The Latest From Michael Lewis

My favorite writer is probably Michael Lewis, a man whose life I recently realized I was inadvertently copying. He went to Princeton, I went to Princeton. He studied economics, I studied economics. He worked for Salomon Brothers, I worked for Citigroup. His interests seem to be writing, sports, business and technology. So we also have the same interests. Really the only difference is that he has numerous bestselling books whereas I possess an alarmingly detailed knowledge of America’s Best Dance Crew. But surely the bestselling books are in my future. Hopefully I won’t have to write them myself, someone can just interview me for a couple hours and then ghostwrite for me.

All of this is just a roundabout introduction for my extremely enthusiastic recommendation of Lewis’ latest piece in Vanity Fair, entitled “Wall Street on the Tundra”. It’s a terrific examination of what led to Iceland, a quirky fishing and aluminum smelting community, into its ridiculous bankruptcy. Lewis hears small bombs go off in the streets during the middle of the night – he eventually learns people are bombing their own Range Rovers for the insurance money. With the nonsensical rise of the Icelandic financial system, Iceland’s krona was rising at 16% per year, so everyone in Iceland took out car loans and mortgages in yen, which was only rising 3% per year.

It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!

I would say it’s unbelievable, except that I believe it completely. So how did this all happen, financially speaking?

I spoke with a hedge fund in New York that, in late 2006, spotted what it took to be an easy mark: a weak Scandinavian bank getting weaker. It established a short position, and then, out of nowhere, came Kaupthing to take a 10 percent stake in this soon-to-be defunct enterprise—driving up the share price to absurd levels. I spoke to another hedge fund in London so perplexed by the many bad LBOs Icelandic banks were financing that it hired private investigators to figure out what was going on in the Icelandic financial system. The investigators produced a chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.

Even more interesting than the finance is the cultural element to all this. Enough from me, read the whole piece here. I promise it’s worth the time. While you do that, I’ll be off writing my first bestseller. Or watching an episode of “Burn Notice”. It’s tough to say which.