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Eph Bookshelf #10: All the Devils Are Here

With All the Devils are Here, Bethany McLean ’92 has likely landed herself atop the list of best-read Eph authors of 2010. All the Devils are Here is a highly-readable primer on the pre-history of the financial crisis. In a tightly-wound 364 pages, the book demystifies the companies and financial instruments at the core of the financial crisis while providing illuminating sketches of many of the central personalities.

McLean and co-author Joe Nocera, a New York Times financial columnist, trace the converging narratives of the principal players: the real-estate market lenders and originators creating subprime (and higher-caliber, but similarly flawed) loans, the Wall Street companies investing in and securitizing these loans and related products, and the government-sponsored enterprises (GSEs, most prominently Fannie Mae) competing with the private players. Their account goes back thirty years to the beginning – the securitization of loans that allowed lenders to divorce themselves from their interest in loan repayment and reduce the importance of repayment ability in lending.

Step-by-step, the authors explain the evolution of the motivations and weaknesses of each set of players. Financial institutions sought to reduce the measurable risk on their balance sheets to free themselves from the cages of capital requirements and to supercharge their profits by expanding the universe of financial transactions. Mortgage lenders, disrespected by elite financiers as mere salesmen, pressed for market share, profits, and a position as a necessary partner in Wall Street’s success. Meanwhile, the leaders of Fannie Mae and Freddie Mac — well-connected former politicians enjoying a well-paid respite or second career without having to leave the Beltway — sought profits using their unique skills as first-rate campaigners, lobbyists, and arm-twisters. What makes this entertaining are the colorful personalities and the maneuvering as the players engage in an unending struggle for competitive and political advantage; what makes it dramatic is the knowledge that all involved are heading for a cliff that some can see — but only in theory while others can’t see it at all.

Unusually for a popular business history of this sort, McLean and Nocera avoid the mistake of conflating the personalities and attitudes of individual business leaders with the culture of their companies. It’s true that one often has a profound influence on the other, but All the Devils are Here is careful to distinguish Angelo Mozilo, for example, from Countrywide, the mortgage lender he created and with whom he is often synonymous.

Curiously, McLean and Nocera often fail to extend this analytic approach to government officials and the regulators they represent: the Treasury Department, OFHEO (the GSE regulator), the Office of the Comptroller of the Currency, and others are often portrayed as being mere extensions of their leaders’ wills and mostly-perfect executors of their wishes. This shortcoming is part of the authors’ larger blind spot: immersed in what they describe as market failures, they often fail to recognize both the contributions of regulatory measures to those failures and the pernicious consequences — predictable and unpredictable — of regulatory failures. For example, the authors brush aside the government’s role in creating the disastrous bond-rating oligopoly as excused by the need to protect against “fly-by-night bond raters.” Similarly they repeatedly assume that if only regulators were uninfluenced by politics and ideology, they would have recognized the risks and acted to save the day. It’s a dubious conclusion — particularly because, as they recognize, increased home ownership is consistently treated by liberals and conservatives alike as a noble and worthy goal — and they may even be right.

That isn’t to say the McLean and Nocera don’t take the time to explore the depths to which politicians and financial companies were inextricably intertwined in the history of the financial crisis.Fannie Mae is revealed as masterfully politically manipulative, under the successive leadership of Democratic politicians and fundraisers such as Jim Johnson, Franklin Raines, and Jamie Gorelick, not to mention the occasional Republican. McLean and Nocera also take note of Ameriquest’s skillful use of Massachusetts Governor Deval Patrick; and the overlap in leadership between the government, Goldman Sachs (Hank Paulson, Bob Rubin), Citigroup (Rubin again) and other Wall Street companies is difficult to miss. But in contrast to their treatment of Wall Street on its own, the authors don’t try to analyze these relationships and draw any larger conclusions.

Other books on the financial crisis treat individual players, industries, and events in greater depth. Of the books I’ve seen, however, All the Devils are Here successfully does what none of the others do — stitch the pieces together into an overall quilt that can be understood from a distance. Although All the Devils are Here occasionally leaves the reader longing for more nuance or more detail, it’s a very worthwhile and useful descriptive account.