book review: all the devils are here

by sam on 01/12/2011

All the Devils Are HereAll the Devils Are Here by Bethany McLean

A really in-depth look at all of the decisions and events that led to the 2008 financial crisis/collapse, from the internal workings at all of the major investment banks, the sub-prime lenders, Fannie Mae and Freddie Mac, the ratings agencies and AIG. No one (or very few people) actually committed “crimes”, but everyone kept pushing the envelope of what was appropriate within their given sphere, and each bad decision was compounded by the bad decisions of 100 other players. Each of these financial products (from the mortgages themselves to the securitization vehicles to the collateralized debt obligations to the credit-default-swaps to the synthetic CDOs), when first created, made perfect sense. But not necessarily when all thrown into the mix at the same time, each one feeding off of the other in a vicious cycle of lower and lower standards and more and more debt.

It’s hard to say who was the worst player in the bunch. Was it AIG, which essentially allowed the entire risk-management function to exist inside Hank Greenberg’s septuagenarian head? Or the ratings agencies, who kept giving all of these things triple-A ratings, which were supposed to mean that the investments were as “safe as treasury bonds”, even after they were well aware of the underlying problems? Or the investment banks who sidelined their own risk-managers because they didn’t turn a profit? Or the subprime lenders, who were handing out reams of money to people that they knew could never pay it back, even in a best-case scenario?

And of course, popular notions of “who’s to blame” are often not anywhere near the truth. Fannie and Freddie got a large share of the blame for causing the problem, but in actuality, they were very late to the party, and only ended up in the subprime market in the first place because they were required, by law, to guarantee a certain percentage of low-income housing. Because the subprime lenders were undercutting the more traditional “hard money” lenders that had previously serviced this market, Fannie and Freddie almost had no choice but to start buying up subprime loans. Of course, they didn’t take a step back and try to use their mighty lobbying power to get out of this obligation, or to highlight the problem, but it’s a very different scenario than the idea that they “caused” the entire mess.

Just amazing.

Not quite as “entertaining” as McLean’s prior book, “The Smartest Guys in the Room”, but then again, the collapse of our entire financial system was bound to be less entertaining than a bunch of guys in Houston who were just giant fraudsters, spending tens of thousands of dollars on everything from race cars to strippers.

Tags: ,

%d bloggers like this: