Hell is empty, and all the devils are here.
— Shakespeare: The Tempest
Because no one can possibly know how long the current recession will last or how deep it will go, there is no end to the books on the financial crisis. As the Nobel laureate, Robert Solow, has pointed out, the recession is because of a dangerous combination of two factors — the unemployment and idle productive capacity that comes from a lack of demand — and the financial breakdown, each being the cause and effect of the other that made “the situation more complex, more unstable, and more vulnerable to prolonged psychological imponderables and more distant from previous experience”. The need to get a clearer picture of what happened and a hang of the motives and actions of the main players, the causes and consequences of what they did, and the ideas and institutions that influenced them is what drove Bethany McLean and Joe Nocera, two of America’s most influential business journalists, to come up with All the Devils are Here: The Hidden History of the Financial Crisis (Portfolio/Penguin, Special Indian Price Rs 599).
Like the earlier books that pointed out the pros and cons of the blame game between “greedy traders, misguided regulators, sleazy subprime companies and clueless home buyers driven by the American mythology of house-ownership as a sure-shot investment that could never fail”, McLean and Nocera take the story much further. Based on news reports and government investigations, they expose the motivations of everyone who contributed to the crisis: famous CEOs, politicians, anonymous lenders and borrowers, analysts and Wall Street traders, “the many devils who helped bring hell to the economy”. In fact, to the Shakespeare quote that forms the epigram to the book could be added another from Hamlet that there was “something rotten in the kingdom of Denmark”.
When just about everyone was involved in what appeared to be, at the time, easy pickings, including AIG (American International Group). Goldman Sachs and Fannie Mae, where does one begin? With Angelo Mozilo, because he started Countrywide Financial in the late 1960s, the first group of companies that would later become the mortgage originator most closely associated with the excesses of the subprime business?
Mozilo, “a smart, aggressive bulldog of a man”, started off properly by believing in the importance of underwriting standards — that is, making loans available to people who had the means to pay them back. Mortgage origination that had always been the province of banks and other financial organisations relied on savings and checking accounts to fund the loans.
“Securitisation mooted the business model” and, in fact, became the essential form of funding. Which meant that, in turn, new mortgage companies could be formed — companies like Mozilo floated that competed with banks for mortgage customers.
To begin with, Mozilo maintained impeccable underwriting standards to get rich. But that became impossible as the subprime mania grew. By 2006, Mozilo developed “a Dr Jekyll and Mr Hyde” quality, warning that while disaster loomed, his company would survive. In fact, just the opposite happened: while Countrywide became the leading purveyor of toxic mortgage products, it took the company to the brink of bankruptcy.
The question we would ask is: what was the underwriting criterion? It was based “on the four Cs: credit, capability, collateral and character”. All of which was fine but what gummed up the business was when Mozilo started using independent brokers instead of his own staff to make loans. This made it hard to control the quality of loans simply because independent brokers “falsified documentation” to get the commission which they took and disappeared from the scene.
Similar scenarios prevailed across Wall Street. Inside Merrill Lynch and AIG, there were senior executives who were worried about the gathering mortgage crisis as far back as 2005 but they were overruled by those who wanted to get along with the business while the going was good. Joe Cassano, CEO of AIG Financial Products from 2001 to 2008, was worried about the credit losses but overlooked the massive collateral calls that finally did the firm in. When you read these accounts, what is significantly absent is the concept of collateral security, that is, a second security in addition to the personal security of the borrower for a loan that is normally made against the security of stocks and shares, property or insurance policies. Whichever way you look at it, credit was plentiful and cheap and if it wasn’t repaid, the firms themselves were responsible.
All the Devils reads like a financial thriller with a cast of characters from the leading financial institutions laid out at the start of the “play” which is like a Greek tragedy. As all thriller writers know, if you do not write the subtext, it writes itself. The subtext you take away from this story of uncontrolled power is that power is illusory. The decision-makers were only puppets, the strings pulled by wider social forces they did not understand. You cannot treat the evidence at face value; you simply have to go behind the scenes to know what really happened.
The Anglo Saxon model of capitalism that was supposed to be based on transparency, the level-playing field and the rule of law, was an illusion. If the book’s account is accurate, secrecy and personal networks ran through the worlds of politics, regulation, finance and financial journalism right up until the crisis hit.
