you about your experience as a financial writer. I will start with your most recent book, Boomerang, and then move to some more general questions.
Did your interview in Boomerang of Kyle Bass, the founder of Hayman Capital Management in Dallas and one of the first investors to develop a bearish view on European sovereign debt, come from the cutting-room floor of your work on The Big Short?
Kind of. I went back to him. So a lot of the interview in Boomerang came after I finished The Big Short, but he was, in fact, on the cutting-room floor of The Big Short. I talked to him about the subprime trade mainly, not the European debt trade.
Is there any leftover material from your discussion with Kyle Bass that you wanted to use in Boomerang, but that you just couldn't or didn't?
It's funny you ask that, because the world would benefit from Kyle Bass getting up on a podium and presenting the research that he did at his firm, showing the inevitability of sovereign default. They were trying to see if there was a quantitative tipping point with sovereigns. Bass looked at sovereign debt differently than the markets, because he was counting not just the sovereign debt itself, but also debt in the banking sector that he thought the government would be responsible for.
I thought that the sovereign debt problem was a fiscal problem, caused by entitlement spending.
But when you look at, for example, France, you can't ignore the government assuming bank debts. If Credit Agricole or BNP goes down, the liabilities of those banks will become a French government liability.
What I didn't do in the introduction to Boomerang, because I didn't want to lose the general reader, is to report on a conversation with Bass in which he walked me through the numbers, and he explained the argument.
Bass’ firm, Hayman Capital – and there must be other firms with this position – is holding long-dated put options on this sovereign debt, so they can afford to wait, but they are still trying to figure out when default happens. Bass thought the endgame would be the end of last year or the beginning of this year, and he may be right; he was talking about Greece. But his argument applies to other countries, and I didn't have the time or energy to lay out his argument in great detail. I was interested in conveying his general argument to the reader, because it was so breathtaking.
If I were to write it again, I might go more deeply into it.
The subtitle of Boomerang is “Travels in the New Third World.” Based on your observations, is peripheral Europe really going to have a third-world economy or is that just hyperbole?
But will peripheral Europe become a two-tiered society? The wealthy have already figured out how to protect and extricate their capital, and pay little in taxes. The so-called austerity programs largely affect the working class. Can you reflect on wealth inequality and whether the debt crisis is creating a deeper division in Europe than what the U.S. faces?
Is the debt crisis creating deeper inequality in Europe than in the United States? There is a factual answer to that, which I don't know off the top of my head. But, just looking at the policies that Europe is pursuing versus the policies that we are pursuing, it makes a lot of sense that inequality is being exacerbated there. Take a place like Greece, which is probably the purest example of a sovereign debt crisis. The rich people in Greece are already out of reach of the government. They are not only not taxed; they don't even have their assets in Greece, having fled the banking system long ago. The people who are exposed are the people who can’t get out. It's fair to say that the more a country is like Greece, the worse it is on a relative basis for the lower 99% versus the upper 1%.