[Editor's note: Please take all conversation regarding the shooting of Gabriel Giffords to this thread. As a courtesy to our guests, please keep comments to the book. ]

Welcome Bethany McLean and Joe Nocera, Hosted by Nomi Prins.

All The Devils Are Here: The Hidden History of the Financial Crisis

Nomi Prins, Host:

There are a plethora of books written, and yet to be written, about what lead up to the 2008 financial crisis, but even so, All the Devils are Here stands out. Co-authors, Bethany McLean (co-author of the bestselling, documentary-inspiring book on the Enron scandal, The Smartest Guys in the Room) and Joe Nocera (Award winning New York Times business columnist), expertly weave a narrative that captures not just the elements, but the characters of the crisis; the human flaws, choices and repercussions perpetrated by a small, dispersed collection of very dangerous people.

They focus exceptionally well, on the mentalities and meetings behind the crisis, across the businesses and agencies that housed them. From the investment banks to the lenders to the rating agencies to the quasi public-private Government Sponsored Entities, Fannie Mae and Freddie Mac, the book exposes the devastating ramifications of internal corporate politics, insatiable drives towards gaining market share and earnings glory, and power struggles galore. And, of course, the greed motivation.

The book includes an expansive who’s who list of the key players, some very well known, and some relatively unknown, but whose contributions to the crisis were no less critical. It also contains a what’s what glossary to keep track of financial terms and acronyms, like SIVs (off book structured investment vehicles that reduced bank capital charges, or rather – moved risky securities around) and ARMs (adjusted rate mortgages that took on – well, devilish qualities as subprime loan issuance gathered speed during the first decade of the twenty-first century.)

With snappy chapter titles like: a Nice Little Bistro (about JP Morgan’s infamous BISTRO synthetic, corporate credit default swap, CDO like deal concocted in 1997 that attracted the AIG Financial Product group as its ‘wrapper’ or insurer, such that JP Morgan could reduce its capital charges by seeking an outside sponsor for the deal’s credit risk. The Chapter ‘The Wrap’ explains further how AIG-FP’s head, Joe Cassano, went on to wrap other deals, seemingly akin to printing money – until they all imploded); my favorite, I Like Big Bucks and I Cannot Lie (about the rise of the second wave of Subprime lending – subprime two – and a giddy set of lyrics sung to the tune of ‘Baby’s Got Back’ in a Washington Mutual employee skit at a Maui retreat in 2006); to the Fannie Follies (about charismatic, defensive, former head, Frank Raines, who in 1998, drilled into his employees that earnings per share would rise from $3.23 to $6.46 in five years, and in so doing, set the stage for a reckless expansion of Fannie’s retained mortgage portfolio that would have horrible consequences, including a $9 billion earnings overstatement in 2001, on his way to a windfall payout of $52 million between 1998 and 2003.)

The book’s pace quickens further as the eye of the crisis approaches, lazar beaming on the players. You will learn how Stanley O’Neal, former Merrill CEO, when confronted by the knowledge that two of his subordinates, Tom Patrick, Merrill’s Chief Financial Officer and Arshad Zakaria, head of global markets and investment banking, were gunning for his job, further sunk into his signature paranoid, insular mentality, so that he alone, controlled the information and had a full picture of Merrill’s risks. Interestingly, as the book demonstrates, a similar phenomenon was in play at AIG, where Hank Greenberg, its once illustrious leader, is depicted as a control freak that preserved his knowledge about the firm’s activities over the notion of sharing them across the company. The book points out that former Countrywide leader, Angelo Mozillo was perhaps less control-obsessed, but instead driven by an intense desire to win against the banks, to be number one in the mortgage lending game, dogmatically continuing to extol the virtues of his company in making it possible for people who would not otherwise be able, to own their homes.

In other words, the big boys that ultimately failed so spectacularly, fostered an environment of fear and separation, rather than information sharing and cohesiveness, something that the authors point out, benefited one of the best performers in the wake of this crisis, (albeit with government help), Goldman Sachs. At that firm, the former partnership culture was somewhat retained as the firm transformed from an old-school investment banking into a competitive trading firm, under the direction of Lloyd Blankfein.

The books is full of facts that escape other crisis renditions, like the one that astonished me the most – on page 289 in The Gathering Storm chapter. As things were declining rapidly in the Bear Stearns hedge funds (that went belly up in the middle of 2007), some firms were actually considering doing something to help homeowners, not because they were mercenary, but because forgiving loans would save billions of dollars on failing CDOs. Bear Stearns owned a mortgage servicer to which a mortgage modification strategy for delinquent borrowers was suggested in April 2007. Merrill Lynch and Morgan Stanley held meetings to see what they could do to stop homeowners from defaulting, too. Why didn’t anything materialize? Because, as Bethany and Joe explain, investors that were short the triple-A tranches of CDOs (betting against homeowners and Bear’s positions) didn’t want that.

From rating agency thirst for market share and degradation of standards, to regulator shopping, to the conversion of the GSE’s from entities that truly supported the ideals of home ownership to ones that maximized share value through lower quality portfolios, to Goldman’s fierce protection of its bottom line, to the rampant, hopeless and fatal denial of how bad things really were from Bear Stearn’s hedge fund manger (and a former colleague of mine there), Ralph Cioffi, to AIG-FP’s head, Joe Cassano, to Countrywide former chief, Angelo Mozillo, the book shows that not just greed, but primal ego and competitiveness led man after man to destroy the department or company he built, taking down a swath of the economy along with that failure. It is an amazing story.

On a personal note, I have known Bethany since I left Goldman. I fondly recall our white-wine chats on the ground floor restaurant of the Time Life building, where the Fortune offices were. For both hers, and later, Joe Nocera’s, guidance in the field of journalism, I owe them both my deep gratitude. And so, I am honored to be hosting this book salon for their masterpiece, All the Devils are Here.

203 Responses to “FDL Book Salon Welcomes Bethany McLean and Joe Nocera, All The Devils Are Here: The Hidden History of the Financial Crisis”

BevW January 8th, 2011 at 2:00 pm

Bethany, Joe, Welcome to the Lake.

Nomi, Thank you for Hosting today’s Book Salon.

‪While we understand the tragic news of the day, there are multiple available threads for discussing the shooting. ‬

‪Please stay on topic‬ and welcome Bethany McLean, Joe Nocera and Nomi Prins.


Bethany McLean January 8th, 2011 at 2:00 pm

Hi, everyone. Thanks for coming.

Nomi Prins January 8th, 2011 at 2:01 pm

Hi everyone! Happy New Year! Welcome to today’s book salon for All the Devils are Here: The Hidden History of the Financial crisis by Bethany McLean and Joe Nocera.

Bethany and Joe: Welcome and thanks for participating and congratulations on the success of your wonderful book!

Joseph Nocera January 8th, 2011 at 2:01 pm
In response to Bethany McLean @ 2

I’m looking forward to it!

Nomi Prins January 8th, 2011 at 2:01 pm

Bethany and Joe: There have been lots of books written on the financial crisis that focus on sequences of events, yours certainly does that as well, but it also focuses deeply and broadly on the labyrinth of people whose mentalities and actions coalesced independently and collectively over decades to reach the boiling point they did, how did you decide to take this angle?

egregious January 8th, 2011 at 2:02 pm

Welcome to Firedoglake – glad you could join us today!

Shoto January 8th, 2011 at 2:03 pm

Welcome Ms. McLean and Mr. Nocera:

Perhaps I’m getting ahead of the discussion, but what do you make of the recent Massachusetts supreme court ruling regarding foreclosures?

dakine01 January 8th, 2011 at 2:04 pm

Good afternoon Bethany, Joe and Nomi and welcome to FDL on this sad Saturday.

Bethany and Joe, I have not had an opportunity to read your book but do have a question.

How do we reclaim the banks and agencies to follow reasonable rules (and the law) and bring the economy back from the brink?

Bethany McLean January 8th, 2011 at 2:04 pm

We were always really interested in HOW this happened. Others told the story of the unfolding of the crisis, but we wanted to tell the story of how we got to the point where a crisis was inevitable. I’m a big believer in the notion that business stories are always stories about people, and I think that was true here – it’s amazing the influence that men like Stan O’Neal and Angelo Mozilo had on their companies.

Nomi Prins January 8th, 2011 at 2:05 pm

You begin the book, following a prologue from inside the head of former Merilll Lynch CEO, Stanley O-Neal, with a chapter called, The Three Amigos, that winds back to the old days of Salomon Brothers and a mortgage desk head name Lewis Ranieri that later inspired some of the Liar’s Poker lore, who later said, “I wasn’t out to invent the biggest floating craps game of all time, but that’s what happened.” Do you think that was ultimately the case of a lot of these guys, who were all pushing the envelope of invention to bad results.

Bethany McLean January 8th, 2011 at 2:05 pm
In response to Shoto @ 7

I actually wrote an op ed for the Guardian, a British paper, a few months ago commenting on the fact that criminals are released from jail because the i’s weren’t dotted and the t’s weren’t crossed, yet somehow banks didn’t think they had to give homeowners due process. the MA ruling is huge, I think – a big shot across the bow to the industry’s contention that hey, these people deserve to lose their homes, so who cares if we followed the rules.

Joseph Nocera January 8th, 2011 at 2:06 pm

We are getting innundated with questions already! that’s good but we need to take them one at a time. I think that the Massachusetts decisions is signal that courts are going to be tough of banks that don’t take the proper steps (as many have not) before foreclosing. It’s about time! Having said that, one can make too much of it. Truth is, most people still don’t contest foreclosures, and this will probably not have as much impact on the banks’ bottom line as many bank-haters are hoping.

Bethany McLean January 8th, 2011 at 2:07 pm
In response to dakine01 @ 8

That’s a great question. I worry that the “financialization” of our society has gone so far that it’s hard to turn back the clock. But one great way is personal responsibility. For the last few decades, banks have marketed and sold this notion that all the credit you want is good for you. It’s not! It’s good for the banks – as long as they can sell your loans off to other investors, that is. If people refuse to live beyond their means, then things will change a little.

Shoto January 8th, 2011 at 2:07 pm
In response to Bethany McLean @ 9

I’m a big believer in the notion that business stories are always stories about people

Absolutely no question about it. In the final analysis, people are making the decisions, and people are executing those decisions – all the way down the food chain.

Peterr January 8th, 2011 at 2:09 pm
In response to Joseph Nocera @ 12

Sounds like maybe this book strikes a chord around here! It certainly has with me, though I have just started it.

Bethany McLean January 8th, 2011 at 2:09 pm
In response to Nomi Prins @ 10

I do, yes. I think that most terrible business stories begin with idealism, turn into the slippery slope, and end in disaster! But few of the perpetrators are ever sitting in a dark room plotting the destruction of the world. I’m not saying this to let people off the hook. Making good decisions in a vacuum is easy. Making good decisions when the overriding temptation is to make a bad decision is what counts.

Nomi Prins January 8th, 2011 at 2:09 pm
In response to Bethany McLean @ 11

following on from that, it seems that even the modification process is rife with fraud, is that part of the remaining grab for stability on the part of the banks and lenders, to the detriment of homeowners?

