This surprising narrative goes back more than twenty years to reveal, in rich, anecdotal detail, how Wall Street, the mortgage industry, and the government conspired to change the way Americans bought their homes, creating a perfect storm. The authors take us inside elusive institutions such as Goldman Sachs, AIG, and Fannie Mae, to reveal who changed the game and why.
So, here we are, in the closing days of 2010 — a good time to reassess those three men in light of the economic events of the past three years. The result, of course, is that they don’t look so smart anymore. But, guess what? Larry Summers has yet to exit the Obama White House, where he’s been the driving force behind this Administration’s economic policymaking — and Robert Rubin is reported to be on the short list to replace him!
Of the three men, only Alan Greenspan, now retired as head of the Federal Reserve Bank after serving under Ronald Reagan, Bill Clinton, and two generations of Bushes, has actually apologized after a fashion for his stubborn refusal to face economic facts that were obvious at the time to anyone well versed in finance who wasn’t blinded by greed, willful incompetence, stupidity, or right-wing ideology. The other two men? Well, we haven’t heard so much as a hint of an admission of responsibility from them.
So, what did “The Committee to Save the World” do to lay the foundations for the 2008 financial crisis? As best I can tell, collectively they made three fateful errors:
1. they engineered the repeal of consumer protections put in place during the Great Depression (the Glass-Steagall Act);
2. they routinely deferred to Wall Street when shaping economic policy, paying special attention to the effect of their actions on the bond market (where the really big money is to be found); and
3. they stubbornly refused to recognize the dangers in the alarming growth of the unregulated “derivatives” market. (If you don’t understand what a derivative is, don’t sweat it. Nobody else does, either, not really.)
Not so incidentally, these same three geniuses were also instrumental in fashioning “The Washington Consensus” that guided the work of the International Monetary Fund and the World Bank and caused tens of millions of people to starve in dozens of developing nations over the last decade and a half. But back to Topic A: the financial crisis.
We’ve identified three of the principal culprits. But, in fairness to Greenspan, Summers, and Rubin, there were many other characters who played leading roles in this still-unfolding tragedy. Some of their actions merely reflected changes set in motion years before. And nobody in any government position, including the Oval Office, calls all the shots. But the buck stops . . . somewhere. When it comes to the public policy that foreshadowed the financial crisis, the committee that “saved” the world bears a lot of the blame.
Now about those other leading characters in this modern immorality play. Chief among them, as best I can tell, were a mixed bag of people both in and out of government:
* On Wall Street, there were dozens of senior executives at such financial powerhouses as Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, AIG, Citibank, and many others whose shared delusion that money is life’s greatest good helped set the course for economic ruin. Some of these men (and a very few women) were brilliant and found ways to make lots of money even when conditions were really, really bad. Others were — well, not to put too fine an edge on things — downright stupid. Their firms (principally, Bear Stearns, Lehman, AIG, and Merrill Lynch) either disappeared entirely in a whirlwind of worthless paper or took refuge under someone else’s wing. By contrast, the champion money-maker, Goldman Sachs, racked up billions in profits by victimizing some of its biggest clients. Being Goldman Sachs, of course, none of its partners faced criminal charges, as they clearly would have done in a marketplace guided by reason and fairness.
* On Main Street, there were also dozens of co-conspirators. For the most part, these were the people who ran the “non-bank financial companies” like Countrywide and other firms that sold mortgages to people who couldn’t possibly afford them. Some were outright crooks running fly-by-night operations, many of them classic bucket-shops, others simply self-deluding or (again that word) stupid. Most of them got filthy rich, though, at least for a time. Dozens should have gone to jail, but did they? What do you think?
* Back in our nation’s capital, two institutions unfamiliar to most of the American public found themselves in the middle of the maelstrom: the two quasi-private mortgage repositories, Fannie Mae and Freddie Mac. Don’t feel sorry for them, though, because, to cop a phrase from an earlier practitioner of misdirection, “mistakes were made.” The leadership of both institutions grabbed at opportunities to make a quick buck. They succeeded, for a time, but only until the profits disappeared — and we taxpayers are now footing the bill to the tune of hundreds of billions of dollars.
