One of the dangers of framing stories as Manichean tales is the purported bad guys can take offense and try to get even. And if you do it in a book, the threshold for liability is low enough that they might indeed be able to inflict some real pain.
Michael Lewis, author of the bestseller The Big Short, along with his publisher, W.W. Norton and his source Steve Eisman, were sued today in Federal court for defamation by one Wing Chau. In case you are one of the five people in America who is interested in finance but has managed not to read The Big Short, there is a scene in the book in which FrontPoint’s Eisman, who is Lewis’ main subprime short hero, has asked to meet someone who is on the other side of his trade. That “someone” is a CDO which in practical terms means a CDO manager. Eisman and two of his employees have dinner with Wing Chau, who is the head of the CDO manager Harding. Needless to say, Lewis’ account makes it clear that he regards Chau as very much part of the problem.
Now we’ve written a LOT about CDOs; in fact, our book ECONNED broke the story of Magnetar and demonstrated how its CDO program, which it used to establish a risk-free short position, drove the demand for a large portion of the subprime market in the toxic phase. And we have taken issue with Lewis’ characterization of the shorts as heros.; Knowingly or not, the strategy that reaped them billions also distorted normal market pricing signals on a massive scale, not only allowing the subprime mania to continue well beyond its sell-by date but also by actively promoting the creation of the “spreadiest” or very worst mortgages.
Our reading of Lewis’ plight is that Chau’s claims seem to be a stretch, given that the facts are less on his side than a reading of his suit might suggest. But as we will discuss later on, litigation on books is so plaintiff friendly that even a weak claim can succeed in court.
Normally, to win in defamation suit, Chau must prove that statements were inaccurate (or showed “reckless disregard for the facts”) and that they were statements of fact, not opinion. So, for instance, if a doctor went on an expensive junket and then wrote an article in support of a drug made by the company paying for the trip, you could recite the facts and be free and clear. You could add that this appeared to be a conflict of interest or an ethics violation (as in making it clear this was an opinion). But saying he had taken a bribe or was a crook would put you at risk.
Now the “opinion” part seems to be the reason for suing Eisman as well, and by any common sense standard, this is a stretch. The book is clearly Lewis’ work and the provocative quotes from Eisman are, well, quotes. Even though Eisman was clearly Lewis’ most important source, he was not a co-author or co-creator. So putting them in the same action seems bizarre, but Chau’s attorneys seem to want to make Lewis liable for opinions provided by Eisman. Chau might have a basis for a separate claim against Eisman…..but that’s above my pay grade.
Oh, and let’s NOT forget, you need to prove damages. Here is the guts of Chau’s basis for going after Lewis:
As a result of the defamatory statements, Mr. Chau’s ability to work in his chosen profession has been severely diminished. Others in the financial services industry have told him repeatedly that The Big Short is a substantial liability to him and a reason investors would be unlikely to invest in venture with which he is associated. He has to explain the book and deny its allegations about him to people in the financial services industry. He has lost business opportunities as a result of the defendant’s false and defamatory statements in The Big Short.
While Wall Street does have a proud tradition of people failing upward, I’d be very much surprised to learn that there were lots of opportunities for a CDO manager who put together over $15 billion of deals that blew up in less than 12 months of their creation. The CDO business is dead, as is the private label securitization business. While The Big Short certainly does not help Chau, I’d doubt that his employment/fundraising prospects would be markedly better in its absence.
But how solid is the claim? Superficially, it looks to have enough “gotchas” to put Lewis et al. at risk. But in fact, the most serious looking errors are debatable.
The lawsuit starts with an overly long recitation of Chau’s credentials (not sure I’ve sell his Babson MBA as hard as he does) versus Lewis’ (a guy whose previous book on finance was nearly 20 years ago) and additional background. Then he provides what looks like dirt: he makes Chau’s professional background sound weaker than it is, states that his fund Harding invested in only in BBB mortgage bond tranches, when in fact it also managed high-grade asset backed securities CDOs (ones consisting heavily of AA and A tranches). And we get this:
Now this looks terrible and irresponsible, right? Maybe not so good for Lewis, right?