Another Amigo you wrote about was David Maxwell, chief executive of Fannie Mae, around since Great Depression times, and a big theme of the book is the transformation of that agency from its New Deal intent to its role in the crisis, indeed the fact that the mantra of homeownership became the excuse for reckless, and fraudulent behavior, and yet, people are still losing their homes, while a lot of the individuals in the crisis you wrote about, are keeping pretty hefty chunks of money, do you see that ever changing?

dakine01 January 8th, 2011 at 2:10 pm
In response to Joseph Nocera @ 12

As a technical note, there is a “Reply” button in the lower right hand of each comment. Pressing the “Reply” will pre-fill the commenter name and comment number being replied to and makes it easier for folks to follow the conversation.

Note: Some browsers don’t like to let the “Reply” work correctly if it is pressed after a page refresh if the page has not completed loading.

Joseph Nocera January 8th, 2011 at 2:10 pm
In response to Nomi Prins @ 10

i think a lot of financial innovation started out with good intentions. that was certainly the case not only with mortgage backed securities but credit default swaps and modern risk management tools. But I also think that at the height of the bubble (and even before), good intentions went out the window, and “financial innovators” were really looking to game the system to the extent possible. Sythentic collateralized debt obligations strike me as a good example of that.

Peterr January 8th, 2011 at 2:12 pm
In response to Bethany McLean @ 11

That sounds like the Leona Helmsley School of Finance: “Rules are for the little people”.

To what do you attribute the fact that none of the folks that caused the crisis you describe have yet to be indicted, let alone convicted and imprisoned?

Joseph Nocera January 8th, 2011 at 2:13 pm
In response to Nomi Prins @ 17

The truth is, there is very little enthusiasm for mortgage modification in the world of banking and servicing, which is a large part of the reason it has been unsuccessful. There is no doubt that modification programs could be vastly more successful if the industry really wanted to make it work. having said that, it must also be said that one reason (not the only one) mods are not embraced is because the default rate on modified loans tends to be very high.

Nomi Prins January 8th, 2011 at 2:13 pm
In response to Joseph Nocera @ 19

that’s why I love how very early on in the book, you talk about JP Morgan’s Bistro Deal, what it was made of, and how it was really a starting point for AIG’s involvement in the crisis, and our ultimate bailout of the company, can you explain a bit of how that went down – I found it fascinating.

Bethany McLean January 8th, 2011 at 2:13 pm
In response to Nomi Prins @ 17

I don’t see it changing, no. It’s why people have a right to be mad – the outcome of the crisis is unfair, no matter how you cut it. Even if you argue that citizens are just as responsible as banks (and I’m not sure I would argue that), citizens are paying the price, while the financiers are not.

Bethany McLean January 8th, 2011 at 2:16 pm
In response to Peterr @ 20

Ha! Leona Helmsley lives. Fortunately or unfortunately, there’s a difference between horribly unethical behavior and outright criminal behavior. Much of what happened in our markets over the last 15 years was legal, and it was signed off on by lawyers and accountants – makes it very hard to prosecute people now. Also, there’s deniability – everyone can point the finger at someone else and say, it was really THEIR fault. Doesn’t make any of it right, but does make it hard to get redress through the justice system.

Nomi Prins January 8th, 2011 at 2:16 pm
In response to Bethany McLean @ 23

Related to that, one of the most jawdropping (of many) moment in your book for me, was something I outlined in the intro here, that at one point, investment banks that were making a lot of money structuring CDOs and leveraging their triple-A pieces were faced with the impending doom of the Bear Stearns hedge funds – at which point – economically, they considered forgiving homeowner loans. Can you get into that notion more? I don’t think anyone else reported on that.

eCAHNomics January 8th, 2011 at 2:16 pm
In response to Joseph Nocera @ 19

a lot of financial innovation started out with good intentions

Gee, I never found that to be the case in my nearly 30 years on Wall St. I always thought that financial laughingly-referred-to-as innovations started out as a way to fool customers, gain market share at any cost, get around pesky regulations, or some other petty minded goal. Then once one was found, every Wall St. firm got up every morning, put on blinders & thoughtlessly copied what the innovator or they did yesterday. Until it inevitably ended in disaster. I found my colleagues to be individually smart and hard working, but collectively as dumb as stones.

BooRadley January 8th, 2011 at 2:16 pm

Nomi, always a great honor to have you here at FDL. Bethany, thank you so much for your seminal work on Enron. Your book was terrific. Joe, welcome. Looking forward to buying the book.

Joseph Nocera January 8th, 2011 at 2:17 pm

JP Morgan’s motives for the Bistro deal–the original effort to off-load big-time credit risk from its books to someone else–was genuinely an effort at risk management, but also managing the bank in a better, more efficient fashion. they needed AIG, or someone like AIG, to sell the credit default swaps because if AIG agreed to take on that risk, the government woudl allow them to reduce their capital against those assets, which was a large part of the reason they wanted to do it in the first place (the desire to reduce capital requirements plays a surprisingly large role in the financial crisis). But of course, like everything else, it morphed from transferring risk of corporate credit–BISTRO–to transferring risk on triple AAA subprime securities. And that’s where AIG got into trouble, to say the least.

Nomi Prins January 8th, 2011 at 2:19 pm

And, as you mention later in the book, another problem of AIG seemed to be very much linked to the desire of its former head, Hank Greenberg, to keep information flow through him, and manage the company that way – that seemed to be a big problem when AIG went overboard with all the CDO wrapping they did, right?

Bethany McLean January 8th, 2011 at 2:20 pm
In response to Nomi Prins @ 25

There was some reporting at the time, but not much. Yes, there was a brief movement at some firms, including Bear and Merrill, to figure out how to restructure the underlying loans so that people wouldn’t default and the securities wouldn’t go bad. But the people who were short, or betting that the mortgages were going to implode, protested that that would be market manipulation. And that was the end of that. As we know now, it is complicated to get these things restructured, and the redefault rates do tend to be high, so I’m not sure this would have prevented the crisis. But the protest does show you how twisted people’s motivations had become.

Joseph Nocera January 8th, 2011 at 2:20 pm
In response to eCAHNomics @ 26

In small-bore ways you are right. But the big stuff, like the original idea to create securitized mortgages, doesn’t fit into your schema. There is no question Wall Street did it to make money, but there is also no question that it had enormous policy ramifications for the housing market and that is why Congress and the US Treasury were also so interested in making it happen. Similarly, the creation of risk models like VAR, which wound up allowing Wall Street to ignore very bad practices (and stamping AAA on lousy subprime securities, began as an effort to impose mathematical and statistical discipline on the unruly business of buying and selling stocks and bonds.

Bethany McLean January 8th, 2011 at 2:21 pm
In response to BooRadley @ 27

Thank you!

Scarecrow January 8th, 2011 at 2:22 pm

Welcome to our distinguished guest authors and host. As I was reading the various chapters, the question that I kept asking is, do these people do anything socially useful?

There have been articles by Stiglitz and others suggesting that Wall Street has essentially failed to justify it’s existence. Whatever transformation of credit and risk allocation they perform is vastly outweighed by the harm they do to the economy.

You’ve detailed beautifully what these people did. Why should we allow them to continue?

Joseph Nocera January 8th, 2011 at 2:23 pm
In response to Nomi Prins @ 29

It was a huge problem (Hank Greenberg keeping all info in his head.) He was in his 70s when he was pushed out of AIG by Eliot Spitzer, and yet he had no succession plan, and information was no shared throughout the corporation, so the executives who had to follow him were flying blind. Greenberg remains someone held in high esteem, and there is a lot of talk about how AIG would never have gotten into the trouble it got into if he had remained. That may well be true, but it misses the point. The fact that he didn’t run AIG responsibly was an abdication of duty that did, in my view, help lead AIG to the abyss.

Nomi Prins January 8th, 2011 at 2:26 pm
In response to Joseph Nocera @ 31

Var – meaning an assessment under certain conditions, and with a certain probability of their occurrence, of the firm’s Value-At-Risk.

In the course of reporting, and writing this book, did you come across anyone who considered it odd that the risk of illiquidity would become such a factor. Or looking back, did people consider the notion that housing prices wouldn’t go down a bigger issue for the breaking down of these models ?

Bethany McLean January 8th, 2011 at 2:26 pm
In response to Scarecrow @ 33

Yeah, I did not start out the book thinking that way, but our research pushed me in your direction. We all tend to think of “innovation” as a good thing, but as one of our characters – former credit rating analyst Mark Adelson – asks, have we created a financial system that doesn’t serve the broader economy? His description was that finance should be “friction” – it’s a cost of doing business. When it becomes the end in and of itself, something has gone terribly wrong. I think you can also see the problem in the continued divergence between Main Street and Wall Street post crisis. Wall Street returned quickly to record profits. If the financial industry is tied to the broader economy, how can that be the case? I’m just not sure what to do about it.

mzchief January 8th, 2011 at 2:28 pm
In response to Joseph Nocera @ 34

{ Welcome Bethany McLean, Joe Nocera and host Nomi Prins. } Sounds like what you’re saying is no one called Greenberg on his flaunting of the well-established procedures execs, corporate counsels and staffers know about preventing control fraud.

Joseph Nocera January 8th, 2011 at 2:28 pm
In response to Scarecrow @ 33

Not to put words in Bethany’s mouth, but I got the impression that she became increasingly skeptical about the value of much financial innovation as we were working on the book. Wall Street is always justifying its existence by saying it raises and allocates capital for the world’s economy. And I suppose there is some truth to this, though not as much as there used to be. But Wall Street excesses–in compensation, in gaming the system, in taking advantage of the very people it is supposed to be helping–seem way oout of proportion to the good it is supposed to be doing.

Bethany McLean January 8th, 2011 at 2:29 pm
In response to Nomi Prins @ 35

Isn’t there some sort of old saying on Wall Street about illiquidity – something about how everything is liquid until it isn’t, or everything is illiquid in a crisis? But no, I don’t think anyone ever worried about that aspect of it. Hearkens back to a comment one person made earlier about how blindingly stupid Wall Streeters can be! I do think most people realized housing prices could come down, and that the party would end at some point. They were just playing the game while they could.

ahennigan January 8th, 2011 at 2:29 pm

Interested to know what your thoughts are on Janet Tavakoli’s, whose research is cited in your book, criticisms that you “pulled punches” by not identifying individual culprits in what appears to be mass scale financial fraud. FYI, I purchased your book for a family member for Christmas because I found both of your various previous works to be insightful and illuminating. Thank you.

Scarecrow January 8th, 2011 at 2:30 pm

Where do our authors wind up on the ultimate role for Fannie/Freddie. On the one hand, you follow their rise and the competition with Wall Street over who could best use government to rig the competition for the billions in the secondary housing market. But it’s not clear to me that eliminating them would do anything other than free Wall Street to function with even less of a check — your early chapters suggest that — while retaining them leaves these huge enterprises as a temptation for govt corruption.

What’s their legitimate role, and how do we structure them to support the financing of the housing market — or is that even a legit function for a GSE?

person1597 January 8th, 2011 at 2:30 pm
In response to Nomi Prins @ 35

did you come across anyone who considered it odd that the risk of illiquidity would become such a factor.

Has anyone considered the role of “distressed paper” traders in the initial meltdown?

They were pretty bored up until… oh about late July 2008. That’s when things seized up in earnest. Remember the constipated owl? Heh heh…

Really, the bad paper had no where to go when it was seen that the trunk was full of junk.

