All the Devils Are Here: The Hidden History of the Financial Crisis
Traces AIG Financial Products' swap book back to its origins.
Summary
McLean and Nocera trace the 2008 crisis back to the 1980s rather than to the housing bubble, following the institutions and individuals over twenty-five years: Lewis Ranieri's creation of the mortgage-backed securities market at Salomon, the growth of Fannie Mae and Freddie Mac under Jim Johnson, the subprime lenders including Household, Ameriquest and Countrywide, the credit default swap business at AIG Financial Products, the rating agencies, and the regulators who declined to act.
The argument is that the crisis required all of these to fail simultaneously and that each failure had a specific institutional cause. Fannie and Freddie used their implicit government guarantee to build enormous leveraged portfolios while lobbying successfully against any capital requirement that would constrain them. Rating agencies were paid by issuers and competed on the ratings they would assign. Subprime originators sold loans immediately and therefore had no exposure to their performance. AIG wrote credit protection with no reserve because the accounting treated it as insurance rather than as a derivative. Regulators, particularly the Federal Reserve under Greenspan, declined to use authority they possessed over mortgage underwriting standards.
The reporting is detailed and the authors are careful about apportioning responsibility, which distinguishes it from accounts that identify a single villain. It is the best available single-volume institutional history of the crisis. Its limitation is scope: the mechanics of the funding run and the policy response during 2008 itself get less attention than the origins, and readers wanting those should pair it with accounts focused on the crisis weeks.
Key takeaways 7
- The crisis had a twenty-five-year origin in the creation of the mortgage securitisation market, not a five-year one in the housing bubble.
- Originators who sold loans immediately had no exposure to their performance, which removed the only party with an incentive to verify borrower quality.
- Rating agencies were paid by the issuers whose securities they rated and competed for that business on the ratings they would give.
- Fannie Mae and Freddie Mac used an implicit government guarantee to fund leveraged portfolios and defeated every attempt to impose adequate capital requirements through lobbying.
- AIG wrote credit default protection without reserves because the accounting treated the exposure as insurance rather than as a derivative position requiring collateral.
- Regulators possessed the legal authority to set mortgage underwriting standards and declined to use it as a matter of policy.
- Each institution behaved rationally given its own incentives, which is why identifying individual villains explains less than examining the structure does.
Who should read it
Investors and risk managers who want the institutional origins of the 2008 crisis traced through the specific incentive failures at each participant.
About Bethany McLean
Investigative business journalist; Vanity Fair contributing editor, formerly Fortune
The Smartest Guys in the Room remains the definitive account of Enron and her Fortune reporting broke the story before the collapse.
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