[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. ]
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.