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STEVE INSKEEP, host:

When the writer Michael Lewis looks back on the Wall Street that he wrote about in his 1980s bestseller called "Liar's Poker," the street looks positively quaint. At the time, it was shocking - shocking that a CEO in an investment bank was paid $3 million. Renee asked Lewis about his newest book, which begins in the days leading up to the crash of 1987.

RENEE MONTAGNE, host:

It's called "Panic: The Story of Modern Financial Insanity," a collection of essays and articles written during the several crashes of the last two decades. Michael Lewis joined us from our New York bureau. Good morning.

Mr. MICHAEL LEWIS (Author; Editor): Good morning.

MONTAGNE: You start with the crash of 1987. There were panics before the '87 crash. Why did you start there?

Mr. LEWIS: Because it seemed to be the first of a new breed of financial panic, and it was panic without any seeming economic consequence. Then we went through this long period up until now where the financial market seemed to be able to convulse in the most extraordinary ways without most people ever really feeling very much. And the lessons people seemed to learn was that, well, the markets do these crazy things, but in the end they don't really matter.

MONTAGNE: But this crash is different.

Mr. LEWIS: It's very different. I didn't appreciate that at first. I thought, my God, here we go again. Another phony crash that at the end of which we're all going to be back to the way we were before. I didn't realize just how big the problem was until I dug more deeply into it. And I didn't do that until the last four or five months. The difference here is the size of the problem is massive, because not only did trillions - trillions of dollars get lent to people who won't be able to repay them, but Wall Street at the same time created a kind of a market in side bets about whether these people would be able to repay their loans. And that market in side bets is tens of trillions of dollars.

MONTAGNE: Except they can't figure out where all the trillions went.

Mr. LEWIS: Most of it went to building a lot of houses that we can't afford. So we have a lot more housing than we need. All those McMansions are part of the answer. So a lot of it got sunk in unproductive assets. But then some of it got made by people who took the other side of the bets and those - a lot of those people are lying low because they're not going to be so popular. But the biggest sum of money ever made by a single person in the history of Wall Street was made last year by a hedge fund manager named John Paulson, who made almost $4 billion for himself because he took the other side of the bets.

MONTAGNE: He saw it coming and then...

Mr. LEWIS: He saw it coming and set himself up to profit from it. And there were a handful of people who did this. So big money has been made, but by very few.

MONTAGNE: If this cycle of panic and crash began in 1987, does it end at this point in time, these sort of masters of the universe moving millions around the world making billions of dollars in bets?

Mr. LEWIS: The short answer is no. There will still be people who will take big risks and earn big returns in the financial markets, but they won't be working at places called banks. I mean, what was so corrupting about Wall Street, as it became, was that, you know, the people at Goldman Sachs and Morgan Stanley and Merrill Lynch and Lehman Brothers, those people were taking huge risks and reaping the returns from those risky bets they were making. But they were doing it with other people's money. And when everything went bad, they didn't suffer the consequences.

And so I think, basically, the markets are going to force the people who are taking the risks to sort of eat their own cooking a lot more than they have in the past. And in the big institutions, they simply won't be allowed to run those sort of risks. They're now regulated as banks. So Goldman Sachs cannot legally anymore run the sort of risks that it was running a year ago. And if you can't run those risks, you don't earn those returns. So, in short, I do think it is over.

The period we think of as the period in which Wall Street sort of dominated the American imagination, it has come to an end. And we're going - we're moving into some new era. I don't think, going forward, you will see people working at a place called Goldman Sachs taking home $70 or $80 million at the end of each year, which they have done in the past.

MONTAGNE: Which will make a lot of people happy.

Mr. LEWIS: Well, one of the madnesses of this - of the last 25 years to me has been the rewards we've bestowed on financiers. The people who have actually been allocating the capital on Wall Street have done a rather bad job of it. And the idea that these are essentially the highest paying corporate jobs in America, by far, seems to me insane and has a really distorting effect on the society. The paychecks on Wall Street in a way justify the paychecks in other sectors of the economy. CEOs of other kinds of companies, which see that, you know, the traders at Goldman Sachs were making $30 million a year and would think, well then, it's right and proper for me to make $30 million a year too. It created a new normal.

MONTAGNE: And you're talking places like Home Depot or IBM...

Mr. LEWIS: Ordinary companies. Or GM, companies that have nothing to do with Wall Street. Wall Street sort of - it wasn't just the best example. It was a kind of opinion leader in American financial life. It has marked the last couple of decades. It distracts lots of young, passionate people from doing the things that they probably should be doing because they think, well, I better go do this thing on Wall Street because it pays so well.

I mean, I went back. I graduated from Princeton. I went back to Princeton a few months ago just to see what the kids who thought they were going to be investment bankers were now going to do with their lives. None of them have any idea what an investment banker is when they arrive at Princeton. But when they arrive, they learn very quickly that's what they're supposed to become because that's what the older people on campus all want to do. And so they quickly set about learning as much as they can about investment banking, instead of studying whatever they should be studying.

I mean, I was at the point I was so frustrated with how unimaginative young people had become in choosing their path in life that I thought that someone should establish a kind of scared straight program for Ivy League students, and they should all be made to go and live with a 40-year-old, you know, hedge fund manager in Greenwich for a week before they set out on their careers on Wall Street just to see how miserable you were after 20 years of it. But the markets have now, I think, corrected it and they...

MONTAGNE: They provided the program.

Mr. LEWIS: They provided the program. And the kids at Princeton now, who thought they were going to become financiers, are having to rethink the premise. And that's a very good thing.

MONTAGNE: Thank you very much.

Mr. LEWIS: Sure. Thank you.

MONTAGNE: Michael Lewis is the editor of a collection of articles on economic crashes called "Panic: The Story of Modern Financial Insanity."

(Soundbite of music)

INSKEEP: And you can read an excerpt of that book by visiting our Web site, npr.org. It's Morning Edition from NPR News with Renee Montagne. I'm Steve Inskeep.

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