Peterr January 8th, 2011 at 2:31 pm
In response to Bethany McLean @ 24

I’m a pastor who also has a degree in economics, so I understand exactly what you are saying about the difference between unethical and criminal. Still, the fact that lawyers and accountants signed off on something doesn’t exactly insulate the company from the legal system.

One example comes to mind: Daniel Sparks’ testimony before the Senate last April was something else. As David Dayen described it here at FDL:

Carl Levin confronted Goldman Sachs trader Daniel Sparks with an email about “Timberwolf,” one of their deals using mortgage-backed securities. Tom Montag, the head of the division at the time, told Sparks, “That Timberwolf was one shitty deal.” Days later, Levin showed, emails talked about selling Timberwolf, the “shitty deal,” as a top priority. In fact, Goldman sold hundreds of millions of dollars on the deal to investors after that initial email.

In a made-for-Jon-Stewart moment, Levin asked again and again about the “shitty deal,” and Sparks tried to dodge, but the conclusion was clear – Goldman Sachs knew Timberwolf was bad, and yet not only marketed it to investors, but marketed it as a top priority.

Susan Collins, following up, could not get a straight answer from Sparks over whether he thought Goldman Sachs had a duty to act in the best interest of their clients.

There’s video of the exchange at the link.

Defrauding your clients is not simply unethical, but criminal. And yet Goldman continues to do business without problem.

eCAHNomics January 8th, 2011 at 2:31 pm
In response to Joseph Nocera @ 31

In weekly ‘risk’ meeting with the man who is now in charge of all of CS, it was very clear to me that no one had a clue as to what the aggregate risk the firm was taking on (equities side at the time). The “models” were always nothing more than a way for execs to absolve themselves from responsibility for risk by putting it into the hands of the “rocket scientists.”

Financial innovation is just a fancy way of saying leverage. And leverage is a double edged sword which rapes nonfinancial corps and households on the way up and taxpayers on the way down, all to benefit the MOTUs, and nothing more.

The economy has grown more slowly during the period of financial innovation, so I strenuously dispute your characterization that my concerns are small bore.

Joseph Nocera January 8th, 2011 at 2:33 pm
In response to Nomi Prins @ 35

in looking back, MANY people came to the view that the big mistake was not believing that housing prices could go down. Indeed, there was a CEO from a bond insurer in our offices the other day who said that the models had actually been right: if you plugged in a 30 percent decline in housing prices, disaster was predicted! but nobody believed it could ever happen.

As for liquidity, I think everyone on Wall Street knows that liquidity is always the ultimate issue in a panic. The guy who never understood that was Joe Cassano at AIG. Despite the firm’s contractual agreement to pay collateral calls if the price of the AAA securities it was insuring went down, he insists to this day that the “underlying value” of the collateral was sound. But that wasn’t the point. the point was AIG’s liquidity problems created by the decline in the mark-to-market prices of the securities it was insuring. He was a smart guy, but he nevr understood the importance of planning for liquidity risk.

Nomi Prins January 8th, 2011 at 2:33 pm

Moving over to Countrywide and its head, Angelo Mozilo – you portray him as initially believing that his company was giving better mortgages than others, like Ameriquest, and really helping people realize the home ownership dream that otherwise couldnt, and he continued to cling to this notion even as his firm jumped on the worst type of subprime lending bandwagon and its mortgages were imploding. For the benefit of those who haven’t read the book yet, can you briefly talk about his mindset and that evolution? Did he really believe his own hype?

Scarecrow January 8th, 2011 at 2:34 pm
In response to Bethany McLean @ 36

Well, one interpretation is that Wall Street doesn’t serve the economy, it drains it.

I think one can use what you’ve documented here to explain much of the reason that incomes and wealth have been siphoned from the lower/middle class upwards, and more particularly, how that wealth have been channeled to the top 1% or .1% of the financial world. So the question is, has Wall Street become the means by which that happens? It’s class warfare, and perpetuating these institution, or allowing them to remain at their current size and economic power is ultimately highly destructive. How do you see that?

Joseph Nocera January 8th, 2011 at 2:34 pm
In response to ahennigan @ 40

I do admire Janet’s work, but I have always been mystified by that comment. I don’t think we pulled any punches at all. We called it as we saw it, but we also tried to remain fair to all involved, even if that meant not called Goldman a “vampire squid.” Which we didn’t.

Bethany McLean January 8th, 2011 at 2:34 pm
In response to ahennigan @ 40

We have a lot of respect for Janet’s work, and during the course of researching the book, I became more sympathetic to her thinking – ie, that this was, for all intents and purpose, fraud. I disagree with her characterization of our book, though. She feels that because we said so many people are to blame, that means no one is. But I don’t think we minced words anywhere in the book about specific people – and the people we named sure don’t feel that way either! Just because it took “all the devils” to create a crisis doesn’t mean that the individuals weren’t devils. Per my earlier comment, I also break ranks with her over the issue of how easy this is to prosecute. I think the lack of prosecutions so far have everything to do with how hard this stuff is to prosecute, whereas I think Janet sees it as an unwillingness to prosecute.

missling January 8th, 2011 at 2:35 pm

It’s quite apparent that the financial architecture has completely failed, yet the administration is doing everything to revive the system to it’s pre crash old self – at the expense of the public. This continued transfer of wealth will inevitably lead to the next crash, a sovereign bonds crises in europe, a housing market implosion in China, or what have you.

Is anyone noticing the surreal absurdity, or are most oblivious to what seems to amount a global crisis of capitalism?

Joseph Nocera January 8th, 2011 at 2:37 pm
In response to eCAHNomics @ 44

I didn’t mean to offend! What I meant was that most small-bore financial innovation is often BS at the start, but several of the big innovations, like mortgage backed securities, began with good intentions that were perverted over time. And for the record, I agree with your assessment of the failing of risk models.

Nomi Prins January 8th, 2011 at 2:37 pm
In response to Joseph Nocera @ 45

Thanks for that response. I just always wonder why it’s not priced as even a remotely possible scenario in anyone’s model, since even though once it’s gone, it’s gone, there are markets that show its decline, and if especially rapidly, it’d be worth knowing, particularly for setting aside capital, which the banks are always strategizing to get around setting aside. Have any regulators considered this, if not banks?

separately, when I read in your book that Cassano had clauses that allowed margin calls when prices went down, even though I’d heard that before, I thought – what a colossal idiot. Same with the notion that banks like Citigroup would buy back securities at the worst possible time, banks that have FDIC support and FED backing. How did those come about?

Peterr January 8th, 2011 at 2:38 pm
In response to Bethany McLean @ 39

Not just playing the game while they could, but actively taking steps to insulate themselves from the crash.

In decoupling the risk of making bad loans from the reward of making good ones, the whole incentive structure of the market changed. Loan originators in this new setup have no particular incentive to make good decisions on extending credit, if they can easily package the loans and sell them off to someone else. Indeed, they can’t make money if they deny people loans. Similarly, those who package the loans and pass them on to investors care little for the quality of the loans, so long as they can sell them and make their money. It’s only the investor at the end of the line who is left holding the bag.

This is basic Econ 101, not esoteric stuff found only in some Nobel prize winner’s mind. Shift the incentives, and the behavior will also shift.

rosalind January 8th, 2011 at 2:38 pm
In response to Joseph Nocera @ 45

Indeed, there was a CEO from a bond insurer in our offices the other day who said that the models had actually been right: if you plugged in a 30 percent decline in housing prices, disaster was predicted! but nobody believed it could ever happen.

I caught a repeat interview with a former exec at either Fannie or Freddie on NPR the other day, and he said his biggest regret is the calculator people use on the front page of their website to calculate how much house they can afford did not let them enter a negative number under the “how much will your property appreciate” question. He was very apologetic that it never occurred to them housing prices could go down.

Scarecrow January 8th, 2011 at 2:39 pm
In response to eCAHNomics @ 44

I think this is important:

The economy has grown more slowly during the period of financial innovation

And it’s also true, isn’t it, that income inequality has gottem much worse in the same period. That suggests to me that the “financial innovation” has essentially been a means for looting the economy and shifting income/wealth upwards.

Bethany McLean January 8th, 2011 at 2:40 pm
In response to Scarecrow @ 41

This is such a great, important question – and such a complicated one. Truth be told, I do not know. In the crisis, the GSEs and Wall Street engaged in mutually assured destruction. I do think there was something fundamentally corrupting about the pre-crisis structure of Fannie and Freddie. But to those who say, let the market handle housing, I say, look at recent history! I don’t see any evidence that the private market did such a great job, either. And I think there are worse things to subsidize than a well functioning housing market. Many people on the Street would like to see them as captive government entities that are forced takers of credit risk – and of course they would! Then the private market can make all the money and leave taxpayers with all the risk. I’ll let you know if I have any brilliant ideas on the right long term structure!

eCAHNomics January 8th, 2011 at 2:41 pm
In response to Joseph Nocera @ 51

You didn’t offend. Everyone is entitled to his opinion. We happen to disagree even about the larger “innovations,” because of my point that even when those were introduced they did not increase growth of U.S. economy (of which I was a forecaster). Of course, innovators promised it would make things more efficient, and therefore promote growth, but that never happened.

eCAHNomics January 8th, 2011 at 2:42 pm
In response to Scarecrow @ 55


Bethany McLean January 8th, 2011 at 2:42 pm
In response to Peterr @ 43

Back to my point about ethical wrongdoing vs criminal wrongdoing – I agree that what Goldman did in these deals was deeply unethical. But it wasn’t criminal because they can hide behind the “big boy” defense – we were doing business with sophisticated investors who had a duty to understand what they were buying, and we had no obligation to sell them good products.

Nomi Prins January 8th, 2011 at 2:43 pm
In response to Bethany McLean @ 49

Related, I spoke recently at a fraud conference, also addressed by one of the FBI directors in charge of financial fraud, particularly focused on mortgage fraud, and we had a frank discussion about the very issue of legal proof for the banks involvement at senior levels, because I had just been talking about the profit motivation which incurred all sorts of misleading coming from the top down. She was discussing the nature her cases at the lending and mortgage broker fraud level (her load is up 500% over the past two years), and said she understood there were connections, but that it was very difficult because of the very screwy nature of the chain a loan goes through, and proving intent at the top of a firm is therefore harder, but if they could, and prove a more direct lead from borrower to corporate fraud, they would look into it.

Joseph Nocera January 8th, 2011 at 2:44 pm
In response to Nomi Prins @ 52

I could be wrong about this, but it seems to me you don’t so much price liquidity risk, as you plan for the potential of a liquidity crisis. That is something Cassano never understood, though it is also true that even firms like Morgan Stanley, which did understand it, would have been finished if the panic had lasted a little longer. Ultimately the government was needed to step in and insure liquidity. As for Citi, if you are talking about buying back the SIV assts, it is because they felt they had no choice. Cassano? he thought that he could make a little more money by agreeing to collateral calls. It was free money–until it wasn’t.