* Don’t forget George W. Bush. The decider-in-chief may not have played a meaningful role in economic decision-making (if only because it’s highly doubtful he had a clue about what was going on). But, dazzled by the argument that the “free market” would regulate the financial sector all by itself, Bush II deliberately appointed to key regulatory positions such world-class ignoramuses as Christopher Cox to head the Securities and Exchange Commission. It wasn’t enough that the regulatory agencies’ teeth had dulled considerably over the years and that the powers-that-were in the Clinton Administration had refused to sharpen them. No, George W. Bush insisted on appointing financial regulators whose stated intention was not to do their jobs.
So, what does all this bloviating have to do with All the Devils Are Here? This is, after all, (ostensibly) a book review. It’s simple, really: Bethany McLean and Joe Nocera’s superb book brought into high relief the roots of the financial crisis like no other book I’ve read and made it possible for me to untangle in my mind the complex interrelationships among Wall Street, Main Street, the Fed, and the Treasury Department. In previous months, I’d read Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves by Andrew Ross Sorkin, The Big Short: Inside the Doomsday Machine by Michael Lewis, The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers by Vicky Ward, and others, all of them excellent books. But McLean and Nocera’s treatment of the crisis from a long-term perspective, with its roots in the evolution of housing policy as well as greed and excess on Wall Street, put the whole question into perspective. If you’re looking for the best way to begin understanding the financial meltdown of 2007-2008 that came close to tanking the global economy, start with All the Devils Are Here.
It's up to date -- dealing with some of the stuff that came out during the Senate's look at Goldman's trades, for anyone who doesn't want to have wade through 900 pages of exhibits on file with the Senate committee. But I didn't come away with any fresh "aha" moments, and I don't think that's just because I've been living this stuff for 2.5 years. It's well-written, but not nearly as insider-y or compelling in tone as many other books (like Andrew Ross Sorkin's tome, or even the Merrill Lynch book by Greg Farrell, Crash of the Titans, that I just finished reading) so that doesn't add value. While it tries to explain complicated issues like synthetic swaps, it doesn't really do so clearly enough for a general reader, I fear.
Recommended only to those who can't get enough financial crisis reading under their belt, or who have resisted reading about the crisis until now: 3.9 stars.
This book centres upon the American financial market and I would love to take the moral high ground by saying that the World economic crash was all "their fault", and that we good old Brits would never be so foolish. Sadly, I think that it is more a measure of scale that lead to America becoming the home of this disaster. I will also point out, although it must be obvious from ever word that I write, that I have incredibly little knowledge of the financial sector and that all my views have been informed by this book and the press.
Having announced my ignorance, it becomes all the more difficult to see why things that, admittedly with hind sight, seem so blindingly obvious to me, were a mystery to these seers. The answer is, I believe two fold: firstly greed - plain and simple. Secondly, the financial markets are mainly boys' toys and a level of testosterone seems to have been involved. Nobody ever admitted to a mistake; your institution might be in danger of collapse, but if I just hold my nerve and deny any problem with my investments, I will make a killing (and if I do not, the shorts will see that I am personally super rich).
This book may be short on surprises, the fourth estate has produced so many facts and opinions that I would be sceptical of an all new view; but it does do an excellent job of marshalling the facts. I, as a self confessed financial ignoramus, could follow the argument and, I get the impression that a person more literate in the field could take even more from this tome. The depressing thing is that, even if we do eventually extricate ourselves from the mess, the likelihood seems to be that we will be lead to another fiscal bubble. Even now, there are significant elements fighting to prevent any governmental control of the markets. This could prove to be detrimental, whichever side is successful: too little control and we will certainly be repeating this situation in ten to fifteen years, too much control and we stifle the flow of capital so essential to any Western democracy.
McLean and Nocera are too wise to offer solutions - that is not the purpose of this book. Before a definitive answer can be found, it is necessary for as many people as possible to understand the problem. I am far better educated upon the topic now, than I was before reading this work; and for that, I would like to offer the authors my sincere thanks.
all the devils are here."
-Shakespeare, The Tempest
As soon as the financial crisis erupted, the finger-pointing began. Should the blame fall on Wall Street, Main Street, or Pennsylvania Avenue? On greedy traders, misguided regulators, sleazy subprime companies, cowardly legislators, or clueless home buyers?
According to Bethany McLean and Joe Nocera, two of America's most acclaimed business journalists, the real answer is all of the above-and more. Many devils helped bring hell to the economy. And the full story, in all of its complexity and detail, is like the legend of the blind men and the elephant. Almost everyone has missed the big picture. Almost no one has put all the pieces together.
