Confidence Game Kills a Zombie Lie (Well, Sorta...)

Wall Street's last decade is full of assorted criminals and villains that will never be held to account. It's simply not plausible that so many well-meaning, law-abiding people made so many innocent mistakes that, purely by coincidence, just happened to fatten their bonus pools. Of course, apologists remain. Over and over again, the propagandists responsible for propping up the hollow façade that remains of Wall Street tell us that "nobody saw this coming."

It doesn't matter that that lie has been deconstructed and exposed over and over and over again. The zombie lie lives on, because Wall Street needs it to. Which is why I'm not the least bit confident that Christine Richard's Confidence Game (Wiley, 2008) will change things very much, notwithstanding its compelling narrative, meticulous reporting and unassailable documentation.

Did I mention its compelling narrative? Because this book hooks you right from the start.

Confidence Game tells the story of a bright hedge fund manager that saw his spot, went all in, faced down the best sharks on Wall Street and emerged with a billion-dollar payout. Typically, this would be the story of a villain, right? Not in this case.

Bill Ackman looked at the emperor and saw that he was naked back in 2002. He loudly proclaimed as much. And all the emperor's horses, and all the emperor's men on Wall Street ran interference. For the next six years. Before all was said and done, Ackman was investigated by Eliot Spitzer, the New York State Insurance Commissioner's Office and the SEC. Ackman stood firm in the face of the onslaught, and for his travails, walked away with $1.1 billion dollars.

How did it happen? Well, a whole book was written on the subject, but in a nutshell, Ackman realized that a pillar of the bond-insurance racket (it was a racket), MBIA, had shuffled some paperwork to conceal their potential liability. They had severely underpriced their insurance contracts and could only sustain themselves so long as the economy continued to grow. Ackman's evidence was ironclad, and he was generous in terms of sharing his information. After all, he had a reason to be -- he had bet against MBIA and fully expected their share price to fall when the information he uncovered penetrated the market.

That's where things began to go wrong.

The market didn't want to accept the information Ackman was providing. Instead, they were downright hostile to it. Market participants (investment banks that built the bond deals MBIA insured) knew that if MBIA suffered, they'd suffer as well. That's the abstract argument. In the real world, these bankers saw that if Ackman got any traction, their bonus pools would dry up overnight as their industry crashed. So they ignored Ackmen. For six years.

For six years the deals continued, getting bigger and bigger. Ackman looked on with unruffled confidence. He kept whaling away at the borg, until one day, the system fell apart. And Ackman was left standing on a pile of money.

If Wall Street or its regulators had listened to Ackman when he first chirped, the canary in the coal mine may have prevented what may go down in history as the world's most devastating financial crisis. Ackman would have earned less than 1% of what he ultimately gained, but mainstreet would almost definitely be better off today.

Of course, the shame of all of this is that none of it has changed Wall Street. The bankers got their bonuses, even after being bailed out. They learned that trickery, lies, deceit, intentionally feigned ignorance and any other unethical behavior required to protect their bonus pools is what pays in the end. Bill Ackmans and Bethany McLeans will come and go, but the titans of finance will always be with us.

(disclaimer: I sometimes get free books. If I read them and like them, I sometimes review them. Because I like getting free books. Confidence Game was one of the books that I got for free, enjoyed reading and decided was worth reviewing, because I think you should read it, too.)