Bethany McLean January 8th, 2011 at 2:45 pm
In response to Nomi Prins @ 46

I think on some level, Mozilo did believe his own hype. But I also think that he, like most of us, had a fatal flaw. His was wanting to be number one at all costs. So he hid behind his belief in homeownership as a rationalization while his company plunged into the worst imaginable lending practices. And he’s right on some level – if Countrywide wanted to be number one, it had to make those terrible loans. Honestly, this to me is one of the scariest things about the modern business world. Competition is supposed to bring out the best in people. Why so often does it result in a race to the bottom instead?

mzchief January 8th, 2011 at 2:45 pm
In response to Bethany McLean @ 56

One option is to treat it like the crime scene it is and send in the fact finders.

eCAHNomics January 8th, 2011 at 2:45 pm
In response to Bethany McLean @ 56

The more I’ve thought & read about this after the fact, the more I think plain vanilla financing is perfectly fine. Let’s bribe the MOTUs by giving them fat profit margins with excess costs and 3-martini lunches, the structure that was in place when I started on Wall St. Then they could sit in their offices, do next to nothing, but not ruin everything they touched. The U.S. economy did perfectly fine under that regime during the 1950s & 1960s.

Joseph Nocera January 8th, 2011 at 2:45 pm
In response to eCAHNomics @ 57

where do you come up with the suggestion that the economy doesn’t grow during periods of financial innovation? how do you define such periods? Though I am no fan of modern financial innovation, i’m skeptical of such a broad sweeping statement.

Scarecrow January 8th, 2011 at 2:45 pm

To both authors and host: what’s your take on how well the Financial Crisis Inquiry Commission has done it’s job — putting aside the Republican “minority report” and the banning of terms like “deregulation” — do you have any confidence they’ll come up with a coherent, understandable story? And will it make any difference if they do?

Any insights on why the Obama Admin pushed the financial “reform” bill before getting the report?

emptywheel January 8th, 2011 at 2:46 pm
In response to Scarecrow @ 41

And to piggyback on this as I’m coming in, what should happen w/Fannie Freddie now? (I’m through the early bits on the GSEs, but have not finished the book). It seems like taxpayer owned F/F are making decisions on profitability for the govt, but that’s a very short-sighted viewpoint that doesn’t account for all the additional damage such an approach is having in communities across America.

We’ve backed F/F w/no limits. How do we get out of that and how do we prevent them from being (as I think the recent BoA settlement was) more bailouts for teh banks?

Peterr January 8th, 2011 at 2:47 pm

Bethany and Joe, I’m curious about your impressions of the financial press before, during, and since the crisis broke.

A good chunk of the financial media strikes me as easily entranced by the spin from the companies they are covering. Sure, they’ll argue about whether the stock price guidance offered for next quarter is a shade too optimistic, but rarely were there questions raised about the wisdom of these “innovative” products.

Who, in your opinion(s), does a good job in covering Wall Street?

Joseph Nocera January 8th, 2011 at 2:48 pm
In response to Scarecrow @ 55

It seems that an awful lot of trends in American life have led to the shifting income to the wealthy. Blaming it all on financial innovation strikes me as a bit narrow.

Bethany McLean January 8th, 2011 at 2:49 pm
In response to Scarecrow @ 55

Yeah, it’s hard to argue with that. I see nothing wrong with Bill Gates being the richest man in America – he created a company that created tens of thousands of jobs and a ton of wealth. But how do you justify hedge fund managers earning billions of dollars a year? What is it that they contribute? I also see a valid role for an investment bank in matching companies who need capital with the supply of that capital. As twisted as some elements of the Goldman/Facebook deal are, it’s still more defensible to me than the trading business is. I just do not understand what that contributes to society. Do you think there’s a grand conspiracy behind this, or do you think it’s the way our markets have evolved, and people have taken advantage of it?

Nomi Prins January 8th, 2011 at 2:50 pm
In response to Bethany McLean @ 56

It is a tough situation, there are borrowers that are less and more risky, but the crisis compounded the behavior of lenders, and banks, and insurance companies that leveraged that risk in so many ways – when one part of the market can substantially leverage or demand an increase in the production of risky loans (the banks) and one part is supposed to back them (the agencies), this problem can’t end, or end well. Do you know what the current production of securitized products has been more recently? Not just after the crash when issuance stopped, but since?

missling January 8th, 2011 at 2:50 pm
In response to eCAHNomics @ 64

How do you bribe those whose wealth is the product of bribery? They own this administration and certainly have been deeply in bed with the previous two.

Bethany McLean January 8th, 2011 at 2:50 pm
In response to Nomi Prins @ 60

Very interesting…

Scarecrow January 8th, 2011 at 2:51 pm
In response to Bethany McLean @ 59

It is not a defense to a charge of burglary that you broke into a home of a rich person wealthy and clever enough to install burglar alarms. I think we should retire the “big boys” argument as a defense.

Goldman is essentially saying, we made deals with people who understood we were actively trying to deceive them, so that’s okay. No, it isn’t.

Joseph Nocera January 8th, 2011 at 2:51 pm
In response to Scarecrow @ 66

The old Pecora Committee actually aroused the public with its relentess hearings–hearings that exposed example after example of wrongdoing by bankers during the 1920s–that it helped paved the way for Glass Steagall and the formation of the SEC. This committee will have no such impact, no matter how good its report is. Don’t forget–in the 1930s, it took three or four years before we had new laws overseeing the financial landscape. This time, the Obama Adminstration didn’t feel as though it could wait that long (which has turned out be correct: with the House now in Repulbican hands, it would be impossible even to get a bill as tame as Dodd Frank passed today.)

missling January 8th, 2011 at 2:51 pm
In response to Joseph Nocera @ 69

Would blaming it on capitalism itself expand the field sufficiently?

eCAHNomics January 8th, 2011 at 2:52 pm
In response to Joseph Nocera @ 65

Growth during the 1980s & 90s was no stronger than during the 1950s & 60s, and, in fact a lot slower than the 1960s. 1970s are an exceptional decade owing to Arthur Burns & Richard Nixon caused inflation, & you can attribute part of the 1980s to correcting the inflation of the prior decade. And of course, there was almost NO growth in employment & slugging growth in GDP during the 00s. It’s a pretty straightforward macroeconomic record, actually.

On edit: I did not say the economy didn’t grow during periods of financial innovation. I said that it didn’t grow any faster during those periods than during periods of no financial innovation. So the marginal contribution of FI was zero.

Bethany McLean January 8th, 2011 at 2:52 pm
In response to eCAHNomics @ 64

Kinda funny – I think there was a piece by Calvin Trillin about this. wall Streeters used to be dumb – the guys who were captain of the football team, but not that bright. When I started at Goldman in 1992, I remember someone saying to me, this isn’t rocket science. But then really smart people started to go to work in finance! And that’s when all the trouble started. I like your idea.

Peterr January 8th, 2011 at 2:53 pm
In response to Bethany McLean @ 59

For Goldman traders to be calling this a shitty deal among themselves while turning around and encouraging others to buy this deal as a golden opportunity sounds like more than unethical behavior.

A securities adviser has a legal responsibility to act in the best interests of their client. But who is Goldman’s client? They have people who come to them and say “I’m trying to sell X — can you find me some buyers?” They have others who come and say “I’ve got Y to invest — can you advise me on where I should put it?” They also have shareholders who say “I own a part of this company, and I expect a return on my money.”

So when Goldman knows that X is a shitty deal, but pushes it on client #2 with Y to invest as something great, that’s fraud with respect to the advice they are giving client #2.

duncan January 8th, 2011 at 2:54 pm

Mozillo sold a big chunk of his Countrywide holdings before the bubble burst. He was also instrumental into pressuring FNM into the subprime game in 2005. I think that he, along with many of the big players, knew exactly what they were doing in trashing the economy for their own short term gain, and were not simply fallible men and women blinded by their own personality flaws, etc. Which seems to be a “meme” or something.

Bethany McLean January 8th, 2011 at 2:54 pm
In response to Scarecrow @ 74

I totally agree that it’s not OK. I also agree that the “big boys” argument is often code for just the kind of abuse you’re describing. Where I disagree with you is whether this is prosecutable fraud. Based on everything I’ve seen, I think that would be difficult. Which isn’t to say there isn’t more there.

Joseph Nocera January 8th, 2011 at 2:55 pm
In response to Bethany McLean @ 70

I definitely think it is the latter. to be honest, I don’t have a big problem with hedge fund compensation–if rich people want to pay them that much to manage their money, that’s not my problem. I do have a problem with a publicly-traded corporation putting aside 50 percetn of its revenues–revenues!–to give multi-million dollar bonuses to prop traders. Yet that is what many Wall Street firms do. I am very much not a conspiracy theorist, so yes, I think this is an evolution, driven in large part by both the rising of trading cultures inside Wall Street firms, and the change from private partnerships to public companies.

emptywheel January 8th, 2011 at 2:55 pm
In response to Nomi Prins @ 60

Can you expand on that. Was she suggesting that the reason why the FBI is sticking with the little guys is because they have been able to trace it up the chain to the big guys?

And any sense why Mukasey refused to nationalize any investigations, and Holder hadn’t been in a big rush to do so either?

Nomi Prins January 8th, 2011 at 2:56 pm
In response to Joseph Nocera @ 75

I would add that, during the Pecora hearings, Pecora actually did a lot more legwork, or at least through the transcripts, appeared to know the answers to his questions in advance, like a good Law and Order person. This commission just really didn’t seem to do that. I have examples in my new forward.

And to underscore Joe, the reform bill as it stands is tame – actually, it’s ineffective at getting to the roots of this financial crisis, or keeping another one from occurring. The banks are still as big (actually bigger) and complex as they were beforehand, and for all the minor regulatory adjustments in the bill (most of which will be lobbied about for years), the overall reform bill doesn’t reform banking.

Joseph Nocera January 8th, 2011 at 2:57 pm
In response to missling @ 76

very funny. (though I’m guessing you weren’t joking.)

Scarecrow January 8th, 2011 at 2:57 pm
In response to Joseph Nocera @ 69

I agree, there are other factors to account for the wealth shift.

But don’t most of them trace back to the fact that income/wealth have been concentrating in the financial sector? That’s where the profits are, and so the salaries and bonuses and greatest potential for upward mobility. So that’s where the Ive League talent heads.

Isn’t that source of their political muscle in Congress? Their ability to buy candidates and bribe the outcomes of legislation and/or regulations (or financial reform? The success of their revolving door with government (which you document well)? Their ability to structure the tax system to favor both the creation of their wealth and it’s protection from taxation?

It’s hard for me to think of a significant factor that isn’t connected.

eCAHNomics January 8th, 2011 at 2:57 pm
In response to Bethany McLean @ 78

I started on Wall St. in 1973. I won’t say my colleagues were dumb nor lazy, but they were leisurely. BTW, I moved to GS in 1976 when there were precisely 24 professional women, and that included the librarians. I still have the list of names somewhere in my attic.

missling January 8th, 2011 at 2:58 pm

Are we not really faced here with Marxian thesis of the internal contradiction of capital accumulation, and aren’t we at the butt end of it, hanging over the cliff, and staring ultimately into an abyss, just about now?

Bethany McLean January 8th, 2011 at 2:58 pm
In response to Peterr @ 79

I think your client number 2 is where your argument breaks down. The people who bought this stuff from GS weren’t defined as clients – they were defined as counterparties. So they weren’t coming to GS saying, can you advise me. They were supposed to be sophisticated investors who could make their own decisions. Of course, they weren’t, and everyone knew that, but the semantics provide legal protection. Please don’t get me wrong -this doesn’t excuse GS ethically. But it’s the way the bond market in particular has worked since time immemorial. (See the beginning of our GS chapter 17, where we quote Mike Vranos back in 1992.)

