All The Devils Are Here (2011), by Bethany McLean and Joe Nocera


All The Devils Are Here is by far the best post mortem to date of the Great Recession of 2008. The authors have done the nation a vital favor. In its parts and in its whole, their authoritative analysis has sent earlier brave texts dramatizing that crucial disaster into an early fade.

McLean and Nocera have written one of those truly important books greater than the sum of the author(s), here two superb financial reporters who obviously have a way with eyewitnesses of the mendacity on Wall Street and elsewhere–many of them insider-sources unwilling to be named. (Don’t worry, enough have forthrightly identified themselves, and are of more than enough believability, to make you want to credit the anonymous.)

But I am sure that All The Devils Are Here took on its own life–“got away” from its authors in the best sense. And the outcome of this? Their book is unforgettably depressing and sobering–hopefully not disheartening. The picture of human beings today near the “filthy lucre” of the 16th century calls to mind Dante’s Inferno on all its allegorical levels–literal, mythical and analogical. “Devils” might more appropriately be “sinners.” As it is, the title is from Shakespeare’s The Tempest: “Hell is empty. All the devils are here.” And I must say that there are few people in the narrative whose lonely and often punished brave resistance to the despicable financial conspiracies might belie a sign reading, “Abandon Hope, All Ye Who Enter Herein.”

You often don’t want to face human primatology, but this book won’t let you avert your eyes.

Here is an outrageously brief summary:

First, there must be a huge market (together with ever more powerful information technology) to bring on a crisis of this size, launching in Warren Buffett’s words, “financial weapons of mass destruction.” After the dot-com and other bubbles, Wall Street looked this way and that and, voila!, lusted after the huge US residential home market, seizing on the Community Reinvestment Act in the late 1990s to be “creative” with lending practices so as to increase home ownership, already in the mid-sixties in key percentiles. The problem for salivating Wall Street was that big, institutional investors wanted residential home asset securities which had the implicit backing of the US Government via the GSEs, Fannie and Freddie, then dominating the US housing market. Of course, following Dante’s lead, we can take it to the bank that Fannie and Freddie were themselves shark tanks (that is, David Maxwell, Jim Johnson and Franklin Raines–wow). But Wall Street, Great Whites as well, found a way to get investors to buy ever more of its own residential loans.

What was it?

The Wall Street banks fostered corruption at the ratings agencies, Moody’s, Standard and Poor’s and Fitch. McLean and Nocera, when asked to identify the most instrumental factor of the Great Recession, identified this one. Naturally, that corruption at the ratings agencies greatly increased those agencies’ bottom lines (see below).

To reduce further and even more outrageously the massive great investigative research by McLean and Nocera in Devils, suffice to say that growing numbers of ultra risky–really, forlorn–subprime mortgages started getting classified AAA by the ratings agencies, aided by a few gimmicks by Wall Street banks in their astoundingly massive securitization of subprime mortgages (assembling myriad loans into a single package which itself is an investment vehicle): Far trickier than pulling a rabbit out of a hat. And if you ask me, nothing short of criminality. Don’t hold your breath for legal redress, though.

As we go along here, keep prominently in mind the enormity of the US residential market. It is crucial to maintain that sense of scale.

So…lets start with loan “originators”: Countrywide, Ameriquest, New Century, Franklin and so on–a considerable, rapidly growing “industry.” For the “originators,” the more subprime loans, the better: they make their living writing loans (as do realtors in selling houses–one can imagine the cozy relationships here between the two). They made millions and millions of loans, for Wall Street hungered after them for developing securitizations. Sound lending practices? You kidding me?

Here are the names of some of the subprime lending schemes of the “originator” banks: NINA (borrowers qualify for loans despite having no income and no assets); no-doc (there is no requirement for documentation of the borrower’s income, etc); “negative amortization” (the borrower doesn’t even pay the usual interest but only part of the interest so that the remaining interest accrues to the principal which in turn increases the principal which in turn increases the interest [which means, among other things, that we’ll never again be able to use that old “If you think that’s good, I can sell you some beachfront in Florida”–it’s now far too quaint]); 20/80 (the borrower takes out two subprime ARM [adjustable rate mortgage] loans, one for the down payment and one for the remaining principal, with eventually killer fees); 2/28 (the borrower pays nothing for two years and then faces very large, escalating payments). If none of these works, there’s always the “Oh-what the hell-lend-it-to-them-anyway” or (only a few successful prosecutions here) the “Oh-what-the-hell-just-forge-the-application” (AKA, the janitor is also an executive). Mozilo, Arnall, and the other leaders of the “originator” banks–they needed huge numbers of subprimes to feed the insatiable appetite of the Wall Street money machines (see above, securitizations). Wall Street: Just get me large numbers of the damn things every month.

