Boomerang: Travels in the New Third World
Michael Lewis, 2011
In five years a nation of fishermen turned itself into a hedge fund, and then the bank losses came to $330,000 for every one of its citizens. Michael Lewis travelled through Iceland, Greece, Ireland, Germany and California to see what cheap money had done to each of these places. This book shows how debts come back like a boomerang, and how to spot that boomerang in your own wallet.
Who it is for
For anyone who takes out loans, is thinking about buying a home, or wants to understand how the 2008 crisis travelled from Wall Street to whole countries and ordinary people.
When you borrow a lot of money to create a false prosperity, you import the future into the present.
Insurance on a whole country for $1,100
In late 2008 Kyle Bass, a fund manager from Texas, had just made a fortune on the collapse of American mortgages. His hedge fund was already looking for the next bet: Bass believed that whole countries would go broke. Insurance against a Greek default cost him $1,100 a year for every million dollars of Greek debt. The market didn’t believe a developed country could default: nobody alive had ever seen it happen.
Lewis listened to Bass and decided he was a little nuts. By the summer of 2011 Greece was on the brink of default, Ireland and Portugal had needed bailout loans, and the same insurance cost about two hundred times as much. By then Lewis had already toured the places where the money ran out: Iceland, Greece, Ireland, Germany and California.
His main point goes like this. The cheap credit of 2002 to 2008 wasn’t just money, it was temptation. Whole societies were told, in effect: “The lights are out, you can do whatever you want to do and no one will ever know.” Each one did its own thing, and the bill came back like a boomerang to people who had never signed it.
Six of these stories lie ahead, and each one holds a lesson for your own money. Let’s start with the island where fishermen became bankers.
The trawler captain who became a currency trader overnight
Stefan Alfsson went to sea at sixteen, became a trawler captain at twenty-three and was regarded in Iceland as something of a fishing prodigy. In 2005 Alfsson gave up the sea and went to trade currencies at Landsbanki.
Lewis asked him straight out: “You spent seven years learning the fishing trade. Then why did you think you could become a banker without a day of training?” Alfsson thought for a minute and admitted that, for the first time that evening, he lacked a word.
The whole country lived like this. In 2003 the assets of Iceland’s three biggest banks came to a few billion dollars, and over the next three and a half years they grew to more than $140 billion. One fund manager explained the scheme this way: you have a dog and I have a cat; we agree that each is worth a billion dollars and sell them to each other. Now each of us owns a new billion-dollar asset. When the banks collapsed, the losses came to about $330,000 for every person in the country.
Lewis sees overconfidence here and points to a 2001 study of the trading in more than 35,000 households: men traded stocks more often than women and did worse, because they trusted their own judgment too much. In the risk-taking jobs at Icelandic banks, Lewis notes, there were almost no women. The one woman in a senior post, Kristin Pétursdóttir, quit in 2006 and started her own firm, which after the crash was one of the few profitable ones left.
That leaves a question worth asking yourself before any money venture: why am I suddenly so good at something nobody ever taught me? And if the profit rests only on everyone around you buying too, that isn’t talent. It’s swapping a cat for a dog.
About the author
Michael Lewis is an American financial journalist, a former Wall Street bond salesman and the author of Liar’s Poker, Moneyball and The Big Short. He explains money through the stories of people.
All books by this author: Michael Lewis
Terms from the book
- Hedge fund
- Default
- Kelly
- Bubble
- Bonds
- Henry
- Bass: Kyle Bass, an American hedge fund manager who runs Hayman Capital in Dallas. He made money on the collapse of American mortgages in 2008 and was one of the first to bet on European countries defaulting.
- Alfsson: Stefan Alfsson, an Icelandic trawler captain who left the sea in 2005 to trade currencies at a bank. One of the people in Lewis’s chapter on Iceland.
- Landsbanki: One of Iceland’s three biggest banks, which all collapsed in the autumn of 2008.
- Pétursdóttir: Kristin Pétursdóttir, an Icelandic financier and deputy CEO of Kaupthing bank in London. In 2006 she quit and founded a financial firm run by women.
- Krona: The Icelandic krona, Iceland’s national currency. In the autumn of 2008 it fell sharply in value.
- Papaconstantinou: George Papaconstantinou, Greece’s finance minister from October 2009. He uncovered the true size of the budget deficit.
- GDP: Gross domestic product, the value of everything a country produces in a year. Countries’ debts and deficits are often measured as a percentage of it.
- IKB: A German bank from Düsseldorf. In the 2000s it became one of the biggest buyers of American mortgage bonds. In 2007 it had to be rescued.
- Röthig: Dirk Röthig, a former IKB employee who designed the bank’s scheme for buying American bonds. In 2005 he warned management about the growing risk and left the bank.
- Subprime loans: Loans to borrowers with a poor credit history or a low income. Mass defaults on them in the United States set off the 2008 crisis.
- Triple-A rating: A rating agency’s top grade, which means a minimal risk that a debt won’t be repaid.
- San Jose: A city in California’s Silicon Valley, one of the richest in the United States.
- Vallejo: A city on San Francisco Bay in California that declared bankruptcy in 2008.
- Whybrow: Peter Whybrow, a British neuroscientist at the University of California, Los Angeles, and the author of American Mania, a book about how abundance affects the way people behave.
All terms
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