All the Devils Are Here: Unmasking the Men Who Bankrupted the World: The Hidden History of the Financial Crisis
Bethany McLean & Joe Nocera
Review by Christopher Silvester
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In the last chapter of The Big Short, Michael Lewis traced the roots of the financial crisis to the moment in the Eighties when the Wall Street investment bank Salomon Brothers decided to turn its partnership into a corporation, thereby transferring financial risk to shareholders, in a move that was copied by the other investment banks.
Bethany McLean and Joe Nocera have chosen a slightly different event from a slightly earlier period, namely the alliance formed in the late Seventies between two Wall Street mortgage traders, Lewis Ranieri of Salomon Brothers and Larry Fink of First Boston, and the chief executive of Fannie Mae, David Maxwell, when they invented mortgage securitisation and effectively permitted the link between the mortgage originator and the secondary market to be broken. As Ranieri later put it, ‘I wasn’t out to invent the biggest floating craps game of all time, but that’s what happened.’
There have been several books, from William Cohan’s House of Cards onwards, that have illuminated different aspects of the crisis, but none has managed to link all these together in such a cogent and sharply focused combination of narrative and analysis as McLean and Nocera’s masterly production.
As their title implies, there are a lot of villains in this melodrama, though some are more lurid than others. Most lurid of all are the billionaire entrepreneurs who founded the mortgage originators Ameriquest and Countrywide Financial, Roland Arnall and Angelo Mozilo. Both had their public-spirited sides, but Arnall built his fortune out of predatory lending to subprime borrowers and Mozilo followed suit out of pressure to compete. Eventually, in their desperate lust for market share, they abandoned underwriting standards entirely. As one disapproving mortgage manager saw it, ‘Breathe on a mirror, and if there’s fog, you get a loan.’
The ultimate delusion, from Bear Stearns to Merrill Lynch to AIG, was the misbegotten belief that triple-A-rated tranches of collateralised debt obligations (CDOs) were without risk. Before the scale of the crisis became known, there was a plan by various Wall Street firms to salvage their triple-A tranches of CDOs by buying mortgages and preventing foreclosures.
This might have averted the financial crisis, or at least rendered it far less toxic, but by then there were too many investors (including hedge-fund manager John Paulson and some shrewd banks such as Deutsche Bank and Goldman Sachs) who were shorting the triple-A tranches and saw the mooted plan as market manipulation.
The collapse of Lehman Brothers was seen as the moment when the crisis came out into the open, but Lehman’s Dick Fuld is not so much a villain here as merely one of the dumb guys. Similarly, Goldman Sachs, which would later be fined by the SEC for acting on both sides of certain trades, is not so much a villain as the smart guy. Still, McLean and Nocera remind us, you don’t have to like them for it.
So, with villains aplenty, who do the authors identify as the heroes? In Washington there was Edward ‘Ned’ Gramlich, the sole voice of reason about subprime lending among the governors of the Fed, and Brooksley Born, former chair of the Commodities Futures Trading Commission, who attempted to increase oversight of derivatives only to be outmanoeuvred by other, less scrupulous regulators.
Then there were the various state attorneys general who tried to protect borrowers from subprime lenders. Finally, on Wall Street, there were Jeff Kronthal at Merrill Lynch, who was fired for excessive caution over buying CDOs backed by subprime mortgages; John Breit, a risk manager at Merrill who resigned after the company degraded its risk function; and Andrew Forster, a deputy in AIG’s derivatives division who fought a losing battle to contain the crisis caused by the infamous collateral triggers in its insurance contracts.
All the Devils Are Here makes sense of the continuum between American homeowners treating their houses as piggy banks and Washington’s lack of regulation of both subprime lending and Wall Street’s securitisation of it. The authors have crafted a seamless prose style between them. Their indignation is cool and measured. Certainly, Wall Street’s bankers represented one devil among many.