Cynthia Kouril January 8th, 2011 at 3:00 pm
In response to Joseph Nocera @ 75

Don’t you think that’s becasue there is not a compelling narrative being dished out in a way that 1) gets on every forn page every day, 2) is easily accessable?

During the Pecorra hearings, it was like the baseball world series or something, the country was riveted and the story was laid bout in such a way that anyone, even w/o experience in finance, could understand.

In this crisis we get bankers testifying to Congress “well it’s too complicated to explain” and Treasury Officals saying the same thing and Senators prefacing their questions with that phrase

It’s not too complicated to expali, that’s just a dodge that they are getting away with because the truth would be devestating. Without a good crossexsaminer to grillt hem in public, I don’t see a national concensus building to create the political climate necessary to bring on good regulatory legislation

Joseph Nocera January 8th, 2011 at 3:00 pm
In response to Nomi Prins @ 84

I agree with you Nomi–Pecora was the chief counsel of an actual Senate Committee, yet he ran it like a real investigation. The FCIC was an investigative body that was run like a Senate Committee. A shame. Its legacy is going to be the many, many great internal documents on its website that were culled from the companies they investigated. Which, I might add, Bethany and I took full advantage of.

Bethany McLean January 8th, 2011 at 3:01 pm
In response to eCAHNomics @ 87

Wow! Amazing history there.

Nomi Prins January 8th, 2011 at 3:01 pm
In response to emptywheel @ 83

yes, that’s pretty much what she was saying, plus she inferred that there is an issue that her division is looking for criminal fraud at the mortgage origination (and related) level, and there’s another division that looks at corporate fraud, I’m not sure if this means that at the FBI, like at any other big organization, silos prevent certain cross-examination (or prosecution) to occur. She struck me as understanding that there would be a basis for criminal investigations, but there was no concrete line to go by, and as a practical, priority workload matter, she had to go with what she could uncover.

Joseph Nocera January 8th, 2011 at 3:03 pm
In response to Cynthia Kouril @ 90

It’s not too complcated to explain, I agree (and I hope All The Devils proves!). But it is complicated, and that allows Wall Street off the hook, largely. But I also agree about the way the Pecora hearings played out like a long-running soap opera that had these great, shocking plot twists. Nobody in Washington has had the stick-to-it-iveness of something even like the Watergate Committee. So nobody can sustain a narrative that takes hold of the country. And everybody winds up with their own version of the narrative based around their own belief system. Which is how the country works overall these days, not just in response to the financial crisis.

Peterr January 8th, 2011 at 3:04 pm
In response to Bethany McLean @ 89

Even if they were counterparties, Goldman is under legal obligation not to misrepresent the product they are selling.

If a real estate broker is taking me through a house, and knows that the house has a leaky roof and a bad furnace in the basement, the broker can’t legally sit there and tell me the house is in great shape from top to bottom.

That’s precisely what Goldman did, which is why Carl Levin went ballistic with the “shitty deal” memo in that hearing.

Nomi Prins January 8th, 2011 at 3:04 pm

You talk about the role of rating agencies, from the standpoint of desire to gain market share of the deals that were being rated, as in direct contrast to past rating agency philosophies that wanted to maintain objectivity and independence of ratings from the companies being rated. Its a fascination aspect of the crisis. And ridiculous that ratings are still being used today for everything from business reports to capital requirements, after they got it so wrong, and are so conflicted. Can you explain what went on in the CDO run-up in this regard?

eCAHNomics January 8th, 2011 at 3:05 pm

Whatever happened to the Angelides Commish anyhow. After a couple of televised hearing they seem to have disappeared into the dust bin of history.

Joseph Nocera January 8th, 2011 at 3:06 pm
In response to Scarecrow @ 86

I don’t really agree that all the wealth is concentrated in the financial sector. A few years ago, the country was up in arms (correctly) about executive pay. Tech execs, Silicon VAlley venture capitalists etc. Chrystia Freeland has a cover story in the new Atlantic abgout “the new global elite” who operate by a different set of rules as the rest of us. (she’s writing a book about this aparently.) That strikes me as a better way to think about it.

Bethany McLean January 8th, 2011 at 3:07 pm
In response to Joseph Nocera @ 82

I agree with you in one respect about hedge fund compensation – if people want to pay that, that’s their business. But I do think it raises a question about the kind of world we live in where it is possible for so many people to make so much money without contributing to any broader form of wealth creation.

perris January 8th, 2011 at 3:08 pm

here’s a question I thought nobody would ever be able to answer but after reading the intro I see these authors mite

I have wondered if the puppeteers knew they were destroying the economy but thought their wealth return was worth that destruction or if they actually thought there would be no pain and suffering from their crimes

or worse, are they so depraved that they wanted to destroy middle class wealth so there would be a greater divide, are they intentionally creating the robber baron economy that these polices cleary develope

or the worst case scenario;

did they intentionally create a depression so that assets and money would “evaporate” so to prevent the inflation everyone was predicting would occur from borrowing so much money and printing so much paper to fund the war and those middle class asset give away’s marketed as “tax reductions”

finally, are they simply morons, not thinking the past would happen again, not thinking there would be some price to pay

a,b,c, or all of the above?

Nomi Prins January 8th, 2011 at 3:09 pm
In response to Joseph Nocera @ 91

You said: “Pecora was the chief counsel of an actual Senate Committee, yet he ran it like a real investigation. The FCIC was an investigative body that was run like a Senate Committee.” That was so very apparent. It seemed like the people on the commission were far behind, not just in their knowledge of the matters at hand, but also in having a cohesive outcome they were trying to reach, as was the case with Pecora. They had an extreme lack of unification, compared to say, anyone from Goldman that was questioned, who all kept to essentially the same script.

Bethany McLean January 8th, 2011 at 3:11 pm
In response to Nomi Prins @ 96

Based on interviews with lots of former analysts, the raters basically gave into the same race to the bottom that I alluded to earlier. This time, it was the triple A that mattered, not the name Moody’s or S&P. So the only way to get and keep market share was to stamp more of these things with a triple A. The business was immensely profitable for the raters, and since they were now public companies, or part of public companies, they had pressure on them to deliver results. The really scary thing to me is how hard this is to fix. Remember in the wake of Enron, where there was this whole hue and cry about reforming ratings, and exactly nothing happened? Seems like we’re headed in the same direction. There’s just so much pressure to keep the system the way it is. After all, big investors and the government like being able to blame the ratings agencies – they don’t want the responsibility.

Joseph Nocera January 8th, 2011 at 3:11 pm
In response to perris @ 100

For most of the housing bubble, I don’t think anybody thought they were destroying the economy, or even their own companies. But I do think there is a fair amount of evidence that as the end approached, there were lots of people who could see problems on the horizon, but had so much at stake personally they wouldn’t stop. Chuck Prince’s famous line epimoized this thinking, but it was surprisingly widespread.

RevBev January 8th, 2011 at 3:13 pm
In response to Nomi Prins @ 101

That’s very good…the way they all sound clueless, for example, when questioning a Supreme Ct. nominee…all grandstanding. How do you think their expertise could be improved? But when they are questioning their sponsors, it is hard to imagine much diligence.

Bethany McLean January 8th, 2011 at 3:14 pm
In response to Peterr @ 95

I could be remembering incorrectly, but I’m pretty sure that the “shitty deal” comment was in retrospect. So GS can argue, well, after the fact, we knew it was a shitty deal, but that doesn’t mean we thought it was at the time we were selling it. Again, I’m not defending them. But I think if this were easy to prosecute criminally, GS would be facing criminal prosecution already. The only caveat I’ll put on my thinking is that it isn’t over yet.

perris January 8th, 2011 at 3:15 pm
In response to Joseph Nocera @ 103

there was so much warning, everyone was telling us there was a bubble, everyone was telling us the bubble would collapse

even I knew it joseph, I instructed my dad to take out a home equity loan, I told him;

“they are going to give you half a million dollars on a house worth 250,000, take the money, try to sell the house, if we can’t let the bank have it

this was the strategy among so many people “in the know” and THAT’S what crashed the housing bubble as fast as it crashed, it shouldn’t have come down as fast as it did but for that, banks lending against value that wasn’t there and people smart enough to take the banks rediculous bet

Nomi Prins January 8th, 2011 at 3:15 pm
In response to Bethany McLean @ 99

and moreover, what happens when their funds help catalyze broader economic destruction. IN the Long Term Capital Hedge Fund debacle, as you write in Devils, a bunch of bankers (except Bear Stearns), with Alan Greenspan involved, got together and put up their own money to bail out some bad bets that would have wider than Long Term ramifications. Its a key difference that then, bankers bailed out their hedge fund counterparty, whereas this time around, yes the issues were broader, but a variety of federal regulators and areas, did the bailing and supporting, perhaps not of hedge funds, but of companies that operated like them or contained them. A lot of people have questioned whether the Bear funds, and firm, was allowed to burn because it didn’t put out during Long Term, what’s your take?

Bethany McLean January 8th, 2011 at 3:16 pm
In response to Joseph Nocera @ 103

I think there’s probably a little bit of (a) in what happened. some people involved knew the end would be bad, but they knew they could make fortunes for themselves while the getting was good. I doubt (b) and (c), though, mainly because I think most people simply aren’t that smart.

perris January 8th, 2011 at 3:17 pm

I also wonder if those people understand this is actually a depression not a recession and the media is simply afraid to say it since that would make matters even worse

perris January 8th, 2011 at 3:19 pm

I was that smart long before the crash, I had given the advice about two years before the market burst

I doubt I am smarter then they are

correction, I know I am smarter then they are but I don’t think they are that much stupider then me to know realize what was going to happen

ahennigan January 8th, 2011 at 3:20 pm
In response to Bethany McLean @ 49

As discussed in Johnson’s and Kwak’s 13 Bankers, besides outright fraud, perhaps most importantly in understanding this culture of fraud is a pervasive free-market/neoliberal ideology that informs political and business leaders opinions and decisions. An ideology that focuses on Wealth Creation, rather than productivity. Admittedly, wealth creation can spur productivity, but in the present circumstance, acute concentration of wealth is starving productivity. Sadly, it appears that neoliberal attitudes, despite an ebb during the immediate crisis in 2008, is now strong as ever, at least when listening to our political and financial class.

Joseph Nocera January 8th, 2011 at 3:20 pm
In response to perris @ 109

Depressions have specific definitions, and the media does not feel it has the expertise generally to step outside those definitions. There is much you can blame the media for, but not that, I think!

Bethany McLean January 8th, 2011 at 3:21 pm
In response to Nomi Prins @ 107

I suspect there was a tiny bit of that at work in what happened at Bear, yes. never discount the power of human emotions! But I think the bigger reason Bear wasn’t bailed out by its peers is that everyone was scared for their own skin at that point. It wasn’t like LTCM where the other firms had the capital to give. The story is a little different with the Bear hedge funds. I don’t think the rest of the Street was smart enough to see it as the beginning of the end for everyone. They were all grabbing for what collateral they could, and didn’t see the effect that doing so would have on their own marks.