I have to tell you, it will not be hard for Lewis to find buy side investors who would confirm what Lewis wrote. The third point in that list is unequivocally true. In fact, the Goldman Abacus suit last year revealed that Goldman went to some lengths to find a pretty passive CDO manager.
Point one is also accurate. Being a CDO manager was considered an easy sinecure. And the “two guys and a Bloomberg terminal” was used pervasively in the industry to describe CDO managers.
Chau takes issue with the idea that Lewis was implying that Harding was one of those “a couple of guys with a Bloomberg terminal” sort of CDO managers when he had a staff of 24.
Funny, the very first call I placed to a buy side guy about this Wing Chau suit led him to recount his experience with Harding (and note I had not prompted him with the Lewis quote):
I didn’t want to meet with them, we took a dim view of the non-institutional CDO managers, and it seemed like a waste of time, so I sent a couple of people on my team. They told me afterwards it was couple of guys and a Bloomberg operation, looked like it was located in a closet at Merrill [the space may have been sublet, but it does appear to have been in the Merrill building], with a bunch of kids. It was clear Merrill was offloading a lot of its deals to Harding.
So it appears some industry participants do not share Chau’s assessment of his business’ stature pre-crisis.
Chau also objects of statements that he said Eisman falsely attributed to him:
If Lewis has the dinner attendees right, it was Eisman, two Eisman subordinates, Greg Lippman of Deutsche Bank, and Wing Chau. Think Eisman’s subordinates aren’t gonna corroborate the broad outlines of Eisman’s account? Odds are just about zero. Plus, given that Chau was put in the reverse position of his usual stance, of having to sell himself to a short rather than a long, it isn’t a implausible that Chau would have tried in the course of the dinner to play up to the shorts and suggest he wasn’t too fussy since shorts would not like the idea that a CDO manager was stringent.
Now what are Chau’s other main beefs?
Lewis said Harding was number one in mezz CDOs from the time of the meeting (January 2007) to the crash. Chau complains Jody Shenn at Bloomberg concludes that Harding was number two over a longer time frame. Since, Merrill was desperately offloading subprime risk in 2007 and Harding was a major conduit, depending on how you cut the numbers (Wall Street firms make an art form of league tables) Lewis may still be accurate. And what is the difference, in terms of damage to Chau’s reputation, between being number one and number two?
From this, Eisman concluded Chau was a front man, handpicked to represent the crooks or morons on the other side of the trade. This was Eisman’s opinion, per admission in the suit.
Lewis also says Chau was fat. So is Larry Summers. Who cares?
Now the funny bit is a reader might conclude that Chau is trying to make a case out of being made the poster child for the sins of a mini-industry. But saying that everyone else did it does not make Lewis’ statements or his recitations of Eisman’s opinions untrue.
Now the bizarre part is that this does not mean that Chau does not have a case. Because books are very long lived, they have far lower thresholds for liability than magazines or newspapers. I went through a legal review for my book, and had to edit a section where I pointed out that an academic had started arguing with survey findings, and in particular accused the respondents of intellectual dishonesty. That’s not proper practice; investigators are not supposed to impose their personal opinions on research findings. But I was told that academics loved to sue, and my publisher has had to pay $1 million to settle a case that sounded utterly bogus a year before. My agent (who was normally very good about going to bat with my publisher) told me about a biography of an entertainment industry figure that discussed his drug use. This was well documented; it had been recounted in magazines and newspapers. Yet the author was sued successfully for putting it in his book even though it was factually accurate.
No matter what the merits of Chau’s claims are, I doubt we will have the satisfaction of learning how this matter is resolved. Litigation is a hugely expensive process; it is a virtual certainty that this case gets settled with the payment kept confidential. If Chau’s side sets its targets too high, the Lewis/Eisman/Norton side might torture him a bit with the most embarrassing discovery they can dream up. But unless both sides decide their manhood is at stake, this will be disposed of behind closed doors.
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I must admit, the headline would have been a good place for some additional punctuation. I had a terrible time figuring out what was meant by that long list of nouns that I thought were adjectives: big, short, villain? What’s a villain stick – and is it related to the ugly stick?
