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Gordon Gekko is alive and well, has bankrupted the world and is back for an encore...,
This review is from: All The Devils Are Here: Unmasking the Men Who Bankrupted the World (Paperback)
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Bethany McLean and Joe Nocera have written an entertaining and rigorous examination of the causes of the global financial meltdown. 'All the Devils' in the book's title add up to more than 100 named individuals but in addition tens of thousands of property agents, speculators, salesmen, regulators and other players who collectively contributed to the subprime mortgage scam which almost bankrupted the world, are described but go un-named.
McLean and Nocera chart the origin of sub-prime mortgage selling back in the 1980s and how the gradual rise (`like creeping slime, which slowly took over the industry') of borderline criminal practices became endemic and to dominate the activities of many huge financial corporations, all afraid to be left behind and miss the free-cash boat. The origins of the `securitisation' process whereby mortgages aggressively sold to people almost certain to default were wrapped up in `derivatives', `credit default swaps', `collateralised debt obligations' and other such esoteric inventions is described with forensic detail: the traditional bond between borrower and lender, and due diligence before granting a loan, were discarded in the scramble for quick profits and commissions. The higher default risk was bundled up and sold on to other institutions around the world which became so far removed from the origin of the product they had little idea of the risks they were taking on. As long as the huge commissions and bonuses continued to be paid to all the players in the game, no-one cared about the eventual consequences and few dared point out the Emperor in reality had no clothes on.
The authors run through the bios of many big players, like Angelo Mozilo of Countrywide and Roland Arnall of Ameriquest, to enable the reader to see them as real 3-D people who got caught up in the game and played their part in engineering the crisis. Regulators failed to keep up with the growing esoteric complexities of new bundled financial products; Congress was aggressively lobbied so that less and less capital was required by financial institutions to back-up loans. Regulators were led to believe that the properties against which loans were taken out could always be re-possessed and sold, and prices would keep on rising, but nothing was done to protect against common practices of over-valuation and high fees paid to sellers before any of the loan principle was repaid. People were scammed and ripped-off on a grand scale, all on the noble principle of `extending home-ownership.' Fannie and Freddie, Government sponsored enterprises, joined in the game because they didn't want to be left behind and their CEOs justifiably believed that, if it all went wrong, the Federal Government would always bail them out.
The ratings agencies, like Moodys, played their part: browbeaten into giving triple-A ratings to bad-risk `structured financial products' and played off against their competitors ("If you don't grant us a triple-A, we'll pay Standard & Poor's to do the job instead") they proved next to useless in the real world, only downgrading a product or organization (like Enron, for instance) days or hours before collapse when everyone else could see what was about to happen and it could no longer be concealed.
The book is quite long at 364 close-printed pages, plus index. It contains a lot of detail but never gets bogged down; in fact the style is racy and continuously instructive. Of all the books on the financial meltdown this is one of the best. If there is a criticism it might be that the focus is exclusively on the USA (where admittedly the subprime scandal originated and slowly contaminated the investment world with stored-up catastrophe); the parts played by debts run up by Eurozone governments like Greece and Ireland, or the catastrophic collapse of the Icelandic banking system which lost more money in a few days than the entire productive capacity of the Icelandic economy, are given scant attention. Of course it's the same basic cause everywhere: overspending with money you don't have, cooking the books, immersing everything in a sea of complexity so deep no-one really understands what is going on; endemic fraud on a massive scale, and old-fashioned greed.
Buy or borrow the book if you can. You don't need a degree in economics to follow McLean and Nocera's lucid text, just be average-smart and pay attention. At the end of the book, you'll understand more about how it all happened, and why.
Could it all happen again? Sure it could, and it probably will.