All the Devils Are Here goes back several decades to weave the hidden history of the financial crisis in a way no previous book has done. It explores the motivations of everyone from famous CEOs, cabinet secretaries, and politicians to anonymous lenders, borrowers, analysts, and Wall Street traders. It delves into the powerful American mythology of homeownership. And it proves that the crisis ultimately wasn't about finance at all; it was about human nature.
The authors of this excellent book explain the supply side of mortgage financing and its regulatory framework but don't explore the demand side at any great length. They show that a property bubble needs a large volume of buyers and sellers and that it needs to be "enabled" by knocking out regulatory and financing obstacles, aspects that are brilliantly illustrated, although they could have added the contribution of the public in its mad rush for the free money. I'm thinking about the property flippers who were just as anxious to get their extra $100.000 as the Wall St. banks were to get their extra $1.000.000.000.
The book could possibly have benefited from more historical context, ie. putting the Sub-Prime Crisis alongside other historic speculative bubbles, since there are remarkable similarities. A good reference in this respect is Edward Chancellor 's "Devil Take the Hindmost" showing for example the City in the 1720's exhausting its possibilities of lending against South Sea Company stock and the South Sea Company itself exhausting the possibilities of lending to its own buyers - sounds familiar?
The contrast between early and later Sub Prime could have had greater emphasis. In the early stages it should have been possible to halt the bad practices, and the authors show that some regulators did in fact try, most notably in 1994, James Bothwell of the General Accounting Office and in 1998 Brooksley Born, chairwoman of the Commodity Futures Trading Commission. Bothwell underwent a brutal attack by Congress with the SEC, Treasury and Fed refusing to give him support, and Born received a screaming telephone call from Deputy Treasury Secretary, Larry Summers saying that bankers were threatening to move their business to London. As she says, "There was so much pressure. The derivatives dealers did not want their market looked at - at all. For some of them, derivatives trading made up 40% of their profits."
In the later stages there was nothing to be done and the authors show the Sub Prime behemoth taking over the US financial system. Under Clinton, Treasury Secretary Rubin and Deputy Secretary Summers provided this special market with top level political protection and at the Fed, Chairman Greenspan prioritized deregulation and actually lauded the market efficiency of derivatives in apportioning risk. An interesting secondary question is whether they actually believed this, or were they were just protecting a valuable new investment game run by friends. McLean and Nocera equivocate on this point, seeming to partially accept both arguments.
The authors show that creating junk mortgages is one thing and selling them is quite another.
Selling CDOs (collateralized debt obligations) required tranches (slicing up the debt) so that parts of it could receive an AAA rating (equivalent to treasury bonds) from ratings agencies, thereby allowing conservative investment by heavily controlled pension fund type capital. It thus became a game of investors "buying ratings" ie. receiving a higher yield on supposedly AAA type risk. The big profits came from manufacturing AAA rated securities and the authors show the complicity of the ratings agencies, quoting from 2007 Josh Anderson, the manager of asset backed securities at PIMCO saying, "Moody's doesn't stand up to Wall St. ... its mistakes are so obvious". S&P, Moody's and Fitch all knew about the rising early defaults rate on sub prime but were clearly afraid to downgrade.
So how did it all happen? McLean and Nocera interestingly show how Wall St. had for some time wished to avoid dealing with the GSE's (Government Sponsored Enterprises, Fannie Mae and Freddie Mac) and eventually found a way round them by directly securitizing sub prime mortgages from non bank lenders. The real risks were hidden under AAA ratings while simultaneously a group of extreme free market activists (strangely similar to Russia's Bolsheviks using communism) were grabbing power under cover of the new ideology.
As with the Bolsheviks, most of the leaders were Jewish (Greenspan, Rubin, Summers, Bernanke + a majority of Goldman Sachs), a fact that isn't mentioned in the book although the authors are happy to go at some length into the Italian background of Mozilo, and the African background of O'Neal and Raines.
It's also probably not a coincidence that after the collapse, the same Goldman team in government arranged for the highly favourable bailout of Wall St investment banks at enormous taxpayer expense, with the prime beneficiary of course being Goldman Sachs itself. Heads we win, tails you lose.
This is the best book I've read so far about the Debt Crisis (Grand Theft), especially for the dateline after 17th June 2007 when Merrill Lynch seized $850 million of Bear Stearns CDOs only to discover that nobody wanted to buy them.