Late last month a defamation lawsuit was filed against the journalist Michael Lewis. The irony of Mr. Lewis being sued for vilifying anybody is that his body of work is so scrupulously villain-free as to cause the reader to suspect the author has some skeletons in his closet. He wrote a book about baseball in 2003 that made zero mention of the word “steroids,” and in similar fashion, he declares at the outset of his financial crisis page-turner, The Big Short: Inside the Doomsday Machine, that pervasive stupidity, not corruption, was the novelty distinguishing the financial crisis of 2008 from all those before it. The embodiment of this system-shattering new strain of cluelessness makes a cameo appearance in the form a saké-slurping financier labeled “the enemy” by an associate of Mr. Lewis’ pathologically indignant chief protagonist, Steve Eisman, upon their encounter at a Las Vegas subprime mortgage conference in January 2007.
The enemy was Wing Chau, a pudgy but well-dressed man who specialized in packaging and “managing” the infamous subprime-mortgage-backed collateralized debt obligations on the verge of nuking the financial system. Mr. Eisman, like Mr. Lewis’ other heroes, was accumulating credit default swaps betting on an epidemic of foreclosures that were in the process of destroying such CDOs. Mr. Chau, whose CDO manager Harding Advisory had then been in business for only six months, effusively explained to his dinner companion that they were actually rooting for the same team. “I love guys like you who short my market,” he said, to Mr. Eisman’s self-professed horror. “Without you, I don’t have anything to buy.”
It has been 12 months since The Big Short first appeared in stores, embedding the episode in the collective consciousness of the moderately finance-minded. Like the real estate crash itself, it happened in Vegas but did not stay in Vegas. As Mr. Lewis tells it, Mr. Chau was the embodiment of the “sucker”: a new money “moron” with a mid-tier education who had spent the years prior to the subprime gravy train toiling at an insurance company for $140,000 a year.
It is unclear why it took until last week for Mr. Chau to formally strike back at Mr. Lewis and Mr. Eisman with an acerbic double character assassination disguised as an audaciously flimsy defamation lawsuit. (Sample transition: “7. Lewis admits that he was so unqualified [for his job as a junior bond salesman during the 1980s] that he feared that ‘someone was going to identify me, along with a lot of other people more or less like me, as a fraud.’ 8. Lewis escaped any charges of fraud and went on to write Liar’s Poker concerning his brief experience at Salomon Brothers, which became a bestseller and made him rich.”) Neither Mr. Chau nor his formidable attorney, Steven Molo, who now represents, among others, two of Bernard Madoff’s oldest investors in his bankruptcy case, returned calls from The Observer.
“I was really surprised to hear about the lawsuit, because I didn’t think anything [Mr. Lewis] wrote was that bad,” said Tony Huang, a Cornell physics Ph.D. and derivatives veteran who worked for Mr. Chau for three years at Harding, reached at his new job at a Princeton, N.J., wealth management firm.
“Although the book did get one thing wrong” about his old boss, Mr. Huang said. “He is not stupid.”
One of the more exotic characteristics of the subprime mortgage crisis was the unprecedented opportunity it afforded a few curious-minded money managers like the paladins of The Big Short to become ludicrously rich, practically overnight, without having to get their hands dirty. So Mr. Eisman manages a multibillion-dollar hedge fund and fancies himself, in Lewis’ phrase “Wall Street’s socialist.” Michael Burry has a glass eye and Asperger’s syndrome and doesn’t believe in charging investors a management fee. Mr. Lewis’ big shorts are all a bit socially displaced and somehow honorable, except in the cases in which he fails to mention their dishonorable qualities.
Mr. Chau’s is not that kind of story. In the summer of 2006, barely a year after he founded Harding, he was personally “overseeing” more than $20 billion (theoretical) worth of the most dubious deals in the history of Wall Street. Through a diversified regimen of fees, bonuses and “incentive” payments, he made $26 million in 2006 alone, according to Mr. Lewis.
Harding specialized in “mezzanine CDOs,” notorious scams in which pools of unsellable BBB-rated slices of mortgage-backed securities were somehow spun into a more complex vehicle that could by the magical math of decorrelation upgrade its ratings to triple-A. Since a foundational delusion of this and all mortgage-based financial “innovation” was the assumption that housing prices would rise every year in perpetuity, this sort of madness should have ground to a halt in late 2005, when the housing market began its descent. Instead, the CDO market surged. At least $500 billion in mostly subprime-backed CDOs were issued in 2006 and 2007–as delinquencies were rocketing, prices were falling and panic took hold.
This was the result of an invention called the “synthetic” mortgage security, a derivative pegged to the value of an underlying mortgage bond, with the crucial distinction that interest payments were made not by homeowners but by speculators investing in credit default swaps that increase in value once those homeowners start to default. By 2006, just as Mr. Chau pointed out at the dinner, “demand” for mortgage-backed financial products was effectively being “driven” by pessimists, like Mr. Eisman, betting on collapse, although the market was too opaque for almost anyone to grasp this. But Mr. Chau understood because the mezzanine CDOs that were Harding’s specialty were a vehicle for creating discount-priced credit protection.
In one of Harding’s first transactions, the $1.5 billion Octans I, the Illinois hedge fund Magnetar agreed to buy the lowest “toxic waste” slice of the deal in exchange for the right to choose which bonds and “synthetics” Octans would comprise. Octans also contained a slice of another CDO called TABS–and TABS in turn “invested” in a slice of Octans–that closed the same month, October 2006. TABS was the invention of the hedge fund Tricadia, which like Magnetar “sponsored” CDO deals by footing the bill for the untouchable “toxic waste” of the lowest tranche, in order to lay claim to the credit default swaps that would pay out when the deal fell apart.
