Book Review: All the Devils Are Here

All the Devils Are Here:
The Hidden History of the Financial Crisis
By Bethany McLean and Joe Nocera
Portfolio; 400pp, $32.95

One of the great mysteries of the financial crisis is that more than two years and dozens of books after its onset, we're still trying to figure out exactly who pulled off the heist. In All the Devils Are Here, Bethany McLean and Joe Nocera attempt to create a financial whodunit and take the latest stab at apportioning responsibility. The result—a Hieronymous Bosch painting of Wall Street bankers, insurance conglomerates, and Washington insiders—is hardly uncharted territory. Yet the authors distinguish themselves through clever sleuthing. Sure, many investment bankers, credit-rating agencies, and regulators were malignant in one way or another, but just as many were simply clueless. The authors' grand conclusion is rather simple: Bright people can do some pretty stupid things.

Take investment bankers. They brewed the intoxicants that spurred the mortgage frenzy and formulated mad-scientist concoctions—like the infamous "synthetic CDOs"—that were essentially casino bets on the housing market. Somewhat inexplicably, Wall Street also bought its own poison in the form of housing-related debt, derivatives, and options. American International Group (AIG), Bear Stearns, Lehman Brothers, and Merrill Lynch died—or set themselves up for near-death experiences—by drinking their own potions. Are these people really evil geniuses? Schlubs is more like it. As one risk manager at Merrill told the authors, "We fell for our own scam."

Rating agencies such as Standard & Poor's (MHP), Moody's Investors Service (MCO), and Fitch were intended to be one of the system's primary monitors of these companies' creditworthiness. Yet, the authors write, they had failed to issue a single warning about Enron, Tyco, or WorldCom before those companies started to blow up in 2001. That dismal experience should have hammered the credibility of ratings and raters. Yet the rating business thrived for the simple reason, McLean and Nocera attest, that both financial institutions and government needed an apparently independent body to put a seal of approval on corporate debt. As one former analyst says, "Enron taught [the raters] how small the consequences of a bad reputation were."

They took the lesson to heart. Throughout the housing bubble, the agencies stuck triple-A ratings on huge swaths of mortgage-backed securities without bothering to ask what might happen if credit were to slow down or house prices were to fall.

In a better world, regulators would have clamped down on Wall Street and the rating agencies and forced them to correct their previous mistakes. However, as McLean and Nocera explain, regulators had little muscle in an age when both Democrats and Republicans believed the market should regulate itself.

The authors tell the tale of Brooksley Born, head of the Commodities Futures Trading Commission, who tried to police financial derivatives during the Clinton Administration. For her efforts she got a bureaucratic mauling from free-market apostles Lawrence Summers and Robert Rubin, both of whom were adamant that derivatives didn't need to be supervised. Many regulators, however, weren't as well-intentioned as Born. Some tried to expand their empires by granting institutions freedom from persnickety restrictions such as state laws intended to end predatory lending. Even after 25 states tried to crack down on mortgage abuses and the FBI warned of the dangers, federal regulators remained blithely unconcerned.

Dicey firms thrived in this environment. Ameriquest, a mortgage originator that inflated appraisals, encouraged customers to lie about their incomes and misled clients about fees. At Ameriquest, the authors write, twentysomething loan officers fueled by diets of coke and meth worked 14-hour days and made $20,000 or more a month if they survived the nonstop pressure from above. "Think Glengarry Glen Ross," one of those former loan officers tells the authors.

Eventually, it all had to come tumbling down. After brilliantly detailing the blunders of a multitude of institutions and individuals, McLean and Nocera come to a tame conclusion. "Much of what took place during the crisis was immoral, unjust, craven, delusional behavior," they write, "but it wasn't criminal." Just criminally stupid.

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