Nomi Prins January 8th, 2011 at 3:22 pm

The government currently in the position of having transformed their implicit, or as I think you point out in the book, not even necessarily so, to an implicit backing of Fannie and Freddie to the tune of $6.8 trillion. Now, its rather unlikely that the remaining mortgage portfolios at the GSE’s will go totally belly up, but what do you think is a reasonable interpretation of future risk, considering defaults and foreclosures are still rising, and many new homes being purchased are bank owned?

Bethany McLean January 8th, 2011 at 3:22 pm
In response to ahennigan @ 111

Interesting. I’ll do some homework on that.

perris January 8th, 2011 at 3:23 pm
In response to Joseph Nocera @ 112

when everyone’s buying power has been reduced or depressed even though their production as increase

when real assets have declined or depressed

when national investments have declined or depressed

when people have to have two incomes where once they only needed one

when people have to work longer to have enough assets to retire

there really is no way to consider it anything but a depression

relying on the wealthy expansion of their assets as a benchmark is nothning short of self serving and assinine

Scarecrow January 8th, 2011 at 3:23 pm
In response to Joseph Nocera @ 112

Joe and Bethany — speaking of the media, after researching/writing this book, and having followed the media coverage of the financial meltdown and reform efforts, where do you see the media in general doing a good job in describing this and where do you think they’ve fallen down? Whats is/are the biggest thing(s) they keep missing?

gigi3 January 8th, 2011 at 3:23 pm
In response to Bethany McLean @ 62

I first met Angelo Mozillo soon after he and Dave Loeb sold United Mortgagee in Virginia Beach and started Countrywide. My boss at the time had been the serving manager at United. Mozillo was singularly driven to grow Countrywide into the largest originator/servicer in the country. He always impressed me a “the ends justify the means” kind of guy. He had a captivating personality which naturally drew people to him.

I am reminded of the psychopathic personality described in a book I recently read, Political Ponerology. One of the points it makes is that politics does not necessarily corrupt people, but corrupt (psychopathic personalities) are drawn to political office. One can make the same argument for many people who go to any lengths to succeed in business.

Joseph Nocera January 8th, 2011 at 3:25 pm
In response to Nomi Prins @ 114

Bethany is the world’s leading journalistic expert on Fannie and Freddie. My own, less informed, guess is that Fan and Fred will continue to post losses from their own subprime portfolio (though one suspects that a lot of those losses have already been taken). But going forward? New mortgages are very tightly drawn, with old fashioned payments, and extensive documentation to make sure the borrower can pay the money back. It is true that Fannie and freddie are guaranteeing the vast majority of mortgages in the US–without which the housing market would collapse–but I’m betting the credit risk is more akin to what it was like before the rise of subprime.

Bethany McLean January 8th, 2011 at 3:25 pm
In response to Nomi Prins @ 114

I don’t know how to make an educated guess on that. If you had access to loan by loan data at the GSEs, you could do a range of additional declines in home prices, the cost of the forced restructuring of mortgages that the GSEs now have to do, and dividend payments to the government, and stack that against the incoming money of new guarantee fees. But the home price variable is so huge – I still don’t know how you’d end up with anything other than a big estimate. Any ideas on your end?

Scarecrow January 8th, 2011 at 3:25 pm

And a follow up question: both of you have been following the financial industry and began as experts. What, if anything, most surprised you after doing the research/writing?

mzchief January 8th, 2011 at 3:26 pm

For Joseph Nocera @ 103: I can’t agree with your statement. Corporate design, planning and contacts changed perceptibly in time for the 1990s and were perfected for the 2000s. An enterprise IT system such as PeopleSoft (“Corp-in-a-box”) is an example of the “innovation” for getting in, gobbling up dollars available in the sweet spot of the bubble then getting out.

eCAHNomics January 8th, 2011 at 3:27 pm

It’s the timing that’s the problem. I left Wall St at the peak of the dot-com bubble becuz I lost an internal political battle & they paid me to leave. I sold my tech stocks in 10/99 becuz I knew it was a bubble & didn’t want to get caught in the 10/87 one-day crash again. After I sold those stocks, NASDAQ went up for another 6 months & 50%. If it hadn’t been my own portfolio, I would have lost my clients. That’s why professionals all miss bubble peaks when every amateur knows it’s a bubble. A 2-quarter miss, on something that can’t be timed, is lethal for pro careers.

Peterr January 8th, 2011 at 3:28 pm
In response to Bethany McLean @ 78

Calvin Trillin’s piece is here.

It’s a great read, and I fear devastatingly on target.

perris January 8th, 2011 at 3:28 pm

I want to add;

comparing all depressions against “the great” depression means the great depression wasn’t great it was a benchmark for the minimum

the great depression is not the benchmark for how low an economy has to be before we consider it a depression, the great depression defines how bad a depression can get, there are quite a few leveles bellow the great depression

calling this economic situation “the great recession” is simply code for “this is a depression we just don’t want to say it”

Joseph Nocera January 8th, 2011 at 3:28 pm
In response to Scarecrow @ 117

I think the media has done quite a good job in covering the financial crisis, and exposing many of the practices that led to the crisis. But we didn’t do nearly enough in exposing those practices prior to the crisis. I myself, I am sad to say, didn’t even know what a CDO was until the crisis. I think what the media has most missed–and what I found most shocking in the research for All The Devils–was the extent to which Wall Street was pulling the strings in terms of the subprime lending that was being done on Main Street. Wall Street had “hand,” as Seinfeld would say–if it didn’t buy the loans, the originators like New Century couldn’t make them. So if Wall Street said, “lower your underwriting standards” they responded by saying, “how low?”

Bethany McLean January 8th, 2011 at 3:29 pm
In response to Scarecrow @ 117

I guess I’m more of a defender of the media than most. I think the media did a GREAT job of covering the bubble in the housing market. (I’m speaking specifically of the business media, not TV shows like sell this house, or whatever they were called.) I also think the media did a decent job of warning about the leverage at banks. What we all missed was the size and scope of the securitization machine and the fragility of the shadow banking system. you can look at that in two ways, and either defend the media by saying that absolutely no one else got the scope of the potential problem either, or you can criticize the media by saying it’s the media’s job to put things together when others don’t. Frankly, I can argue that both ways.

ahennigan January 8th, 2011 at 3:30 pm

Well it might go without saying, but if your homework evolves into another book, please feel free to reference me in your acknowledgments section. You’re welcome in advance!

Joseph Nocera January 8th, 2011 at 3:30 pm
In response to mzchief @ 122

Hmmm…. do you think PeopleSoft is an example of senseless financial innovation?

Nomi Prins January 8th, 2011 at 3:30 pm

I think you’re right, we’d have to know what they’re holding on a more specific basis, but also come up with a more realistic evaulation of the risks, I haven’t come across any statements or explanations of how they’d be assessing their risk, and downside, differently now than during the crisis. Plus, it seems the additional risk to consider is how much securitized product is parked now, we know that the Fed has $1.25 trillion in various MBS and ABS securities, the Treasury and Fed have some other investments directly in GSE deals, and what’s less known, is what happened to all the paper held by longer term asset management or pension funds, not CDOs perhaps, but other securitized product. I fear there’s a lot out there that’s artificially holding prices up, in addition to the continued flow of defaults and foreclosures. something to ponder.

Bethany McLean January 8th, 2011 at 3:32 pm
In response to Scarecrow @ 121

bluntly, I was more inclined to blame homeowners when I started the book. I was, and am, a huge believer in personal responsibility. But I was shocked by the extent to which these bad loans were sold. a big thing for me was these internal wamu documents showing their salespeople how to convince customers who wanted a 30 year fixed rate to take out option ARMS instead, because wamu could make more money selling those. I was also stunned by the extent of the consumer advocacy as early as the 1990s, arguing all across Washington not just that this was predatory lending, but that it was ultimately dangerous for the banking system. And as we all know now, the regulators and the politicians did precisely nothing.

Peterr January 8th, 2011 at 3:32 pm

The timeline as Dayen described it in my comment above says that emails pushing Timberwolf as a top priority were just days after the shitty deal memo was written. It was the reason to push the deal — get it off our books! — not a judgment made in retrospect.

As for why it hasn’t been prosecuted already, I’ve got no clue. Or at least no evidence to back up any wild guesses.

Joseph Nocera January 8th, 2011 at 3:33 pm
In response to Nomi Prins @ 130

Cliff Asness and others say that the government guarantees proferred by Fannie and Freddie are, in fact, artificially holding prices up. And that the crisis won’t truly be over until we stop propping up housing prices, and get them to a place where banks are willing to make mortgages again without government support. I sincerely hope he’s wrong–after all, the government has been involved in the housing market for a very long time. But I do fear that he just might be right.

perris January 8th, 2011 at 3:33 pm
In response to Joseph Nocera @ 126

Wall Street was pulling the strings in terms of the subprime lending

one of my good friends sold money at that period, he used to (in good faith because he believed it) talk people into subprime loans, variable rate that he was certain they could refinance on the equity and pay off the loan when they jump hit

that was how he was instructed to sell the loans and he could get anyone money, all they needed to do was apply and he could get their credit rating raised enough to qualify

the lending industry was dying to give lend away their money to people they knew as a fact could’t pay the loan

I am guessing they just wanted to sell the loan before the crap hit teh fan

eCAHNomics January 8th, 2011 at 3:33 pm

Guessing you’re not intimately familiar with the economic consequences of the ‘market’ imperfection of asymmetric information.

Scarecrow January 8th, 2011 at 3:34 pm
In response to Joseph Nocera @ 126

I think that’s a critical point — that Wall Street started demanding that the mortgage originators feed the securitization process.

Was there a key moment, a transition point when Wall Street moved from just securitizing what’s normally out there to demanding that sub-prime or worse be created to feed the securitization hog? When did that happen, and what should we have noticed when it did?

Bethany McLean January 8th, 2011 at 3:34 pm
In response to Peterr @ 124

Thanks for finding it! I remember reading it at the time, but wasn’t sure where.

gigi3 January 8th, 2011 at 3:34 pm
In response to ahennigan @ 111

Michael Hudson makes the same argument about starving productivity in this article written almost two years ago.


Nomi Prins January 8th, 2011 at 3:34 pm
In response to Joseph Nocera @ 126

That’s exactly the phenomenon I described in Pillage and earlier work, product is always driven from the top, because that’s where the demand is most acute; the worse the product , i.e the more complex the loan, the more spread to Wall Street.

But, how do you think that’s changed? or has it? Seems like right now, there’s a whole bunch of ‘distressed asset’ desks hiring on the Street, one could argue they are looking to structure deals of assets already distressed or in default, but on the same logic a lot of people missed, could their demand not force more assets, or loans, to degrade, because there’s no financial incentive from the banks, to remedy them – there’s money waiting on the other side?

Bethany McLean January 8th, 2011 at 3:35 pm
In response to Nomi Prins @ 130

Agreed! Let’s discuss over drinks.

mzchief January 8th, 2011 at 3:35 pm
In response to mzchief @ 122

The word “contacts” is also true but also think “contracts” when you read the statement.

Joseph Nocera January 8th, 2011 at 3:36 pm
In response to Peterr @ 132

The government did get $500 million out of Goldman for that, so it wasn’t completely ignored. But I would like to stress what Bethany has said: these cases are really really hard to prosecute. You don’t think the government wanted to put Joe Cassano in jail, for instance. Justice spent two years trying to build a case against him, and finally gave up. It concluced, I think, that he did’t something dumb rather than something criminal–even though the consequences of his actions nearly brought down the financial system!