But didn’t this let more Americans buy homes? That’s what Mozilo, Arnall and Wall Street told Capitol Hill. What happened? Ten percent went to loans for new homes. Almost the entire rest went for “refis.” It was the bubble equity in homes already owned–most of the loans, refinancings, were to get at that equity. Furthermore, over 60% of the subprimes were solicited. “Hi, Mr. Smith. Why don’t you drop by Acme Bank and we’ll give you a no-doc second. How about your neighbors? Bring them, too! Plenty for all! OK, bye, see you and the Mrs. tomorrow.” “Hello, Manny? How’s the weather in Manhattan? Listen, I think we can come to within 5% of those 3,800 loans you need by the 15th. Refi’s the name of the game, baby!”

Here, and keeping in mind the enormous size of the US residential housing market, let’s go back to those ratings agencies. Here’s the game: as the securitization investment vehicles got more and more complex (sliced and diced in tranches and, when “synthetic” [i.e., CDOs of CDOs], merely referring to the underlying AAA mortgages in the original CDOs, and recalling that these same AAA mortgages actually had been overrated off subprime loans by Moody’s and the others because that way their bottom lines improved [astronomical increase in fees])…well, sorry for this sentence (but you can see the complexity growing)…but the point is that in the CALPERS conference room (and in many other pension-fund conference rooms in many other states) the pension fund managers must have just had a devil of a time following all this stuff…. “Excuse me, Mr. Investment Facilitator, we greatly appreciate the fascinating detail on your charts, but actually, can you tell us the rating of this CDO, by tranch? Oh, it’s mainly AAA! Great! That’s all we need to know!” Postscript: corruption charges against at least one high-ranking CALPERS official appear in the offing, so presumably and with hardly any surprise, there were cases of inside complicity along with the deception of the con.

Now meanwhile, and continuing to keep in mind the enormous size of the US housing market, there was another matter. “Look, Manny, forget the weather here in Manhattan. The thing is, you and I both know this subprime stuff is a lot of crap, so we either better get it off our own books before Der Tag or get it insured so we handle the risk and also don’t have impossible capital requirements!” “Great idea, Larry. I know some really dumb bankers abroad who can’t wait to invest in these subprime vehicles. As for insuring debt, call AIG-FP (Financial Products). They’re over in London, and with Hank Greenberg gone, nobody else in AIG has any real idea of what Joe Cassano, a lead financial officer, and his guys at FP are doing. They’ll insure anything!”

In other words, once the loans have left the “originators” and arrived at Wall Street and gone onto the books of those banks, the Wall Street banks should: 1) securitize the dubious loans by packaging them in large bundles; 2) get ratings agencies to overrate the subprime loans in the securitized packages; 3) convince large institutional investors that the US home mortgage market is beyond financial crises and that hence the securitized packages are sure things, e.g., blend the mortgages in such ways as to convey falsely that the package cannot have a catastrophic drop in value; 4) in doing 1-3, get the great bulk of the toxic assets off your own books at your Wall Street investment bank, freeing up room to engage in yet another subprime cycle; 5) enjoy the great gains to the bank through fees charged in these cycles for the securitizing and arranging of the mortgage-based investments; 6) keep some securitized bundles of mortgage-based assets on your own books and make large gains there as well.

So: here there are suckers at both ends: (a) the homeowners and those wanting to own homes who took out subprime loans; and (b) the investors at the end of the line who invested in the securities comprised significantly of the subprime loans.

These cycles went on and on in the lead-up to the Recession.

