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Subprime ‘Devils’ Made O’Neal, Greenberg Wreck Economy: Books

Stanley O'Neal, CEO of Merrill Lynch & Co Inc.
Stanley O'Neal, chairman, president and chief executive officer of Merrill Lynch & Co Inc., delivers the keynote address at the University of Pennsylvania 2007 Wharton Economic Summit in Philadelphia, April 12, 2007. Photographer: Mike Mergen/Bloomberg News.

As Wall Street bonuses bulged and housing prices were peaking in 2005, Daniel Mudd found himself dreading his top job at Fannie Mae.

Going to work felt like “a choice between poking my eye out and cutting off a finger,” Fannie’s former chief executive officer recalls in a new account of the subprime meltdown, “All the Devils Are Here.”

The nation’s largest provider of mortgage financing was under assault, as authors Bethany McLean and Joe Nocera show: Subprime mortgage originators had eroded Fannie’s lock on the secondary mortgage market, investors were on edge, and the Bush administration was pushing it to guarantee yet more loans for low- and middle-income Americans.

So Fannie waded into the subprime market, helped inflate the housing bubble and ultimately landed what has been called “the mother of all bailouts.” The truly sad thing is that none of this really helped low-income Americans to buy homes, McLean and Nocera say.

“What was the point of it all?” they ask, citing evidence that only some 9 percent of all subprime lending between 1998 and 2006 went to first-time home buyers. “The rest were refinancings or second home purchases,” and foreclosures soon wiped out ownership gains made during the bubble.

So much for George W. Bush’s “Ownership Society.”

With the U.S. unemployment rate stuck at above 9.5 percent, many angry Americans used yesterday’s midterm elections to send Barack Obama a resounding message: “No, you can’t.” Yet anyone determined to blame Obama for the economic morass will find relatively little ammunition in these pages.

Volatile Admixture

What emerges instead is a detailed and scrupulously balanced account of how the Great Recession bubbled up from decades of government housing goals, financial engineering, craven lawmakers, ignorant homebuyers, sleazy subprime lenders and arrogant Wall Street executives.

The result was a volatile, and bipartisan, admixture of federal meddling and laissez-faire that built up during the Clinton administration and boiled over on Bush’s watch. After reading this book, I worry that the backlash against Obama, however understandable, may mean that those most hurt in the meltdown have voted to get whipped some more.

McLean, who writes for Vanity Fair, and Nocera, a New York Times columnist, have arrived late for the subprime party. Though they give us some fresh glimpses of Stan O’Neal’s belated discovery of Merrill Lynch & Co.’s potential losses -- the CEO “looked like he was going to throw up” -- much of the material here is familiar from previous works, including Gillian Tett’s “Fool’s Gold” and Andrew Ross Sorkin’s “Too Big to Fail.”

Blinded Narcissists

Yet the authors succeed in pulling the jumbled pieces of the financial crisis together and showing how it flowed from human foibles ranging from Hank Greenberg’s autocratic rule at American International Group Inc. to O’Neal’s suspicions of everyone around him.

Take Alan Greenspan, Robert Rubin and Lawrence Summers. When presented the chance to regulate derivatives in the Clinton years, the men whom Time magazine dubbed “The Committee to Save the World” balked. Why?

“Greenspan was blinded, as ever, by ideology,” they write. “Summers was blinded by his deep-seated need to be viewed as a brilliant man.”

“As for Rubin, he was blinded by pride,” even though derivatives made him nervous. That’s partly because the woman who fought hardest to regulate the instruments, Brooksley Born of the Commodity Futures Trading Commission, wasn’t deferential enough to the Treasury secretary, they write.

Human ‘Devils’

The “devils” in the title notwithstanding, one of this book’s strengths is to put a human face on institutions that have been demonized -- even as it raises questions about their dealings. The authors are particularly good at dissecting how Goldman Sachs Group Inc. marketed the infamous Abacus 2007-AC1 collateralized debt obligations.

Goldman agreed to pay $550 million to settle U.S. regulatory claims that it misled investors in the transaction. Yet none of the parties come out well in this book -- not the German lender that loaded up on CDOs; not the analyst who oversaw the rating; not the “independent” agent that was supposed to choose the portfolio of mortgage-related investments underlying the deal; and not Paulson & Co., the hedge fund that helped make that selection and bet against the vehicles.

U.S. presidents have been promoting homeownership as a way to strengthen families and communities ever since Herbert Hoover campaigned for “Better Homes in America.” Though subprime lending was supposed to support that American Dream, McLean and Nocera argue that it did nothing for low-income homeowners.

“By the second quarter of 2010, the homeownership rate had fallen to 66.9 percent, right where it had been before the housing bubble,” they write. Then came the cascading foreclosures.

“Subprime lending was a net drain on homeownership. A lot of needless pain was created in the process.”

“All the Devils Are Here: The Hidden History of the Financial Crisis” is from Portfolio/Penguin (380 pages, $32.95). To buy this book in North America, click here.

(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

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