Bethany McLean January 8th, 2011 at 3:36 pm
In response to eCAHNomics @ 135

More now than when I started the book. Although I have been doing this for a number of years, researching it was an education for me in many ways.

Nomi Prins January 8th, 2011 at 3:36 pm

That reminds me of another stunning point in Devils – can you talk a little about the push-back that happened when Georgia and other states, decided to try to pass legislation to better regulated loan integrity – and what a shit storm that created with lenders and lobbyists? I don’t know if many people are aware of how many attempts were made to circumvent loan fraud that went nowhere in the scheme of profit motives at the lenders and banks

Joseph Nocera January 8th, 2011 at 3:37 pm
In response to eCAHNomics @ 135

no, that is not something i’ve ever gotten intimate with, though I understand the general concept.

Scarecrow January 8th, 2011 at 3:37 pm

That’s interesting. Dean Baker often says that only a few saw the housing bubble as it was occurring, but few paid attention, and that regulators/legislators ignored the signs and said later, “no one could have anticipated.” You suggest the media saw this at the time (is that what you mean?), which means the regulatory inaction at Greenspan’s Fed, OCC, etc is even less defensible.

Bethany McLean January 8th, 2011 at 3:39 pm
In response to eCAHNomics @ 123

Yup. I remember a former Wall Streeter walking me through the logic: I think this is going to end badly, but if I keep my mouth shut, I keep my seat, and I make millions. When it ends, I won’t have done anything worse than anyone else. If I act on my fears/suspicions, then I lose my seat and my millions. Easy decision for many people.

Bethany McLean January 8th, 2011 at 3:40 pm
In response to Scarecrow @ 146

Yeah, I disagree that no one saw the housing bubble. Go back and read Fortune, the Wall Street Journal, any business publication – I remember lots of bearish articles about housing. Where we failed was in realizing just how devastating the declines could be, and in making the connections.

Nomi Prins January 8th, 2011 at 3:41 pm
In response to Joseph Nocera @ 142

Do you think there’s any kind of conspiracy case to be made in any of these instances, maybe not with intent, maybe with it? Like, he didn’t intend to shoot the gun, but he was holding it when it went off ? Not to oversimplify, but we known, and you write extensively, that there was a motive to manipulate numbers, as there still is, for as long as possible to make as much as possible. IN Fannie’s case, that led to a $9 billion earnings restatement. In Cassano’s, a bailout. In Mozilo’s, a flameout – and many stranded homeowners that are combining in various class action suits, he got a fine, yes. But, do you see the line between ‘ gee, I didn’t really know’, and ‘I know but it’s not technically illegal’ to ‘it’s a crime’ ever changing?

Scarecrow January 8th, 2011 at 3:42 pm
In response to Nomi Prins @ 144

Yes, and during the early hearings on FinCrisisInqCom, state Attorneys General and securities regulators testified that when they tried to enforce rules on the books, they were stymied by claims of federal preemption, coming from those fed regulators who should have been stepping in but didn’t.

Bethany McLean January 8th, 2011 at 3:42 pm
In response to Nomi Prins @ 144

Yes, that was another thing that was stunning to me. I’m going to get the number wrong – it’s in the book – but I think at one point, 27 states were trying to pass anti predatory lending laws. They were stymied by federal regulators arguing preemption and by the lobbyists for the lenders. But don’t you think someone should have said, wait, if this many states think they have a problem, isn’t the problem real? Also along these lines is the Ameriquest settlement for $325 million in early 2006! Shouldn’t this have told everyone there was a massive problem? But no one cared. And Roland Arnall became an ambassador.

kspopulist January 8th, 2011 at 3:43 pm

what a fantastic discussion!
thanks to everyone, authors, hosts, participants!
Hooray for Journalism!
I want to buy your book!

econobuzz January 8th, 2011 at 3:44 pm
In response to kspopulist @ 152


Joseph Nocera January 8th, 2011 at 3:44 pm

I read a small book by Ned Gramlich about subprime that came out before the crisis (he had died by then). he was a former fed governor, for crying out loud, and had been worried about subprime for a number of years. But his book is completely about the devastating it brings about on Main Street–to home buyers and communities. There isn’t a word in it about the way it had infiltrated the financial system, and the damage it could do in that regard. I think very few people saw THAT connection.

Nomi Prins January 8th, 2011 at 3:44 pm

I left my Wall Street seat – never to have the potential to make millions again. It seems like the notion of staying in the game though, is paramount to the people that ultimately run and ran the firms in your book, and that brought upon the crisis. You cover this throughout the book, but what’s the one part of the DNA of Cassano, Mozilo, O’Neal, etc that keeps them going even when things are so obviously going to fall apart?

eCAHNomics January 8th, 2011 at 3:44 pm
In response to Joseph Nocera @ 145

You should study it. That particular ‘market imperfection’ not only explains why none of the blame should be placed on the borrowers and all on the ‘lenders’ in the housing bubble. It also explains why medical (and legal and higher ed) costs rise so much rapidly than other costs in the economy. The knowledge gap between buyer & seller gives the seller pricing power. It also helps the seller that the customer is vulnerable, esp in medical industry. But also in home ownership, which leaves the owner not only without a clue about the fine points about complicated financial instruments and therefore at the mercy of the lender. But also at the mercy of all the other home maintenance rip-off artists. The latter are small enough to result in owners whining and can often be overcome by personal recommendations. But docs & financial institutions can literally be existential threats, either to your life or to your financial well being. Stakes are high.

Scarecrow January 8th, 2011 at 3:44 pm

Ah, but those publications would be the last ones calling for greater federal intervention.

eCAHNomics January 8th, 2011 at 3:45 pm


Bethany McLean January 8th, 2011 at 3:45 pm
In response to Nomi Prins @ 149

I think Allstate’s recent lawsuit against Countrywide is really interesting. It didn’t get much attention, but Allstate actually went through a huge number – maybe 17.000 from memory? – of the underlying loans in order to prove that CW lied on the reps and warranties. I think that raises a question about whether the SEC let Mozilo, et al off the hook too easily. “They lied” – with proof! – is very different from “they didn’t make it easy for investors to see how much their lending standards had deteriorated.”

Joseph Nocera January 8th, 2011 at 3:45 pm
In response to Scarecrow @ 150

completely true! the OCC and the OTS viewed the banks as “their clients,” and they were even competing for banks to join their regulatory regime. (Greenspan heartily approved of this competition, btw.) Using federal preemption was a means to show the banks that they were on their side. Now that I think of it, this is one of the thigns that most shocked me in researching the book.

Peterr January 8th, 2011 at 3:45 pm
In response to Joseph Nocera @ 142

I’m not one who generally puts a lot of stock in David Brooks, but he certainly seems to have gotten it right in discussing Goldman’s strategy for those hearings:

This spectacle presents Goldman with an interesting public relations choice. The firm can claim to be dumb but decent, like the rest of the establishment, and emphasize the times it lost money. Or it can present itself as smart and sleazy, and emphasize the times it made money at the expense of its clients. Goldman seems to have chosen dumb but decent, which is probably the smart narrative to get back in the establishment’s good graces, even if it is less accurate.

Less accurate is an understatement.

Joseph Nocera January 8th, 2011 at 3:47 pm
In response to Nomi Prins @ 155

I think it was denial. I know there was greed involved, and other factors. But honestly, I think these guys couldn’t bring themselves to look the thing square in the eye. Instead they averted their eyes and hoped for the best. This was most obvious to me in the case of O’Neal, who had been through the Long Term Management Crisis and vowed, as he later put it, “to never let the bond guys do it to us again.” A few days before he was ousted, he told somebody, “The bond guys did it to us again.”

Bethany McLean January 8th, 2011 at 3:48 pm
In response to Nomi Prins @ 155

I definitely think so. Mozilo told a friend that he had two choices: not get into subprime lending and lose his job as Countrywide’s profits shrank, or get in. He felt like he had to keep up. On one level, that’s sort of understandable, but it’s also truly awful and frightening if people in Mozilo’s position don’t feel like they can or should be the ones to say no.

Joseph Nocera January 8th, 2011 at 3:49 pm
In response to Peterr @ 161

I happen to think David Brooks is quite perceptive about a lot of things. But that discussion is perhaps best left for another day.

eCAHNomics January 8th, 2011 at 3:50 pm
In response to Joseph Nocera @ 160

And ‘regulatory capture’ is worse today than in 2007, with Rs in D.C. asking lobbyists what they would like to see congress do.

Bethany McLean January 8th, 2011 at 3:50 pm
In response to Scarecrow @ 157

Yes and no. I think if anyone at those publications had seen where it was going, they certainly would have called for intervention. But they didn’t see it. So then you can ask, well, why didn’t they see it? Is it because they – rather we – thought too much like the people we covered? Maybe.

Nomi Prins January 8th, 2011 at 3:50 pm

It seems like as powerful as these guys considered themselves, or were, or wanted to be, that competitive streak clouded any judgement – if it was there to begin with.

hackworth1 January 8th, 2011 at 3:50 pm
In response to Joseph Nocera @ 164

What else could you say about a colleague? A stopped clock is correct twice a day.

Peterr January 8th, 2011 at 3:51 pm
In response to Joseph Nocera @ 164

Good idea.

And thanks so much to you, Bethany, and Nomi for *this* discussion — it’s been quite something!

Joseph Nocera January 8th, 2011 at 3:51 pm

I believe that MBIA is bringing the same kind of case against Countrywide’s owner, BofA, has had an interesting victory. Based on the loans they have looked at, the judge is going to allow them to draw statistical conclusions about the percentage of loans they can try to get BofA to reimburse. Let’s face it, 2011 is not going to be a lot of fun for Bank of America.

Scarecrow January 8th, 2011 at 3:51 pm

So — are we headed for the same cliff again? Are all the major factors that produced that last financial collapse still there?

Any faith in the “systemic risk” council?

And isn’t the present mortgage/foreclosure mess and it’s threat to putback of MBS a litmus test for that council?

perris January 8th, 2011 at 3:52 pm
In response to Peterr @ 169

man oh man, these guys read fast, type fast and this is frigging great

Joseph Nocera January 8th, 2011 at 3:53 pm
In response to perris @ 172

time flies when the q’s are coming fast and furious. I didn’t feel like I could keep up!

BevW January 8th, 2011 at 3:53 pm

As we come to the end of this great Book Salon,

Bethany, Joe, Thank you for stopping by the Lake and discussing your new book and the Financial Crisis.

Nomi, Thank you very much for Hosting this great Book Salon.

Everyone if you would like more information:
Bethany – Wiki

Joe – Wiki


Nomi Prins – website

Thanks all,
Have a great evening.

Nomi Prins January 8th, 2011 at 3:53 pm

This has been an amazing discussion, thank you both so much. I hope everyone buys All the Devils are Here if they haven’t already.

We do have a few minutes left. I wonder if each of you could provide your thoughts on:

Can this happen again? Has anything really changed? Where do we go from here?