Oh. Stick is a verb. “Big Short” is a proper noun. Now I get it.
While this might be entirely a problem of my severely addled brain (severely, severely addled), I wound up with a laugh.
My inexpert thought would be that it is about to get less threatening to write a book as opposed to any other form of media. Newspapers and magazines are increasingly available long after publication on the web, while books are increasingly relegated to the back list very shortly after publication (and more and more difficult to obtain in dead tree form). I see the media merging in duration, for better or worse, and more importantly – I see the attitude shifting. Today’s kids do not see books the way that I did as a child, as a more permanent work.
Granted, the judges making the law are all old folks who survived law school, ergo, are more in touch with their “dead tree” than most other life forms outside of termites. But juries? I think we’re headed towards a different view of these things. Usually, when I’ve seen a jury understand the law but think it was wrong, you get a verdict for the plaintiff in a token amount that really, really upsets the plaintiffs’ attorney who has the case on contingency.
Will fix title, it needs quotes.
Agreed re the courts, but the precedents are well established. Maybe 10 years after digital books this will change but authors now are stuck. And I did not include that the author eats ALL of the liability. The publisher basically has recourse to the author (although they may lay out some dough first).
I wish someone would explain in a paragraph what justified those who took the LONG side of those CDO bets. Anyone could have looked at housing prices, incomes and mortgage standards in 2005, and noticed the emergent bubble. I continue to believe you are giving buy side “professionals” a pass.
I sugget you read my book.
In addition, there were not that many bona fide longs. The industry wound up with a a big percentage, probably more than half, of the long side. This was due to bonus gaming which I describe in the book.
Some were real stuffees. The managers like Wing Chau (and the better ones in real shops with real grownups) told convincing stories about how they were picking decent loans out of the bad ones. Remember, the FHA had two decades, maybe more, of lending to borrowers with only 3% down in a non-bubble housing market and having default rates comparable to prime. Not for profit lenders during this time were also lending to subprime borrowers and had defaults levels the same as prime loans. So some people were pulling it off. But they were few and the big fish in the market misrepresented their product. The bank refused to provide the loan level data that might have allowed investors to do real due diligence. And they DID ask for it.
So you were ultimately on the other side of Steve Eisman’s trade. Hope you enjoy contributing to his reputation and net worth.
Housing prices, income levels, mortgage standards. What other data did anyone need? You say the banks refused to provide data, so what, the buyers bought anyhow? The more you expain this, the less I understand it.
I do understand that the banks retained much of the long side and would today be wiped out but for gaming by the Fed. But I still see no reason to make excuses for long side professionals without whose incompetence the CDO disaster could never have occurred.
Those responsible for investing other people’s money cannot simply claim they were “misled” by evil bankers.
Jake for the win! I cannot possibly fathom anybody even coming close to refuting that comment.
“long side professionals without whose incompetence the CDO disaster could never have occurred”
Huh? Depends what you think the “CDO disaster” was, perhaps. I thought it was a combined liquidity and solvency panic in the regulated banking system.
Or perhaps it depends which long side pros you are thinking of. For instance, I don’t see how fund managers had much to do with causing the crisis, and in fact I don’t actually recall any fund managers reporting CDO losses on the scale of (let’s say) Citi or ML or UBS; it all seemed to be rustic municipalities in far-flung corners of the globe.
Or dumb German banks, is that who you mean? I still don’t get how they actually *caused* the crisis.
If you mean monolines, or AIG, rather than FMs, then certainly, they screwed up in the grand manner. And then you find that the likes of GS, Magnetar, Lippman and Paulson *were* actually able to spot that. Which instantly puts other banks’ counterparty risk management under the spotlight, too.
Finally there are MMMFs and the like that actually bought AAA CDOs and then broke the buck or needed support. Definitely part of the problem, but not in the end, relative to the rest of it, a very expensive part, if I remember correctly. Is that who you mean?