Investment banks–primarily Citigroup and Merrill Lynch–took the burden of “placing” the sinking layers of Harding’s mezzanine CDOs, sometimes in other CDOs, sometimes in other off-balance-sheet vehicles, sometimes with a bona fide investor who’d been somehow duped, other times with an investor who’d been somehow bribed. Citigroup lent Harding the millions to buy the equity slice of one of its CDOs and largely convinced pension funds to buy CDO pieces by packaging them with “liquidity puts,” insuring them against certain losses. This scheme alone ended up costing at least $14 billion. Meanwhile, Merrill formed a special “subsidy” unit that paid extra bonuses to traders who agreed to withstand the embarrassment of eating a loss so they might hide CDOs. In early 2007, Merrill commissioned Mr. Chau to create a new CDO called Neo, to house some of its old CDO scraps. It had defaulted by the end of the year.
A few good-faith investors who got stuck with these nothing-backed securities have sued Harding, which is now down to two employees (Mr. Chau and his wife) managing a reported $4 billion in assets from an office in New Jersey. But in an interview with the Financial Crisis Inquiry Commission last fall, he was amiable, articulate and even contemplative without ever wavering from the insistence that it had all been an honest mistake, that he could have never contemplated such dramatic defaults and that he had bui
lt his CDOs according to the specifications of investors.
An effective mortgage relief bill, Mr. Chau suggested, could have avoided many of the losses suffered by investors in his CDOs. He lamented the injustice of a government that bails out its financial system and its commercial real estate sector but leaves behind “mom and pop.” (He also, curiously, went out of his way to cite the Jupiter High Grade Asset CDO, part of which was acquired by taxpayers in the AIG bailout, as his career-making deal.) Contrary to his claim that his infamy, thanks to The Big Short, has ruined him professionally, he is listed having worked a post-crisis stint at a boutique brokerage run by Michael De Giudice, a close family friend and an informal adviser to Andrew Cuomo.
Of course, Mr. Lewis’s caricature of Mr. Chau, as vivid as it is, does not seem as damaging as the extensive reports that have appeared since depicting him as someone who singularly “epitomized the devolution of the business,” in ProPublica’s words. To Mr. Lewis, that devolution was a triumph of stupidity; but upon closer inspection, as one might expect, it was also a conspiracy and a crime (albeit of the decriminalized sort to which we have all grown accustomed when it comes to our banking industry.)
Appropriately, Mr. Chau’s curious complaint seems much more intent on making Mr. Lewis and Mr. Eisman look stupid than making any serious legal case against them. And in this it largely succeeds, leaving readers with a brilliantly cartoonish impression of Mr. Lewis. He is an alternately pathetic and shamelessly exploitative has-been who “saw the world economic crisis–which he acknowledges was ‘a tragedy’–as another opportunity for a bestseller.” Confined to his “family compound” in Berkeley and lacking any firsthand experience with the market since the days when it resembled “the world described by Tom Wolfe in The Bonfire of the Vanities–an elitist environment of Ivy League men in white button-down shirts, talking into telephones while having their shoes shined,” Mr. Lewis finds himself beholden to the likes of Mr. Eisman.
All you need to know about Mr. Eisman is that well into middle age he still indulges in public temper tantrums and weekly trips to the comic-book store to get first dibs on the weekly shipment. “He knew more than any grown man should about the lives of various superheroes. He knew the Green Lantern Oath by heart, for instance, and understood Batman’s inner life better than the Caped Crusader himself. … Spider-Man was his favorite,” the lawsuit tells us of Mr. Eisman, quoting directly from The Big Short and sneering “Eisman was no doubt eager to talk to a famous author writing a book that would glorify him” as the superhuman market deity that could make triple-digit profits vanquishing the credit markets awash in toxic subprime slime.
And so Mr. Lewis allowed himself to become a conspirator in Mr. Eisman’s campaign to make an evil dragon figure out of poor Mr. Chau: “to expose to public hatred, contempt, ridicule or disgrace” the dutiful son of a hardworking Chinese immigrant who waited tables every night in his family’s modest restaurant until, in sincerest hopes of honoring the father who had “fled Chairman Mao’s China in 1953″ to afford him the opportunity, he went to business school. As a result of this conspiracy’s spawn, The Big Short, Mr. Chau, the dutiful son made good, has suffered incalculable “personal humiliation and mental anguish.”
The complaint ends with a demand for a jury trial and an award of damages in excess of $75,000. Considering the tens of billions of dollars that evaporated under Mr. Chau’s well-compensated “management,” this is brash, although hardly on par with the $1 million a month “consulting” retainer demanded by the man who supervised an AIG unit that lost more than a hundred billion dollars on subprime mortgage securities. Joseph Cassano wrangled 12 months’ pay.
And while Mr. Chau’s case has a quaint merit as literary criticism, Mr. Lewis stands to retain a certain advantage before a jury. Not only has he amassed his fortune writing books like The Blind Side, he is, as the blogger “Yves Smith” of Naked Capitalism remarked the day Mr. Chau filed his suit, “undeniably cute.”
“And since they’ll be facing an all-female jury–since obviously, what male who shows up for jury duty in downtown Manhattan hasn’t read The Big Short–that’s actually all that matters,” she said.
Ms. Smith giggled softly and elected to leave this compliment of Mr. Lewis un-couched by any of the customary criticisms of his oversimplified explanations of complex phenomena or his misleading hagiography of short-sellers with which she has been known to consume many thousands of words of text on her blog. Sometimes it doesn’t need to be the source of existential torment, parsing the good and right and cute from the reckless and venal and diabolically corrupt.