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Michael Lewis has explored the flaws of the financial market in a series of books. In his latest, “Flash Boys: A Wall Street Revolt,” he details how he thinks Wall Street is rigged by high-frequency traders for their own gain.
While the new book continues to raise controversy, Here & Now’s Robin Young asked Lewis where he thought we were in terms of regulating Wall Street six years out from the financial crisis.
“The whole subject of government regulation of our financial sector is very frustrating, and it’s very frustrating because, one, the subject’s complicated and the system doesn’t handle complexity very well,” Lewis said. “Two, money has a huge effect on our political process, and the financial sector has a lot of money to spend to influence it. Where we are is, you know, there’s been some attempt in the Dodd-Frank legislation, for example, to address the problems that led to the financial crisis.”
Lewis says the wiring of the stock market allows high-frequency traders to know when an average investor hits a button to buy a stock, run ahead of that order, buy up the stock before the investor, and sell it back to that average investor for a tiny profit per share.
All this happens in split seconds, and the flash trader only earns a penny or two a share, but it amounts to billions of dollars a year out of the pockets of smaller, individual investors.
“Where we are is in a kind of murky, uncomfortable, unhappy place where the financial sector seems to have had a large say in how it’s regulated, and, as a result, possibly not regulated enough,” he added.
Young asked him about criticism of his book, including people like Joe Nocera, who says it’s too pat, and others who say that high-frequency trading is actually a positive because it lowers borrowing costs for all traders by by using technology to bypass traditional middleman traders who charged a much higher amount to make the market work.
“I don’t disagree that the technologies offered huge benefits,” Lewis said. “That’s not the point. The point is, the technology’s also this kind of scalping operation in the middle of the markets, where the markets are, basically, systematically rigged in the favor of a handful of participants who pay for special access, both to the stock exchanges, and to the bank broker’s customer orders, and have, you know, basically no risk in their training. So what I say is, yeah, the technology’s good, but that’s not the point. The point is that Wall Street is capturing still too much of stock brokerage revenues.”
In his previous books, Lewis has shown how Wall Street both gamed the system to make money, in part by creating a fog of complexity, and how that complexity in the end fooled many on Wall Street into complacency about the dangers of things like highly leveraged mortgage derivatives.
In “Flash Boys,” Lewis writes of Wall Street: “What had once been the world’s most public, most democratic, financial market had become, in spirit, something more like a private viewing of a stolen work of art.”
ROBIN YOUNG, HOST:
It's HERE AND NOW.
The New York Times is reporting that two of the world's biggest banks, Credit Suisse and BNP Paribas, have been meeting with U.S. regulators to ask for leniency. Attorney General Eric Holder is reportedly pursuing criminal charges against Credit Suisse for offering tax shelters to rich Americans, against BNP for doing business with countries that are the U.S. blacklist.
Both are European banks, But Holder's office says it's also still pursuing investigations against U.S. banks including Bank of America and Citigroup, because of those toxic mortgages that contributed to the 2008 financial crisis. As Holder put it: No bank is too big to jail.
But is that really the current thinking? So far only one lowly banker has been jailed, and he did not create or sell any of the mortgage securities. Also, will there be any regulatory moves on another aspect of Wall Street: high frequency trading, in which traders can front run an order to buy stock by split seconds and make a profit at the expense of the average investor? Or as Michael Lewis put it on "60 Minutes": Wall Street is rigged.
Michael Lewis is author of "Flash Boys: A Wall Street Revolt." And before that, of course, "The Big Short," about the subprime mortgage catastrophe. He joins us from the studios of the Berkeley School of Journalism to talk about things Wall Street for us. Where are we?
Michael, welcome back.
MICHAEL LEWIS: Thanks for having me back.
YOUNG: And talk first about these investigations that Eric Holder is reportedly pursuing. We well know in March of 2013, he said in the Senate that prosecutors have to be careful, charging large banks criminally could seriously harm the financial sector. That's where we first heard too big to fail. Now he says, very defensively it seems, no, no, no, we are indicting. Do you believe it?
LEWIS: You know, the short answer is I don't know. But the longer answer is it's not just Eric Holder. I mean I think the wildcard right now in Wall Street prosecutions is Eric Schneiderman, the New York attorney general, who has some very broad and general powers to go after, you know, common sense definitions of fraud. And he's - I think he's the one who's most likely to cause trouble for Wall Street.