Richard, I think it is this simple: first, take the total dollar value of defaults on subprime mortgages; compare that total to the total Fed bailout. [I believe the difference is more than ten trillion but I imagine you know exactly what it is.] That difference suggests if it does not define the contribution of synthetic CDOs, which bear the same relationship to subprime mortgages as fantasy football bears to football. You and Yves suggest that the only substantial players on the long side of these CDOs were giant banks and AIG. I will bet my hair shirt that very well compensated bureaucrats at pension funds, money funds, other respectable so called money managers bagged clients into nearly half of this CDO drek. Further, that they have no excuse for buying it except the eternal bureaucrat excuse that they had no alternative since their jobs were jeopardized by prospective failure to “produce a return”. You guys must realize that the entire corporate system is one gigantic swindle. The problem begins with corporate directors who do not direct but simply collaborate in executive theft, with regulators who do not regulate but simply pause for breath between corporate sinecures, with accountants who obfuscate and fabricate financial results without a qualm, with money managers who peddle advanced degrees in business school hokum but are clueless about the eternal relationship between risk and return. In today’s world a white collar has become a badge of shysterism. Those not peddling propaganda, outright falsehood or pernicious economic drivel could fit nicely within the confines of any high school gymnasium. For more on this you two should read my book, which I will be glad to trade even up for econned.
so true, Jake Chase, so true.
Jake 1) there never was $9Trillion of synthetic issuance.
2) Money funds of various kinds were certainly involved. Mostly these were propped up by their “parent” banks. Later there was a direct Fed guarantee, which has expired. Overwhemingly the investors in these funds were corporations (a lot of then, though not all, you guessed it, banks).
3) “I will bet my hair shirt that very well compensated bureaucrats at pension funds, money funds, other respectable so called money managers bagged clients into nearly half of this CDO drek.”
Examples (outside money funds, where I am not contesting your point, though I haven’t seen a final cost for the guarantee)?
Jake,
You do not know what you are taking about.
First, MMFs were involved in AAA CDOS primarily via repos. This is not considered “buying” despite the name because it’s a short term collateralized loan. The owner is a major financial firm. The firm that famously broke the buck, Reserve, did so because it was a large holder of Lehman commercial paper.
Even AAA subprime loans did better than is widely believed. The subprime AAA paper per toxic phase (mid 2005) when CDOs started distorting the market, was all money good. The ABX index suggests that for first half 2006 paper (which would be second half 2005 loans for the most part), the first three of five AAA tranches were all money good (they paid out first) and the next two will probably be money good. So the losses on subprime AAA bonds are later 2006 and 2007, not all subprime AAA bonds. Remember, the CDOs were made of junior tranches, BBB through junior AAA, but heavily BBB to AA.
Your original discussion was of CDOs, then you switched to subprime paper. The bulk of what Wing Chau and other banks did in the toxic phase, 2005 to 2007, were heavily synthetic deals or pure synthetics. That’s why we had a global financial crisis. The CDS exposures were 10 times the cash BBB subprime bonds. That’s not my number, that’s S&P.
“Synthetic” for the higher (unfunded) tranches (synthetic deals had a cash reserve, so the lower tranche parties typically ponied up some dough) meant no cash passed hand at closing. You were effectively a guarantor.
The audience for the AAA tranches of synthetic and heavily synthetic CDOs was more limited than for “cash” CDOs. A lot of investors, pension funds in particular, were not permitted to do synthetics. And as I’ve indicated, the cash buyers for CDOs started to retreat to the sidelines in 2004-5. The fact that subprime was looking risky was NOT a secret. It was discussed in every mortgage conference from 2005 onwards.
German pension funds and, as Gordon Gekko would say, idiot sons.
Landesbanken were more like S&Ls who were suddenly allowed to and did operate like hedge funds. Like giving a kid access to a bomb making factory.
Yves,
Could be worse for Chau. Michael Lewis et al could ask him to value to take the Brown Paper Bag Challenge – valuing the contents of a brown paper bag is the equivalent of trying to value a structured finance security given the lack of data available.
Then, Michael Lewis et al could ask him to value the contents of several brown paper bags stuffed into a large brown paper bag (the equivalent of a CDO).
I suspect that the prospect of taking the Brown Paper Bag Challenge will cause the lawsuit to be dropped.