So even more outrageously to boil down the superb history given in Devils, let’s just simplify by saying that, of course, the inevitable happened. The authors liken it to those mirror arrangements where your image repeats infinitely. Which is to say, that “systemic” (as in the infamous prospect of a “systemic” failure of the banking system itself as the Recession began in earnest) means “entangled massively.” (Rule: No Wall Street jargon means what it seems to mean.) Everybody was on the hook to everybody else via CDOs and CDSs and all their variants. A labyrinth of mirrors. There was long and short. There was debt of debt. Eventually there were oceans between borrower and eventual lender; the old-fashioned simple connection–the Jimmy Stewart one in It’s A Wonderful Life at the Frank Capra First Regional Bank between the young Smiths who borrowed the Jones’s CD for their mortgage over there on Maple Street and Capra Bank…hey, you kiddin’ me? After enormous packages of securitized loans were sold to large investors, the mortgagers owed loan holders whose identity often they did not know.

Eventually, of course, the toxic loans frightened people. The collateral began to seem diminished. Big banks like UBS began writing down losses. The whole crazy machine froze up.

And Treasury Secretary Hank Paulson, after possibly hopeless attempts at tutorials to the occupant of the Oval Office (Hank didn’t have a lot of time for fulsome course work in basic Economics since here the first warning indicator he noted was the sound of stock-bombs dropping), got tough and saved some large rear ends with our money.

Lots of imprudent business had been done at Circuit City and Best Buy, though, by the millions of plain-folk refi’ers, those frenzied consumers, and so for the many of them who were burned in the scam, few stones lay at their feet for casting at their fellow sinners, the financier villains who conned them in the first place.

You know the rest.

By the way, Paul Volcker has said that the idea there is value in the preservation of Wall Street “innovation” is a load of something off the barn floor. Especially as evidenced in the Great Recession. He can’t think of any of it that helped out our Nation.

Did any of it help home ownership? All the Devils Are Here shows statistics that bear out your intuitions. We’re almost precisely back to the percentage of US home ownership when subprime loans first began to be overrated.

One thing the book makes us think about is “systemic” in another sense. Maybe not intentionally (see above, runaway narrative). Ben Franklin told the curious woman outside the Convention Hall that he and the other Framers had created a Republic, “if you can keep it.”  All the Devils Are Here convinces you that we need drastically to rethink and correct the Government role in the economy, and especially the Financial Sector. It has to be free market capitalism, no question. We’ve learned that, History the teacher. But let me, exhausted from McLain and Nocera’s expose’, try to end this rant on something of an allegorical note that might be usefully suggestive.

There’s a woman who figures large here named Brooksley Born. She graduated first in her Stanford law class. As head of the CFTC when something might have been done, she said that over-the-counter derivatives should be transparent, regulated, and were a threat to the US economy and our money. She was viciously lectured on Capitol Hill. She was called by the White House Economics heavy, Larry Summers, who yelled at her that he had thirteen bankers in his office who were threatening to take their derivatives trading to London unless she was stopped. Alan Greenspan called her into his office at the Fed and told her the government shouldn’t go after fraud in the Financial Sector–the market would take care of it; self-regulation. Robert Rubin, the third member of this Blessed Trinity, stopped speaking to her.

So, today, Born might have taken that call from Summers as follows: “Well, tell those bankers late spring is nicest in London. And while I’ve got you on the line, let me remind you that you and Greenspan and Rubin, despite Time Magazine’s famous cover story on you three, ‘The Committee To Save The World,’ have failed disastrously! You yourself have believed in ‘market discipline’ forever. I hear that you don’t suffer fools. You must find yourself insufferable. Good-bye.”

As a final thought experiment, picture Ayn Rand in Gerald Ford’s office on the arm of her enthralled acolyte, Alan Greenspan, and telling a reporter that “I don’t believe in controls, any controls.” Now shut your eyes and imagine such a world to live in.

Here we have the antithesis of civilization, do we not?

Is Rand an idiot or what?

How on Earth has she influenced anyone? Especially a Fed Chairman? (Maybe the answer lies in the story that Greenspan as a youngster fell in love with bebop and played horn next to Stan Getz in an early band but, listening to Getz, decided music wasn’t for Greenspan. Besides, if you’ve listened to Getz’s elegant understated playing with that marvelous architecture, you’d know that Stan Getz could never say things like “undervaluation of risk.”)

Can’t we do better?

Don’t phone Dante.