It’s during the White House years that Mr. Meacham’s story takes hold. We see Andrew Jackson making the hard trip east from Tennessee to Washington where the political permanent class waits in judgment, wary of Jackson’s frontier background and fearful of the source of his power. Jackson’s landslide victory in 1828 marked the first time that a president was elevated entirely on the strength of popular support, and the Founders’ low regard for the common intelligence still percolated through Washington.
Last week, Max directed our attention to a major new piece of reporting on the financial crisis: a Portfolio article by Millions favorite Michael Lewis. The author of Liar’s Poker, among other books, Lewis is a gifted explainer of an industry badly in need of explanations. In the Portfolio piece, for example, he immerses us in the world of short-sellers who saw the subprime meltdown coming. However, the key paragraph – wherein trader Steve Eisman has an epiphany about how investment banks are leveraging subprime bonds – resorts to a sports metaphor, and thus fails to demystify an elusive instrument at the center of the financial crisis: the credit default swap (CDS).”When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats,” Lewis writes.But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans.’I’ve heard financial insiders inveigh against peons who “don’t know a credit-default swap from a turnip,” but how are we to wise up, if explanations only come in the form of metaphors (athletic or agricultural)? Grabbing a fig leaf from the N+1 playbook, as it were, I decided to ask a friend in finance to explain the Peyton Manning analogy, as simply as possible. Here’s what he had to say (wait for “the rub”):Assume the following: Eisman buys a crappy mortgage security (say, a $1,000 bond from a mortgage given to a strawberry picker who makes $14,000 dollars per year). Say the mortgage rate the strawberry picker pays is 15%. This means he’s agreed to pay $150 a year to Eisman. But Eisman is worried that the strawberry picker will default because the guy’s house value has collapsed and his income is drying up. Thus, Eisman wants to buy insurance on the $1,000 he’s loaned. The way he does this is via a credit default swap.A CDS is essentially an insurance policy on a loan, and here’s how it works. Eisman finds a counterparty willing to sell him insurance on his loan (a big investment bank like Lehman Brothers). Eisman agrees to pay the bank a fixed rate every year for protection of the mortgage security he owns (the crappier the loan, the higher the rate). Let’s say for the $1,000 loan to the strawberry picker, his rate will be 10%. The bank pays him nothing on a regular basis, BUT, if the borrower defaults, they pay him the full $1,000.So: if times are good and everyone makes payments on time, the payments are structured as follows: The strawberry picker pays $150 per year to Eisman; Eisman pays $100 per year to Lehman (which then uses some of the cash to provision for losses, and uses the rest to make more loans). The strawberry picker gets to keep his house, Eisman keeps $50 per year (loan payment from strawberry picker minus the insurance premium he pays to Lehman), and Lehman gets $100.Got the structure? Now here’s the rub.Imagine Eisman never actually had exposure to the loan in the first place. Being the brilliant skeptic he is, Eisman would never lend $1,000 to a strawberry picker with little income. He thinks that strawberry man is doomed to default on that loan, and he actually wants to bet AGAINST him. So instead of giving the loan and buying insurance, he just buys the insurance (hence the often used and rarely understood term “side bet”). To do this, Eisman still has to pay the “premium” for the insurance he’s bought, and since it’s a risky loan, the rate is high (e.g. $100 per year in the example above). [Though he stands to win $1,000 if the loan defaults.] In effect, Eisman is paying a “subprime-like” interest rate to Lehman every year! That’s what Lewis was getting at.I would have used a different metaphor. I would have said it’s like a New Yorker buying a bunch of home insurance policies in New Orleans because you are expecting that there will be a massive hurricane coming to wreck them. Now lets say that the insurance company took the money you were giving it, didn’t provision for the coming doom, and instead, used that money to lend to more people building and buying houses in New Orleans.That’s leverage upon leverage upon leverage. And that’s the mess that is unraveling before us.
