The following post and Q&A was written and submitted by Tom Ehrenfeld. Joe Nocera is one of the best business journalists working today. He combines a deep knowledge of business with a healthy dose of skepticism, not to mention a good journalist’s passion for poking the powerful in the eye when they need it.
All the Devils Are here, co-authored with Bethany McLean (co-author of the definitive Enron book The Smartest Guys in the Room), provides the most comprehensive, even-handed, and insightful coverage of the financial crisis of 2008. Instead of running on about how good this book is, I'll just share a few short excerpts that feature the crisp writing and clear analysis that give this book its power.
"Here was the ultimate consequence of the delinking of borrower and lender, which securitization had made possible: no one in the chain, from broker to subprime originator to Wall Street, cared that the loans they were making and selling were likely to go bad. In truth, they were all taking on huge risks in granting these terrible loans. But they were all making too much money to see it. Everyone assumed that someone else would be left holding the bag." (p. 228)
"All over Wall Street, an immense amount of risk was building up in the system. It wasn't just that firms were taking on risk when they bought subprime mortgages and bundled them into securities, or when they kept some of the leftover pieces themselves, or when they bought whole subprime mortgage originators. Over the course of a decade, subprime mortgages had managed to seep into Wall Street's bloodstream, as firms used products created out of them to increase leverage, reduce capital, generate profits, and, more generally, game the risk-based rules that were originally intended to give firms the flexibility to deal with the modern world. All of which also meant that the increasing risk was masked by layer upon layer of complexity, hidden where few on the outside could see it." (p. 240)Joe recently took time to answer a few questions: Other crisis chronicles have gone out of their way to personalize the story—they characterize the events as outcomes of the greed of power brokers like Fannie Mae CEO Jim Johnson, or dramatize the tenacious efforts of a prescient short to get the world to listen to his insights. But your book ratchets down the "you are there" reconstruction of dramatic events, choosing instead to reveal how systematic forces inexorably caused the meltdown. Was this a conscious decision? If so, why? Joe Nocera: We absolutely made a conscious decision to report and write it this way. We always knew we wanted to write about the underlying causes. We didn't know where that would take us. Bethany had grounding with Fannie Mae and Freddy Mac—she had written about them for Vanity Fair and Fortune. I had grounding in issues surrounding Wall Street. From there we dove in without precisely knowing where we were going. I was thinking about subprime in terms of Wall Street. But Bethany saw very early on that the subprime issues began on Main Street. And so that was where you had to start. You had to start by examining where subprime mortgage lending came from, how it became popular, and how it became predatory. Tracing the rise of subprime lending was critical. Bethany figured that out very quickly and it turned out to be genius. I was tracking Lou Ranieri and the rise of mortgage-backed securities. She was writing about the rise of subprime. She stumbled upon Roland Arnault at Ameriquest and figured out that he was ground zero for shitty subprime mortgages. And so we basically started to see this as a story that had a chronology that moved back and forth from Main Street to Wall Street to Washington with side trips to the ratings agencies. And at a certain point we realized we were putting together a jigsaw puzzle, and it would be an accomplishment to put the pieces together and not see the individual pieces. That was not what we had at day one but at the end we did so because that was where our strengths lie—in analytical skills and writing ability. Does your approach shift some of the blame from individual behavior, focusing instead on ways that the system was rigged to fail? JN: We were living in a bubble mentality and not just the last few years—a bubble mentality that let Washington think deregulation made sense, that let Countryside think it made sense to give out subprime, that let rating agencies bundle subprime into tranches and have seventy percent be triple A. These were mass delusions. Like tulips. But within that mass delusion people did things they knew they shouldn't have been doing. Credit agencies knew they were selling their soul to the devil by rating these tranches as AAA. And you can go down the line with this: the guy at Merrill Lynch who took a $5 billion exposure and turned it into a $55 billion at the end of the year. Lots of people at Merrill Lynch knew this was not going to end well and they did not care. There seems to be a striking contrast in the tone of your first book, A Piece of the Action, which you have said is about "the democratization of money" through the growth in individuals investing in stocks more than 25 years ago. It seems quaint today to think about, say, Peter Lynch advising individuals to buy stock in companies whose products they like. That represents a far simpler, and more old-fashioned approach than the way Wall Street operates today. JN: A Piece of the Action came out in early 1994. Nine months later Netscape had its IPO. I remember that stretch of time between the publication of the book and that particular IPO. And the truth is that my book became quaint on that very day. Netscape's IPO was the day that everything changed: everybody wanted to get rich quick, individual investors got hooked on the market in a fundamentally new way. That was the day that the modern Wall Street, for better or worse, was created. One of the most discouraging threads in this book has to do with the failure of any regulatory agency to identify common industry practices as predatory, unsustainable, and potentially catastrophic to the economy. In a new afterword, for the paperback edition, you are unconvinced that the new regulations have sufficient power to correct the underlying causes of the crisis. Are you any more sanguine about the ability of Washington to prevent the recent crisis from recurring? JN: I don't know if the new regulations are sufficient or not. It seems to me that Dodd- Frank fiddled with the world as it existed in 2008 rather than trying to radically change that world in ways that would make us feel safe. And since the House Republicans have taken over, the pushback has been incredible. It's been like the eighth season of Dallas where what happened was like a dream. It's like the crisis never happened, and it's absurd. They're fighting capital requirements, fighting everything. And it's infuriating to watch this. I think you have to go back to the response in the 1930s. Its incredible that at the time Congress went to Morgan Bank and said, we are splitting you in two. It's incredible that that the country had the wherewithal to do that, and that they went ahead and did do it. We did not have another major financial crisis for 80 years. And that is the best you can hope for with financial regulation.