(or anything else you’d like to add :) )

Joseph Nocera January 8th, 2011 at 3:53 pm
In response to hackworth1 @ 168


Bethany McLean January 8th, 2011 at 3:55 pm
In response to Scarecrow @ 171

I’ll take one piece of that as a farewell comment. I have very little faith in the systemic risk council. The only people who see inconvenient things are skeptics and outsiders. Those sorts are always kind of crazy (and I mean that as a huge compliment), and they don’t land in political jobs like being members of a systemic risk council! I think it would be very hard to have a truly independent thinker land in that slot – and even if so, harder to believe anyone would listen to him/her.

hackworth1 January 8th, 2011 at 3:55 pm
In response to Joseph Nocera @ 173

You are much quicker (in every sense of the word) and more responsive than either Harry Reid or Hillary Clinton.

Joseph Nocera January 8th, 2011 at 3:56 pm
In response to Nomi Prins @ 175

I most certainly think this could happen again. Dodd Frank only changes things on the margins. Wall Street incentives haven’t changed on iota, and the essential system remains in place. (like the Depression, when the system was dramatically changed by new laws designed to prevent another crash.) Right now, fear still pervades the system. But it will eventually go away, replaced as it always is by greed. And then–head for cover. Thank you all for joining us today. This was a lot of fun.

Scarecrow January 8th, 2011 at 3:56 pm

Much thanks to Joe, Bethany and Nomi — great discussion.

Buy the book, folks. It’s a great read, often like a fine mystery each chapter, and a terrific history/resource.

RevBev January 8th, 2011 at 3:57 pm

I think it is really scary that all these smart people have so little confidence that the system will really work better and with any more integrity…that’s my take.

Rayne January 8th, 2011 at 3:58 pm

Wow. I haven’t been able to keep up let alone ask a question — but then I haven’t needed to. It’s great when a book salon generates so much discussion and information in an organic fashion.

Thanks to Bethany, Joe and Nomi for this great discussion.

Bethany McLean January 8th, 2011 at 3:58 pm
In response to Nomi Prins @ 175

The more things change, the more they stay the same! Seriously, I’m not even sure we can go with the first part of that, and after Enron, I’m wary of spouting off about lessons learned. The worst piece I ever wrote was after the conviction of ken Lay and Jeff Skilling – I opined on how this would change behavior across the business world. Ha.

Bethany McLean January 8th, 2011 at 3:59 pm
In response to Scarecrow @ 180

Thank you all so much!

Peterr January 8th, 2011 at 3:59 pm
In response to Nomi Prins @ 175

Unless there are serious legal and financial consequences for those who played fast and loose with the legal system, it will indeed happen again.

Dodd-Frank, while passed, has not been funded by Congress — and the way things are going, what limited reforms it has will be gutted before it gets funded.

Sebastos January 8th, 2011 at 3:59 pm
In response to eCAHNomics @ 156

It looks to me as though “asymmetric information” is why capitalism as a whole cannot work. What makes anyone think that adequate regulation of the market is even possible in the long term? Isn’t that just an article of faith? As long as large pools of private capital exist, and corporations are allowed to act in secrecy, they will manage to keep the system complex and obfuscated enough that no one can catch them robbing us blind except after the fact (as this whole discussion illustrates). Regulators will be bribed not to regulate effectively, legislators will be bribed not to write laws that allow the guilty to be prosecuted, academics and the media will be bribed to conceal the truth. And the public and the few not susceptible to bribery will be unable to keep track of it all for very long (again, except after the fact). Keeping information asymmetric is just a (relatively minor) cost of doing business.

The only solution is to abolish the whole system of private capital, business corporations, and trade secrecy that makes it possible. When you’re being cheated, you kick over the table and end the game.

Nomi Prins January 8th, 2011 at 3:59 pm

Thanks again Bethany and Joe.
And to everyone for their wonderful comments and questions! Sounds like we’ll meet here again in the future.

jpe12 January 8th, 2011 at 4:00 pm

Thanks for coming out, all.

Two quick questions: (1) any ideas if the next systemic blowout is on the horizon? Any ideas what asset class or structure will drive it?

(2) Dodd-Frank seems to have two disparate aims that are in tension: (1) prohibiting banks from taking on risk via the Volcker rule, on the one hand, and (2) requiring them to take on risk via the requirement that they keep 5% (IIRC) of securitized assets on their balance sheets. Do you have any takes on which competing vision – requiring risk to prevent moral hazard or prohibiting to the extent possible – is the better regulatory regime?

SanderO January 8th, 2011 at 4:00 pm

Our capitalist system is a ponzi scheme. No good intentions come from people who are in pyramid schemes.. fractional reserve banking in the hands of a few banks is the cause.+

hackworth1 January 8th, 2011 at 4:00 pm
In response to RevBev @ 181

Agree. To our credit, most FDLers knew we were being conned with FinReg just as we were conned with HCR, Democratic Majorities, Obama and Change we can believe in. Another great crash looms, because nothing has been done to prevent it.

eCAHNomics January 8th, 2011 at 4:04 pm
In response to Sebastos @ 186

abolish the whole system of private capital,

and replace it with what? A gubmint run system which is accountable to no one?

Sebastos January 8th, 2011 at 4:11 pm
In response to eCAHNomics @ 191

A gubmint run system which is accountable to no one?

Do you really think the government is inherently accountable to no one, as opposed to being unaccountable at present because it’s bribed to within an inch of its life? All I’m proposing is to make economic production subject to the same democratic controls as the rest of the things the government does – and to give those democratic controls a chance to work by removing the source of the bribes.

No, it’s not guaranteed to work. But the present system is guaranteed not to.

eCAHNomics January 8th, 2011 at 4:28 pm
In response to Sebastos @ 192

Do you really think the government is inherently accountable to no one,

Yes. In the absence of a mixed system, you would have to rely on a benevolent dictator to make the govt accountable. History of benevolent dictators not so great, not very many.

Absolute power & all those cliches….

PeasantParty January 8th, 2011 at 4:30 pm

Thanks! Excellent Book Salon!

Sebastos January 8th, 2011 at 4:43 pm
In response to eCAHNomics @ 193

Time to rethink the clichés. Madisonian separation of powers, Madisonian checks and balances, don’t depend in any way on a market economy. Eric Patton has an interesting diary “It’s capitalism” open now, where there’s discussion of various alternatives to capitalism.

But at present the point isn’t the alternatives themselves – it’s the clichés. I continue to be astonished at how thoroughly the capitalist meme gets itself hard-wired into people’s brains. What does it take for people to reconsider whether the need for it, and the unworkability of any alternatives, has really been established? This whole Book Salon – and especially your point about “asymmetric information” – has been one long object lesson in the unworkability of capitalism, yet few draw the conclusion.

Karin January 8th, 2011 at 4:53 pm

I was just lurking here, but what an education!

DWBartoo January 8th, 2011 at 4:59 pm

Excellent Book Salon.

eCAHN, you rock.

Would be most interested in what, if anything, you imagine might be a possibly better economic system?

At present, the “system” serves only the elite, and given that this nation produces little actual wealth, the means of “production” having been offshored, along with jobs; in future, one imagines that the new global neo-feudal system (those “different” rules) will not serve democracy nor humanity very well.


eCAHNomics January 8th, 2011 at 5:42 pm
In response to Sebastos @ 195

And what makes you think that if all power devolved to the govt, that voting or separation of powers would continue to exist in any form whatsoever?

eCAHNomics January 8th, 2011 at 5:44 pm
In response to DWBartoo @ 197

Oh, I think a mixed system is the best of bad alternatives humans can hope to achieve. Not expert enough in history to know how humans happen to fall into that particular sweet spot from time to time, nor do I see anything other than complete disaster for U.S. economy. Unfortunately, it will take a lot longer to play out than many think or hope. YMMV.

Sebastos January 8th, 2011 at 6:42 pm
In response to eCAHNomics @ 198

Apples and oranges – “all power devolved to the govt?” How does the elimination of private capital bring that about? The government still faces the voters as usual, and no one piece of the government ever has all the power. Quite the contrary – a “mixed” system is a complete illusion, and inevitably ends up with business owning the government, as we are now seeing.

DWBartoo January 8th, 2011 at 8:02 pm
In response to eCAHNomics @ 199

I agree with your assessment(s).

Especially regarding disaster … and time.

Your comments obtain significant milage, eCAHN … in my experience.


papau January 8th, 2011 at 8:24 pm

The term “wrap” is usually used in the insurance business for annuity that were designed to use (“wrap”) a given group of assets so that investors in those assets got favorable annuity taxation treatment from the IRS. I was not in the derivatives side post the simple interest derivatives of the late 70′s and early 80′s. Indeed option treatment was the rage when I last – long ago – looked at the math, so perhaps the use of “wrap” as a credit risk assumption contract developed after I left.

By the way, AIG went from insuring home loans credit risk for a fee to issuing credit default swaps – with the latter the reason for the majority of its problems.

The original “credit default swap,” was just a variation on what bankers and others in finance had been doing for a while to hedge against fluctuations in interest rates and commodity prices.

As to JP Morgan and BISTRO in 1997, that was just taking 300 different very good loans, totaling $9.7 billion, that had been made to a variety of big companies like Ford, Wal-Mart and IBM, and cut them up into pieces known as “tranches” (that’s French for “slices”). The bank then identified the riskiest 10 percent tranche and sold it to investors in what was called the Broad Index Securitized Trust Offering, or Bistro for short. The Bistro was put together by Terri Duhon.

While Wall Street likes to pat itself on the back, their variation on hedging – this time hedging for credit risk rather than interest rate change – was no big deal, although the “tranche” concept was new. in the 1970′s when my friends Clancy and Tilly at the Hancock discussed it and published the math/options theory (and Tilly went on to be a principal and head of the Wall Street actuarial Department that priced these investments), this was just a way to sell collections of bonds and get bigger fees. Banks that made – and then sold to the FHA, mortgage loans had no credit risk. It was those Banks that wanted to make loans that broke FHA rules that needed these innovations.

Somehow what was done in securitization in the 70′s and 80′s has been lost down the memory hole – perhaps because it was all good as it freed up monies for mortgages in the US in a Reagan first term that would have seen a Great Depression without the innovation.

It was not until the Bush election that I began to hear of offerings that used “C” bonds and called the offering triple A. Indeed a chart of the problem shows that Bush ending effective supervision in the government as Greenspan refused to develop supervision at the Fed in 2003 led quickly to “liar” loans. Note should be made that low income community loans never showed a major problem – the claim that they did is just a GOP lie. Likewise the claim that the 2004 scandal investigation of the FHO, with Barney and others defending the FHA concept, showed Democratic involvement forgets that the “scandal” was a CEO salary and benefits scandal and had nothing to do with liar loans (which at the time could not be sold to the FHA).

Sebastos January 9th, 2011 at 10:08 am
In response to eCAHNomics @ 198

What makes you think that the existence of private capital contributes anything whatsoever to checks and balances, or to separation of powers? In the 18th-century environment dominated by small proprietorships, Madison may have had a reason to think so, but no one today does – least of all at the end of a discussion like this Book Salon.

The Madisonian idea is that the government is divided into pieces that keep watch on each other for deterioration toward autocracy, and the only common influence on all of them is the voting public. Divide and conquer. That will not work, as we have seen here, when Big Money acts as a unified force pushing all the pieces of government in the same malignant, autocratic direction.

There is no guarantee that separation of powers can work in a socialist society. But if it can’t, then it certainly cannot work in a capitalist society either.

If Madison were alive today, he would be a socialist.

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