Here in Iowa City, the only town in America whose economy is fueled entirely by football, alcohol and literature, we get more than our share of readings to attend. While I don’t make it to all of them, I did manage to hear Marilynne Robinson read a few weeks ago. Ms. Robinson is an enchanting reader, and her new book Gilead was atop many “best of” lists for 2004. As anyone who has read a review of Gilead knows, it is Robinson’s first novel since Housekeeping was published 24 years ago, and the way many in the media talk about it, it might as well have been 224 years ago. While Robinson has written two non-fiction books about such varied topics as John Calvin and Great Britain’s nuclear policy, Gilead is indeed her first new work of fiction in many years. But so what? I for one would like to see more authors take their time between novels. One of my favorite writers, J.F. Powers, wrote only two novels and wrote them nearly 30 years apart. They’re both nearly perfect, and I don’t find myself wishing he wrote more. In fact, the scarcity makes it that much more likely that I’ll actually read one of his books a second or third time, something I rarely do. I don’t think I’ll find myself diving into Kingsley Amis’ very fine Old Devils as I’ve been poisoned by the vast sea of mediocrity that separates that book from his masterpiece Lucky Jim. So hats off to the Marilynne Robinsons, the J.F. Powers, and the Donna Tarts of the world. I sometimes wish we had a few more of them and a few less mediocre novels.
Some quick observations: Bob Woodward’s new book Plan of Attack is selling as fast as I have seen any book fly off the shelf in my two years at the book store: faster than Hillary and approaching Harry Potter levels. One time Millions contributor Kaye Gibbons has a new novel out called Divining Women. Early reviews are mostly good. On the other hand, the review that New York Times’ “Madame” Michiko Kakutani gave Alice Walker’s new book, Now Is the Time to Open Your Heart, is just about the most brutal I have ever seen in that paper. View the carnage hereIn Millions news, I’m heading to New York tonight. I’m in a wedding this weekend and there are other East Coast errands to run, so I probably won’t be blogging much, if at all. I will, however, be checking the comments here as well as my email. I don’t know how special this makes me, but I have been asked to be a trial user for Google’s mega-hyped webmail service, GMail, so if you are curious about how well it works, feel free to drop me a line.
I’ve had gift cards for some chain stores lying around for months now – gifts from Christmas and my birthday – and yesterday I decided to use them. It was strange though, despite having quite a bit of free money at my disposal, I found it very difficult to buy myself books. Over the last several years I’ve grown so accustomed to buying books very cheaply that I couldn’t rationalize paying full price, even with the gift card. I felt pretty bad about it, too. I know that authors get their paychecks when we buy their books new, but they don’t see any of my money if I buy a book at a used bookstore or a yardsale. I also feel bad because most independent bookstores can’t afford to mark their books down, and even the chain stores only put a handful of titles on sale, but I know that Amazon will have the book I want at 30 percent off, or more. After thinking about it for a while, I decided to get mad at the publishers. Why does a book have to be a luxury good? I won’t pretend to know the economics of bookselling, though I know that it requires many people – all of whom need to be compensated – to put out a book, but does it really make sense to charge 25 bucks or more for a new book? There are probably a lot of people who occupy a grey area as book customers. They enjoy reading but not enough to spend 25 bucks on it or even the 15 they now want for a paperback. Instead they buy a magazine or see a movie or go out to lunch, all equally entertaining in their minds. I don’t know where the money gets squeezed out of the book creation and selling process, but if books get cheaper people will read more and I won’t stand with my nose pressed up to the window of the bookstore staring at new releases that are beyond my means.Nonetheless with all this cash in hand, I had to buy something, so instead of spending it all on handful of paperbacks or a smaller handful of hardcovers, I decided to buy a truly expensive book, this time for Mrs. Millions who deserves such things. I bought Modern House Three, a Phaidon architecture book of considerable heft filled with glossy pictures of space age homes (she’s an architect). I got a couple of books for myself, too, a couple of novels I’ve been curious about for a long time: Donald Antrim’s The Verificationist and English Passengers by Matthew Kneale. I actually still have some more left on these cards, so maybe I’ll take another stab at the whole chain bookstore thing soon.