I think Penn & Teller did an excellent job explaining how to avoid defamation in the first episode of B.S. If you swear a lot and generally appear absurd it’s hard for a court to take you seriously. The trouble is that it’s hard for anyone to take you seriously when you do that.
It tickles my cynacism, though, to know that about the only person to get sued in this entire fiasco is an author who described it (and his source).
One of the most depressing things about being consistently cynical is that you realize how often you are right to be that way.
hehe, I didn’t think about it that way…damn
I haven’t read the complaint, but there’s no basis for libel in the first set of statements about “CDO Managers,” even if they were untrue (which they’re not). On their face those statements make no reference to Chau, just “CDO Managers” in general, specifically attributing it to a view of Wall Street insiders. I can write, “Pharmaceutical company executives consider doctors to be crooks,” and it doesn’t matter if it’s true or not, it couldn’t be libel. The second set looks like an actual, verifiable conversation (I’m sure Lewis or the publisher wouldn’t have allowed this without some authentication). This is the kind of case that Lewis should win on summary judgment, the problem is not that publishers fear losing alone as much as paying ridiculously expensive litigation costs and then losing, that’s why they settle.
Yves,
I do know what I am talking about and I also know what you are talking about. I do not think what you are talking about is nearly as important as what I am talking about. In fact, I think what you are talking about is part of the problem.
Money good? None of this drek would be money good without 23 trillion from the Fed balance sheet. Lets hope a trillion or two ends up in the hands of the workers.
I’ve responded to your arguments in considerable detail and you have failed to rebut mine. Then you falsely say I have not engaged with you. So I can only conclude you are disingenuous or have deficient reading or reasoning skills.
Tell me how the Fed has bailed out the subprime borrowers, exactly? How has the Fed’s super low interest rates helped their ability to pay their mortgages? We are talking actual payment experience for AAA subprime bonds (as you tried to move the discussion from CDOs since you were losing that argument). Whether the Fed bought this paper has no bearing on that issue.
Your statements continue to make my point, that you do not what you are talking about, better than anything I could say. Just keep writing, you’ll only dig a deeper hole for yourself.
“For more on this you two should read my book.”
Checking the back cover it looks like a book of opinion with an enraged air.
Contrasts with Yves points here that are painfully all about facts, backed by painstaking research.
Trying to gather some publicity through a fight with the pro, ain’t you? ;-)
Yves, you have to assume that a majority will stay ignorant of the details on which you are an expert. We still have the right to be mad about the whole thing!
I found the Yves Smith critique of his book fascinating. in his interviews he got asked this sort of question.. isn’t there some moral conundrum? In one interview, he said these people were rich, but not a happy rich.. they were devastated that nobody had listened to them etc. On the other hand, they also talked to regulators, they talked to journalists, and they got ignored. . . so there is the issue, of what more should they have done? In another interview, he said, they had a duty to their investors to make money, and this was the best play they saw.
It is almost like, he didn’t bring up the question, in my opinion to get so close to a source, perhaps an author puts such questions to the side.
Yves said it in her critique IIRC, that they could have simply stopped buying shorts. . . that was the solution to their conundrum. If nobody had been buying shorts, the Synth CDO market would have shut down much sooner and lessened the crisis.
But i must confess, that The Big Short really helped me understand that issue in the first place. When Lippman has the shorts meet the CDO Manager, it all becomes crystal clear to the reader. It is like a perfect illustration of what Yves is talking about in EConned, what a CDO Manager is, what their motivation is, what they do for a living, and why they are chosen, who chooses them, etc. The reason they are called ‘a guy and a bloomberg terminal’.
As for Mr Chau, he obviously is probably in it for the money. He can’t get a job and so he is trying to take it out of someone’s hide, and what better target that Eisman, who is very rich? And Lewis and his publisher, who are doing pretty well?
The funny thing to me is, if Chau is having trouble because of a book, what about all the other people in the industry? What do they put on their Resume?
Rahm Emanuel, as this site has pointed out, was close to Magnetar Capital, just became mayor. And nary a word was peeped. His associates directly were involved in a financial act that most people would consider incredibly distasteful.