Felix Salmon

Did Michael Lewis libel Wing Chau?

By Felix Salmon
March 1, 2011

Is this a case of reality copying satire? A couple of weeks ago, Michael Lewis caricatured the dissenters from the FCIC report:

Financial Crisis Cause No. 3: The Chinese

And then today, in his defamation lawsuit against Lewis, Wing Chau seems to imply that’s what Lewis actually thinks:

Wing Chau and his immediate family are Chinese immigrants. His father, Muk Loong Chau, fled Chairman Mao’s China in 1953 to make a better life for his family in America—to pursue the American dream. Mr. Chau was born in Hong Kong, where the family was waylaid for many year while awaiting a visa. Eventually, the family immigrated to Rhode Island, where his father took various jobs at Chinese restaurants, usually working six days per week.

Why is this in the lawsuit? As Nitasha Tiku notes, it has nothing to do with the case, and can only be there to make Lewis seem prejudiced against the Chinese.

Meanwhile, there’s all manner of wonderful stuff in the suit designed to make us prejudiced against Lewis:


I’m particularly fond of the BA in Art History (I have one myself) and the “family compound” (sadly not).

There’s lots more where that came from in the suit, which is particularly adept at using information from Lewis’s book to cast aspersions on its central character and, ultimately, on the book itself.

All of which is enough to make you want to dismiss the lawsuit as a very silly and opportunistic, if it weren’t for the fact that hidden on pages 15-18 of the 37-page complaint seems to be a pretty colorable case against Lewis and his publisher. (Steve Eisman is also a defendant, which I’m not so sure about.)

Wing Chau certainly comes off very badly in the book — in my own review, I said that Lewis “sets up a hapless fund manager named Wing Chau as a major villain”. It’s very easy to see that the reputational damage he says that he suffered as a result of the book’s publication is real. So the next question is: does the book portray him accurately? Or does it stray into defamatory fiction?

The book states that Chau “controlled roughly $15 billion, invested in nothing but CDOs backed by the triple-B tranche of a mortgage bond”, and told Eisman all manner of things about himself which few fund managers would ever admit to a perfect stranger, even if they were true. Chau says that he was invested in A-rated bonds as well as corporate and other non-mortgage debt; I believe him, although the complaint never quantifies what proportion of Chau’s CDOs were anything but BBB-rated mortgages. I can also believe that some of what Eisman says that Chau said was made up — although Bloomberg did find a second source confirming that Chau thanked Eisman for shorting the market, thereby providing more raw material, in the form of credit default swaps, for him to write.

I’ve suspected since March 1 of last year that although The Big Short is a spectacular book and a superlative piece of narrative financial journalism, Lewis was all too willing to simply accept whatever he was told by Eisman without checking his facts particularly assiduously. In the grand scheme of things, that doesn’t matter. The specifics of the allegations about Goldman Sachs and Wing Chau might not be spot-on, but the bigger picture is. Lewis’s readers weren’t misled about the financial crisis in general, or Eisman’s story.

But if Wing Chau can persuade a jury that specific factual allegations against him caused him significant damages, this could be a hard case for Lewis to win.

Lewis’s best defense, I suspect, will be that the fall-off in Chau’s business was inevitable, after the crisis broke, and that his dismal performance as one of the largest managers of subprime CDOs would have left him with precious little “reputation in the business community” either way. It’s entirely possible that Chau’s friends, being nice to him, have told him that he’s not the reason no one wants to invest with him, it’s the book. But there’s a good chance that they’d come up with some other excuse had Lewis not written The Big Short.

I suspect this case won’t ever go to jury: Chau doesn’t want to go through discovery, and no one wants to spend enormous sums of money on lawyers. So maybe a well-crafted complaint could get some kind of a payout for Chau quite quickly. But if he wants to fight this case all the way, he end up subjected to some highly embarrassing cross-examination.

6 comments so far | RSS Comments RSS

If I were Lewis, I’d give every appearance of wanting to go to trial. Publicity sells Lewis’ book, whereas it doesn’t do much to help Chau, who is in danger of becoming a household name if this goes to trial.

Posted by johnhhaskell | Report as abusive

I’m not a libel lawyer, though I had to study it one semester in school.
I think Lewis’ people will work very hard to portray Chau as a public figure – usually reserved to people who are famous – actors or politicians – or have thrust themselves into the limelight – activists.

In those cases the bar for proving libel is high – you have to show the writer/publisher willfully lied or was totally indifferent to the accuracy of the statement. Without that defense, Lewis’ case gets tougher to win.

Now I never heard of Chau before yesterday, so that might be hard to prove. I guess Lewis’ lawyers can try to show that Chau was already famous in his profession (rather than famous throughout the U.S.)

Posted by RZ0 | Report as abusive

In one respect, I believe, this case might illuminate broader issues, because Lewis’ book, in focusing on the microcosmic matters it did, did tend to give a skewed perspective of the macrocosm.

Specifically, Lewis’ book feeds into the idea that there was something institutionally novel about the mechanisms behind the real estate bubble of 2003-2007: that the doomsday machinbery involved a shadow banking system, dubious off-balance sheet entities, etc. Lewis’ book, by focusing on entities like Harding Advisory, may have contributed to the broader error.

It is an error, because in outline that crisis was created by very familiar mechanisms. The following ingredients were key:

1) Absurdly easy-credit policy at the Fed
2) Rest of the world (including China!) continues to treat U.S. dollar as the pseudo-gold standard, enabling that absurdly easy-credit policy, and
3) Easy money makes the big investment banks sloppy about the risks they take — risk managers get re-assigned to closets, etc.

The truth about ingrediant (3) was hidden in plain sight. It was, in large part, right there on the balance sheets. They didn’t really need fronting by Chau and Harding Advisory to dig themselves (and Main Street) into this hole. Although he may have helped bring a shovel or two to the construction site.

Posted by Christofurio | Report as abusive

felix – how about the best zinger about Lewis in that excerpt you posted: he is a citizen of CALIFORNIA! hissssssss. boooooooooo.

Posted by KidDynamite | Report as abusive

I sure hope the case does go to trial, I bet the discovery would be fun.

And I have to disagree with Christo, even though I agree that Fed-subsidized credit (let’s call it what it is) was the most ultimate cause of the housing bubble. Lewis’ book was as advertised a story about “The Big Short” at the end of the bubble. Thus its background focuses on the history of the instruments that would be shorted and the people who developed, sold, bought and shorted them.

I applaud Lewis for trying to tell a true story of a major buyer of CDOs. I can’t say personally if he told it 100% accurately, but it rings true enough. Maybe all it boils down to is a basically anecdotal story of a particularly arrogant dumb cluck (go ahead and sue me, Wing, I dare you).

Sure, there will always be plenty of dumb clucks. The systemic failures and perverse incentives that led investors as a group to mis-invest are more important, of course. But hubris and illusions of invincibility were a big part of the story.

Posted by t.alan | Report as abusive

Try this thought exercise: what will historians a hundred years or two from now say about the causes of the crisis?

I think there will be three turn-of-the-century trends assigned roughly equal weight: rampant mis-regulation and mis-manipulation (Fed-subsidized credit, government/GSE-subsidized mortgages, the quasi-official status of credit ratings), a short-termist fad in investment, and America’s illusion of invincibility.

And I’m quite sure that 2008 won’t be counted as the end of any of those three trends. Probably not even the apex.

Posted by t.alan | Report as abusive

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