[Editor’s note: This week we’ve invited Megan Hustad, author of How to Be Useful: A Beginner’s Guide to Not Hating Work, to dissect our contributors’ first-job follies.]Max writes:When I finished college, I followed my then-girlfriend (now wife) to Los Angeles, where she was to attend grad school. Fortuitously, some buddies of mine from high school were headed to L.A. as well. I found an apartment with them and we set out looking for jobs. At the time, I felt singularly unqualified to do anything in particular despite just a couple of months before having been handed a diploma that had cost into the six figures.In L.A., of course, when you look aimlessly for employment, you land in the entertainment industry, which is exactly what happened to my friends and me. As I began my job hunt, I was sufficiently dazzled by this prospect even though I had never up until that point considered acting, directing, or screenwriting. As I would soon find out, if you’re not the “talent” in Hollywood, you’re just another guy at a desk.I landed at a second-rate agency in Beverly Hills as an assistant for a newly hired literary agent. We’ll call him Bert. I was so clueless that every mundane detail was a revelation: “We send out thirty copies of this script to production companies!?” “I’m supposed to call your client and tell him ‘I have Bert on the line for you?'” As I soon realized that the job mostly entailed getting coffee and related menial tasks and looking busy when the head of the firm came through, I pushed for anything that would make the hours there bearable. I got along with my fellow assistants but the bosses tended to look beyond me into the distance when I talked to them. Attempting to play to my strengths, I asked Bert if I could read some scripts.I tore into them ruthlessly. Part of this was because these scripts were undoubtedly bad – heist and car chase rehashes – and part of it was because I had never read a script before and had no idea what they looked like. I produced pages of notes cataloging logical falacies, stilted dialog, and poor character development (this for a knock-off of Vin Diesel-vehicle The Fast and the Furious) and included lots of snarky asides. I handed the notes off to Bert and he never mentioned them again.From there my trajectory was decidedly downward. I was transferred to another agent, in a move that I now realize was intended to punish her poor performance – give her the worst assistant so she knows she’s on thin ice – and then ultimately “laid off” to punish her further. From there, I headed down the path of temp work and retail before turning things around by going back to school. As it has been for many, my first brush with Hollywood was humbling.Megan Hustad responds:Ever heard of The No. 1 Ladies’ Detective Agency? Me, too! I was an assistant at Vintage Books, and my boss handed me the manuscript (for the fourth in the series, I think, but none had been published in the U.S. yet) and asked me to make six copies. I was to keep one, distribute the rest, and read overnight. That was big clue Nos. 1-6; seldom were so many souls asked to weigh in on a manuscript overnight. But no, I strolled in the following morning with this assessment: “I dunno, it seems ‘small’ to me. I just can’t picture the audience at all.” I may have added an aside about library ladies too, but I’ve suppressed the memory, so I couldn’t tell you.Thing is, the impulse to cough up withering assessments of proposals, scripts, or what have you, is strong. Especially when you’re employed in a creative industry but mainly engaged in menial tasks– how else, you think, can I help people understand that I’m capable of so, so much more than I’m being asked to do? This is what I learned, however, after eventually quitting Vintage (because my, ahem, “career” there had stalled out) and reading a lot of success manuals from the 1910s and 1920s, when snark was first in vogue: It’s actually very difficult to make positive and affirming statements, using American English, and still sound like you have a brain. Very demanding, intellectually. I mean, Lincoln had it down, but it didn’t come easy. You basically have to practice. Uselessness rating: 4For more information, please see these related posts:Welcome to the Working Week: Megan Hustad Analyzes Our On-the-Job FoiblesWelcome to the Working Week 2: EmreWelcome to the Working Week 3: GarthWelcome to the Working Week 4: Andrew