NY Times Book Review of "All The Devils Are Here"

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johnkarls
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NY Times Book Review of "All The Devils Are Here"

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NEW YORK TIMES BOOK REVIEW OF "ALL THE DEVILS ARE HERE" By Bethany McLean and Joe Nocera ("Devils" is available from your local library, or from Amazon.com for $11.10 + shipping)

New York Times - 11/19/2010
Welcome To The Casino
By Paul M. Barrett -- Assistant Managing Editor of Bloomberg Business Week

Two of our finest business journalists have written a thorough account of the origins of the financial crisis of 2008. More than offering just a backward look, it helps explain the most troubling business headlines of the moment, as well as those that are certain to come. For starters, there is the unfolding foreclosure-paperwork fiasco. Next up will be a clash over whether big banks should be forced to take back billions of dollars in contaminated mortgages they sold. Down the road, we will no doubt confront the danger of the next asset bubble inflating as a result of the Federal Reserve's use of extreme monetary policy to stimulate the economy. These continuing and future problems are all symptoms of a larger syndrome whose origins Bethany McLean and Joe Nocera ably chronicle in "All the Devils Are Here: The Hidden History of the Financial Crisis."

The title alludes to a line in "The Tempest" ("Hell is empty, and all the devils are here"), and fiends surely abound: subprime sleaze kings; bonus-happy Wall Street plutocrats; and, of course, Alan Greenspan, the fallen maestro of the Federal Reserve, whose see-no-evil free-market ideology made a virtue of unchecked financial recklessness.

For those readers who have not immersed themselves in the murky tale of the way dubious housing finance became entangled with Wall Street's casino culture, McLean and Nocera offer as legible an overview as exists. McLean, a former Goldman Sachs employee, writes for Vanity Fair and was the author, with Peter Elkind, of an insightful book about the Enron scandal called "The Smartest Guys in the Room." Nocera is a business columnist for The New York Times and, like McLean, a former longtime staff member at Fortune.

Others have illuminated facets of the crisis in more depth. John Cassidy's "How Markets Fail" explained the economic history and theory with greater sophistication. Gillian Tett's "Fool's Gold" offered a journey into one investment bank, J. P. Morgan, and a close look at how it helped create a financial instrument, the credit derivative, that amplified risk rather than minimizing it. "In Fed We Trust," by David Wessel, took the reader behind the scenes in Washington, where politicians and regulators missed all the warning signs. For their part, McLean and Nocera concentrate on the basics and bring them together in brisk, well-organized chapters.

They are particularly strong in their examination of the American myth that every family deserves to own a home. This belief, they explain, provided camouflage for all manner of chicanery, putting people into houses they could not afford and erecting corrupt investment empires on the notion that unrealistic mortgage payments would somehow continue to flow. Democrats and Republicans, investment bankers, financial speculators and affordable-housing advocates - they all conspired, with varying motives, to prop up the delusion that real estate prices could not fall and that the refinancing merry-go-round would never stop turning. Hundred-billion-dollar bailouts and millions of family foreclosures have taught us otherwise.

And here is where "All the Devils Are Here" provides a service even for those who have tried diligently to keep up with the literature of the crisis. McLean and Nocera enable us to grasp the latest depressing news about lenders trying to take possession of suburban homes for which they cannot find the relevant paperwork or for which the paperwork seems fabricated.

The authors show that beginning back in the 1970s, the simple transaction of a bank collecting monthly mortgage payments got caught up in a far more complicated Wall Street invention known as securitization. Rather than keep mortgages on their books, lenders sold them to packagers who, for a fee, bundled individual loans into bonds that were carved into "tranches" and then sold to investors. Over time, the bonds became more intricate and riskier. So did the underlying mortgages, which proliferated as a result of low interest rates set by the Fed. No one worried much about the dangers of default because ownership of mortgage debt kept changing hands.

Demand exploded for more mortgages to keep the production line humming. Record keeping was an afterthought. When the forces of financial gravity inevitably came into play, and overextended homeowners stopped sending their monthly checks, the value of all those securities dropped, though no one could say by how much. Panic ensued, destroying Lehman Brothers and Bear Stearns. Credit froze, taking us to the precipice of a global depression.

Swift government intervention reduced the calamity to a severe recession but did not erase the unaffordable home loans or retroactively create an easily followed mortgage paper trail. As McLean and Nocera demonstrate, the dishevelment of the records that were kept during an era of frenzied securitization explains the present chaos over foreclosures.

"All the Devils Are Here" is similarly useful for deciphering what will surely become a high-stakes clash between powerful investors and the banks. The investors are already accusing the banks of knowing full well that they were larding mortgage-backed securities with loans very likely to go bad. According to testimony before the Financial Crisis Inquiry Commission, the banks commissioned research that revealed the toxicity of their products, but Wall Street kept silent. As this ugly revelation sinks in, hedge funds and other institutional investors that bought the securities are going to be calling their fiercest lawyers. This conflict could heat up as early as the end of the year.

Another public quarrel McLean and Nocera bring into focus is the esoteric debate about Federal Reserve monetary policy. Ben S. Bernanke, the chairman of the Federal Reserve, has pushed interest rates practically to zero to try to stimulate growth and reduce an unemployment rate that currently hovers near 10 percent. Dissenters from this policy, like Thomas M. Hoenig, the president of the Kansas City Federal Reserve Bank, warn that Bernanke is repeating the mistake of his predecessor, Greenspan, who employed similar measures to combat the recession that followed the dot-com crash of 2000. As McLean and Nocera recount, in April 2005 Greenspan airily dismissed worries that his policies could encourage irresponsible mortgage practices. Lenders, he said, were able to judge the risk posed by individual applicants and to price that risk accordingly.

Well, that turned out to be wrong. But what about the future? The next crisis probably won't be a housing bubble or an Internet craze, because those are fresh in our collective memory. But in some other corner of the economy, easy money is almost certainly beginning to feed hubris and greed. So the chances are, the devils will be coming back again.

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