Thursday, November 18, 2010

Book Review: All the Devils Are Here, by Bethany McLean and Joe Nocera

This article was first published at Blogcritics

A better title for Bethany McLean and Joe Nocera's comprehensive history of the recent financial crisis All the Devils Are Here would be All Here Are Devils. If there is one undeniable truth their book seems to document, it is that there is no one involved in the debacle, be they Wall St. moguls, Washington polls, government regulators, rating agencies, unscrupulous lenders or unqualified borrowers, who is free from blame. There were those who were outright crooks. There were those who failed to do due diligence. There were those who were simply greedy. There were those that were too dumb to see what was going on. What McLean and Nocera Have written is an indictment of all the devils involved, and everyone involved smells of the sulfurous pit.

Certainly books on the financial crisis in the past few years have not been lacking. More often than not they have been books devoted to one particular aspect or company. Michael Lewis tells the story of the men that managed to read the tea leaves and make a fortune from the crisis. William Cohan describes the collapse of Bear Stearns. Gillian Tett describes the creation of credit default swaps. All the Devils Are Here looks at the whole picture and tries to provide a coherent explanation of what happened, how it happened and most importantly why it happened. If there is only time to read one book on the subject, this should probably be it.

It goes back to the beginnings—to the creation of mortgage backed securities thirty odd years ago. "In the simplest of terms, it allowed Wall Street to scoop up loans made to people who were buying homes, bundle them together by the thousands, and then resell the bundle, in bits and pieces, to investors." In the past, if a bank had made a loan to a home buyer, that bank would hold and service the mortgage. Repayment of the loan would be to the bank. With securitization, the bank or whichever company made the loan would no longer have any interest in the repayment. That would be the concern of the buyer of the new securities. Suddenly it wasn't so important to worry about the credit worthiness of the home buyer; repayment wasn't your problem. On the other hand there were hefty fees to be made from making loans, the more loans, the more fees.

Of course, it gets more complicated with innovations on the basic theme and innovations on the innovations, but the underlying principle is the same. Loans could be made without any consideration for whether they could be paid back. As long as the real estate market was hot and prices on housing kept rising, home owners could refinance loans to meet their obligations. But, and there is always a but, prices don't always rise. Bubbles burst.

McLean and Nocera's explanations of the different financial instruments and the way they were used are as clear and concise as any I've read. This is not to say that I didn't have to read some of them two or three times to try to make sense of them. As with any profession, financiers and those who write about them have their own jargon, and it is difficult for them to avoid that jargon. Terms are defined, but it is easy for the casual reader to forget the definition. The alphabet soup of initials is confusing (even given the authors' acronym key at the beginning of the book which lists twenty nine different acronyms). Moreover, it isn't always easy to distinguish who owes who what when a short seller borrows securities and prices change. If the authors are correct, and I would suspect they are, even these people who were dealing with them on a daily basis didn't really understand them.

The book details the problems with the pseudo-governmental enterprises Fanny Mae and Freddy Mac. It deals with the subprime mortgages spun out by predatory lenders like Countrywide and Ameriquest. It describes the machinations of financial giants like Goldman Sachs and Merrill Lynch. It documents the role of AIG. The failures of ratings agencies like Moody's are documented as are those of governmental regulators. If the authors don't go into quite the detail on any one of the problems that the book length treatments of the problems do, they make up in breadth what they may lack in depth. Besides, there is more than enough depth here for any but the most professional of academics.

It is interesting that there is really no one in this book that comes out of this mess with anything approaching honor. Some seem less culpable than others; some seem smarter at least when it came to seeing their own self interest. Individual characters emerge as vain, obstinate, jealous, power hungry and self centered. These are men and women who are used to having their own way. They measure success by the size of their bonuses. The cast of characters is large, and sometimes for the uninitiated it is easy to forget which name goes with which company. Who works for AIG? Who is the CEO of Lehman Brothers? Roland Arnall is the head of what company? Again, there is a list of players at the beginning of the book, but like end notes, too often it is too much trouble to turn back to it.

With the country still suffering from the effects of this financial meltdown, while the movers and shakers responsible seem to have come out of it unscathed, the indictment in All the Devils Are Here ought to be required reading for us all. You know what they say about history and repetition.

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