Boomerang: Travels in the New Third World

Financial journalist Michael Lewis begins this work of narrative nonfiction by recounting a visit to Kyle Bass, manager of Hayman Capital, a Dallas hedge fund. Lewis had sought Bass out while researching investors who profited from the collapse of subprime mortgages, risky home loans made to borrowers with weak credit. Bass, a former Bear Stearns bond salesman, had moved past the subprime crisis to a new thesis: Western governments were absorbing trillions in bad private-sector loans, and the resulting sovereign debt levels would lead to defaults. His analysts calculated that worldwide debts had more than doubled since 2002, with countries like Ireland carrying debts exceeding 25 times their annual tax revenues. Bass began buying credit default swaps, a type of insurance against debt failure, on several European countries at absurdly cheap prices. By the summer of 2011, his predictions had largely materialized: Greece neared default, Ireland and Portugal had required bailouts, and Spain and Italy teetered on the brink. Lewis decides to investigate the crisis for himself, starting with Iceland.

Lewis travels to Reykjavík in mid-December 2008, weeks after Iceland effectively went bust. An official from the International Monetary Fund (IMF) describes the country as "no longer a country" but "a hedge fund" (1). Iceland's three largest banks had expanded their combined assets from a few billion dollars in 2003 to over $140 billion. The boom inflated everything: the stock market multiplied nine times, real estate prices tripled, and students abandoned traditional fields for financial engineering. When the banks collapsed, 300,000 citizens faced roughly $330,000 per person in losses. Lewis describes how Icelanders imitated American investment banking, buying foreign assets with borrowed money and lending to one another at inflated prices. Multiple outsiders warned of disaster, but their concerns were dismissed. Lewis visits Prime Minister Geir Haarde, who blames the crisis on the failure of Lehman Brothers, the U.S. investment bank whose 2008 collapse intensified the worldwide financial panic, rather than on Icelandic recklessness.

Lewis traces Iceland's deeper economic history. The country had transformed itself from one of Europe's poorest nations to one of its richest by privatizing its fisheries in the early 1970s, assigning transferable quotas that turned fish catches into tradable financial claims. The resulting wealth funded education, producing a highly skilled population with few economic outlets besides fishing and aluminum smelting. Investment banking filled the void. Lewis notes that the crisis was almost entirely male-driven. Kristin Pétursdóttir, the only woman in a senior position at an Icelandic bank, quit in 2006 to start an all-female firm, which became one of the few profitable financial businesses left after the crash.

Lewis next travels to Greece, where cheap credit revealed a different national impulse. Rather than building a private financial empire, the Greeks used borrowed money to enrich themselves through the state. Lewis catalogs the waste: Government wages had doubled in 12 years, the national railroad earned 100 million euros against 700 million in costs, and over 600 professions qualified for early retirement. He meets Finance Minister George Papaconstantinou, who describes discovering upon taking office in October 2009 that the declared budget deficit of 3.7 percent was nearly 14 percent and that a projected 7-billion-euro deficit exceeded 30 billion. Tax evasion was systemic: An estimated two-thirds of doctors reported incomes below the taxable threshold, and the country lacked a national land registry. Unlike in Iceland, Greek bankers had remained conservative; their biggest mistake was lending 30 billion euros to their own government. Lewis also investigates a scandal at the Vatopaidi monastery on Mount Athos, where monks swapped a worthless lake for valuable government properties, helping topple the previous government. Lewis frames a central question: whether a society so atomized by self-interest can summon the collective will to reform.

In Ireland, Lewis investigates a crisis of yet another character. The Irish used cheap foreign money not to conquer world finance or loot the state but to bid up domestic real estate. Anglo Irish Bank alone confessed to 34 billion euros in losses; unemployment had risen from 4 percent to 14 percent, and the budget deficit had reached 32 percent of gross domestic product. Lewis profiles Morgan Kelly, a University College Dublin economics professor who discovered that construction employed over a fifth of the workforce and Dublin home prices had risen over 500 percent since 1994. Kelly published warnings that were largely dismissed. The pivotal moment came on September 29, 2008, when the Irish government guaranteed all debts of its six largest banks. Merrill Lynch had advised the government, in a memo costing seven million euros, that the banks were profitable and well capitalized. Lewis reveals that Merrill had earlier suppressed its own analyst's critical report on Irish bank lending after the banks threatened to pull their business. Lewis argues the guarantee was catastrophic and unnecessary: Anglo Irish had only six branches and no automated teller machines, and the roughly 80 billion euros in bank bonds could have been defaulted on without threatening ordinary depositors.

Lewis turns to Germany to explore a paradox: Germans were financially disciplined at home but lost enormous sums abroad, including $21 billion in Icelandic banks, $100 billion in Irish banks, and $60 billion in U.S. subprime bonds. Deputy finance minister Jörg Asmussen tells Lewis that for the euro to work, the Greeks must change their culture. German leaders had promised voters they would never bail out other countries, but letting debtor nations default could collapse the European banking system. Lewis visits Dirk Röthig, former executive at IKB, a German bank that became Wall Street's biggest customer for subprime-backed securities. Röthig warned his superiors to pull back; instead they doubled down, and IKB announced losses of roughly $15 billion. Lewis attributes German vulnerability to a deep trust in rules: German bankers accepted triple-A ratings, the highest possible credit grades, at face value, never imagining that Wall Street might deliberately sell them worthless bonds.

In the final chapter, Lewis examines the American crisis at the state and local level. He profiles Meredith Whitney, the analyst who warned on 60 Minutes in December 2010 of widespread municipal defaults. Whitney's broader argument held that the country was dividing into zones of financial security and financial crisis, with California as the most alarming case. Lewis bicycles with former California governor Arnold Schwarzenegger, who describes a political system designed to prevent change. In 2005, voters rejected all four of Schwarzenegger's reform propositions on spending limits, gerrymandering, union political spending, and teacher tenure, effectively ending his reformist agenda. Pension costs doubled during his tenure, and the state spent $6 billion on prison employees but only $4.7 billion on higher education. Lewis visits San Jose, where pension and health costs for retirees consumed more than half the city budget, and Vallejo, which had declared bankruptcy in 2008 after public safety costs devoured 80 percent of its budget. Lewis interviews Peter Whybrow, a neuroscientist at the University of California, Los Angeles, who argues that the human brain evolved for scarcity and is poorly equipped for abundance. Whybrow illustrates the point with a pheasant that ate without limit, grew too fat to fly, and was eaten by a fox.

In an afterword dated June 2012, Lewis notes that the crisis remains unresolved. Governments worldwide continue protecting banks from market forces while exposing ordinary workers to harsh market conditions. No Wall Street figures have been jailed. The anger spawned by this unfairness has produced movements like the Tea Party and Occupy Wall Street but has found no effective political channel.