Saturday, March 29, 2014

Book Review 318: All the Devils Are Here

ALL THE DEVILS ARE HERE: The Hidden History of the Financial Crisis, by Bethany McLean and Joe Nocera. 380 pages, illustrated. Portfolio

 On page 48 of “All the Devils Are Here,” the Community Reinvestment Act is mentioned (it gets less than a sentence) and then never again. This is important because the rightwingers, desperate to excuse the failure of Reaganomics, have adopted the CRA as THE cause of the crash.

Business reporters Bethany McLean and Joe Nocera correctly attribute no weight to it at all. There were plenty of causes and in this rollicking toboggan ride ending in the Bush Crash, McLean and Nocera tell the tales through personalities. There is not a graph in sight, nor a chart, only selected statistics.

 One is that in the last, desperate months of the credit bubble, 35% of residential loans made were for second homes or speculation -- it ought to be (but is not) needless to say, those loans were not scored for bank CRA compliance. Nor were any of the loans made by Countrywide, the biggest issuer. Nor for refinancings, which were the majority of all residential loans.

 But enough, if it wasn’t the CRA, what was it? There is a single and simple answer, that the people running the lenders did not understand risk. And while this is true, it is unsatisfactory. Why didn’t they? Wasn’t that their job?

A cynic might say, no, it wasn’t. Their job was to sucker investors without regard to eventual repayment, and devil take the hindmost. McLean and Nocera come close to this position, while not quite understanding it.

A good part of the book is devoted to those now infamous smarties like John Paulson and Goldman Sachs, who did foresee a crash and shorted or otherwise manipulated the paper to make money for themselves, all in best Adam Smithian fashion. But, and this is the part McLean/Nocera don’t get, those vultures did not understand risk either.

 They could detect risk in a portfolio but not in a system. (Janet Tavakoli, who did understand the big-picture risk and spoke out, all unheard, gets no more attention than the CRA.) They, and by them I mean the top managers of the biggest institutions, all regarded the national and world financial system as a game of musical chairs.

 Some (but not all, and especially not people like Alan Greenspan and Larry Summers, two very stupid men who had reputations for being extra smart) did get that a crash would come. But each knew that he was smarter than all the rest, and had the best sources of information, so that his institution could circle the chairs until the last moment, being certain to grab one for itself.

They did not understand that most of the chairs, not just one, would be taken away at once. In other words, they gambled the entire financial system against a few billion dollars for themselves. Had it not been for the lessons of the New Deal, not entirely forgotten, and the gigantic resources of the government, the system would have been destroyed, to come back who knows when.

 There are hardly any heroes in Nocera and McLean’s telling but Treasury Secretary Hank Paulson comes closest.

In the end, Nocera and McLean finger unregulated markets, saying that those who blame Fannie Mae and Freddie Mac have the story upside down.

 I have a few problems with this generally persuasive book. Foremost is the attention to the inner demons of the key players. I agree that personal motives are hugely important in the working of management (one reason why Reaganomics is too inhuman to work), but an awful lot of the demons are inferred or attributed to unsourced informants. It makes for a lively book but also makes it hard to assess its reliability.

 Second, it is irritating to be told that bigger down payments would have helped cushion or even forestall the Bush Crash. For one thing, in the hard hit areas price declines were so big that even a 20% or 30% equity would still have been wiped out. For another, there is nothing to show that a big down makes for a more reliable borrower.

 Tens of millions of 5%, 3% and 0 down mortgages were successfully written for the FHA and the VA over generations and repaid. It wasn’t until private, market-oriented lenders got involved that the system went haywire.


  1. According to you, This is important because the rightwingers, desperate to excuse the failure of Reaganomics, have adopted the CRA as THE cause of the crash.

    In order to avoid an attack of the strawmen, would you please provide a link to a rightwinger who believes such a thing?

    Because, once you stop amassing squadrons of them, reality just might intrude. According to the NYT review of Fragile by Design

    [The authors] devote two chapters to the origin of the 2008 crisis in the United States. In essence, they say, banks were encouraged to engage in subprime lending by government pressure. And to make up for any erosion in profits this entailed, regulators turned lenient on capital requirements, allowing banks to rely much more heavily on borrowing. This was certainly part of the story.

    Goal post shifting starting in 3, 2, 1 ...

  2. As McLean and Nocera document nicely, 1) there wasn't any government pressure; 2) the banks did not require any pressure to leverage up anyway.

    The theme of 'Devils' is that the investors could not get enough crap loans, rather than being forced to accept them. Nocera and McLean are aware of the rightwing explanation, and in their final chapter explicitly say it is 'upside-down,' (like a mortgage).

    As long as causes precede effects, Nocera and McLean must be right -- or at least the rightwing version cannot be correct. (Nothing unusual, the rightwingers are desperately rewriting the history of the Hoover Depression to cover the failure of their ideology, too.)