The general - the longer answer is that, you know these - it does appear that an awful lot of what happened in the credit crisis, in the financial crisis, wasn't illegal. I mean it's amazing to say that Wall Street investment banking designs subprime mortgages to fail, bet against them to make money, not tell anybody, rig the rating agencies and it's all legal. So I think they may have trouble finding sort of crimes.
YOUNG: Yeah. Well, you do write of Wall Street: What had once been the world's most public, most democratic financial market has become in spirit something more like a private viewing of a stolen work of art.
Where are we there, this idea of transparency, regulation, you know, are banks being forced to have more capital on hand? This was the talk, you know, during crisis, is there enough oversight of derivatives trading? Where are we on all of that?
LEWIS: So, the whole subject of government regulation of our financial sector is very frustrating. And it's very frustrating because, one, the subject is complicated and the system doesn't handle complexity very well, but, two, money has a huge effect on our political process and the financial sector has a lot of money to spend to influence it.
So where we are is, you know, there's been some attempt in the Dodd-Frank legislation, for example, to address the problems that it led to the financial crisis. And if you ask - I don't know - former Treasury Secretary Timothy Geithner, he says in his recent book that he thinks it's all kind of fixed. I don't agree with that. But I tell you, where are we? So capital requirements have been raised and that's good thing. But do they...
YOUNG: And hold all, I just have to - when he says fixed, does he mean like the fix is in or repaired?
LEWIS: The big - he got the big things he says he wants. But what he didn't get is really any kind of change in the incentives inside the financial sector. He got - he did get higher capital requirements for the big banks, which is a good thing. But they are, from the point of view of many people who look at, trivial requirements still, instead of whatever it was, three or four percent.
You know, there're complicated calculations that go into determining what the capital ratios are. But now, say they're six percent. But there's a good argument that they should be 20 percent. It's not clear to me or anybody else that these institutions are actually, you know, stable.
So where we are is in a kind of murky, uncomfortable, unhappy place where the financial sector seems to have had a large say in how it's regulated and, as a result, possibly not regulated enough.
YOUNG: Well, talk a little bit more about Timothy Geithner and his current book tour. Remember, he was head of the New York Fed before becoming Secretary of the Treasury. His detractors say he let a lot of big fish off the hook. As you just said, in his new book, he says, you know, things have been repaired. And he also says it sort of implies it's sort of easy to criticize, but in his job, you know, he - he says I understand why people wanted more justice, but we were landing a burning plane, and in doing that your first obligation is to do it safely.
LEWIS: He's got a very good point. I mean, I don't think - I'm very sympathetic. I liked his book. And I'm very sympathetic to the situation he found himself in. And I think it is probably true that we're all better off that he focused on propping up the system rather than dismantling it in the middle of a crisis.
The problem is that having resuscitated these big banks, he did nothing - and maybe he couldn't have done anything - to constrain the political influence they had, you know, they would have on the process once they were revived. And I think, you know, it's too much to lay on the doorstep of one man, but I think it is true, it's a fair criticism of him that he doesn't seem to care very much and didn't care very much in office about, like, how these financiers actually worked, I mean, what was driving their behavior, how they were incentivized.
And so they don't - the problem in the financial sector, one of the big problems, is just the extreme short-termism. People are looking to the next - to the year-end bonus, and that's still there. So I think, you know - some good things were done. He was in a very difficult situation. It's much easier to criticize him than it is to sort of improve upon his decisions. But it's - we're still left with a very unsatisfying financial sector.
YOUNG: Well, Michael Lewis, we are left with about a minute, lucky you, because I want to ask you about criticism about your book and your criticism of high-speed trading. As you know, people say, well, wait a second. There's actually some benefits to this kind of trading. It uses technology to bypass traditional middleman traders who used to charge a much higher amount. What do you say to people who say that your view of this new kind of wired Wall Street was a little too pat, too good-guy, bad-guy?
LEWIS: You're raising a straw man. I don't disagree that the technologies offered huge benefits. That's not the point. The point is that the technology is also enabling this other, this kind of scalping operation in the middle of the markets, where the markets are basically systematically rigged in the favor of a handful of participants who pay for special access both to the stock exchanges and to the banks' and brokers' customer orders and have, you know, basically no risk in their trading.
So what I say is, yeah, the technology is good, but that's not the point. The point is that Wall Street is capturing still too much of stock brokerage revenues.
YOUNG: It's rigged, as you put it. Michael Lewis, the book is"Flash Boys." Thanks so much.
LEWIS: Thanks for having me.
YOUNG: You're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.