Book review: All the Devils are Here

I’ve just finished All the Devils Are Here: The Hidden History of the Financial Crisis and it shows that just when you think you know everything sleazy that happened up to and during the 2008 financial collapse you still have a lot to learn.

One of the authors is Bethany McLean, a journalist famous for helping to expose Enron’s accounting fraud. Her partner is Joe Nocera, a New York Times reporter. They concentrate on telling the story rather than offering suggestions for cleaning up the system.

Much of the reporting on Fannie Mae’s lobbying efforts was new to me. Up to the point of collapse, Fannie Mae earned most of its profits by holding onto consumer mortgages that paid, say, 6 percent, and borrowing short-term funds at lower interest rates thanks to its presumed status as an arm of the U.S. government whose debt would be federally guaranteed (as in fact it was). This was a way to make almost unlimited profits that a lot of high school graduates could have managed, yet managers helped themselves to billions of dollars in compensation for running this scheme that was guaranteed to blow up and wipe out shareholders if ever interest rates rose or homeowners began to default.

How did Fannie Mae protect its special status? They would open “partnership offices” in the districts of important House committee members. Those offices would be run by children of senators and other important politicians and would hold ribbon-cutting ceremonies, studded with politicians, to celebrate Fannie Mae putting money into a senior citizen center or whatever. Fannie gave high-paying jobs to former top officials in the Clinton administrations. By paying an above-market salary to the child of a senator or a former Democratic appointee, Fannie Mae was able to stave off Bush administration hospitality and enrich its managers permanently and its shareholders temporarily (until they were all wiped out when the government took over).

This was not the only example of the spectacular returns on investment from lobbying. One of the biggest and sleaziest subprime companies, Ameriquest, hired Deval Patrick, currently governor of Massachusetts, to serve as a board member of the parent company (ACC). Patrick was paid $360,000 per year and in exchange lobbied politicians such as Barack Obama so effectively that Ameriquest’s founder was eventually confirmed by the Senate as America’s ambassador to the Netherlands.

The book helps answer the question “Why does everyone hate Goldman Sachs?” An example is on page 338, in which Goldman Sachs put together a $1.5 billion CDO in 2004 called “Davis Square III”. This was stuffed full of mortgages from early in the decade of mortgage madness, before credit standards fell and fraud by loan officers became the general rule. The credit ratings agencies gave the CDO a triple A rating. AIG agreed to insure this CDO against default for a minimal percentage. Goldman meanwhile directed the manager of the CDO to swap out some of the better quality mortgages with 2006 and 2007 subprime loans, which were virtually guaranteed to default. There was some fine print in the CDO structure that enabled the manager to do this. Goldman then bought insurance on this crippled CDO from AIG. The ratings agencies finally woke up and downgraded the CDO in May 2008, “costing AIG $616 million in additional collateral calls–which came, of course, from Goldman Sachs.”

Stan O’Neal, the former CEO of Merrill Lynch, is featured in a chapter called “The Dumb Guys”. He took on $55 billion in exposure to subprime loans and didn’t even realize it, wiping out the shareholders who’d paid him hundreds of millions of dollars in salary. His top executives, also paid a fortune by the shareholders, were equally clueless. In July 2007, they estimated that Merrill’s total subprime losses would be no more than $82 million (about half of O’Neal’s golden parachute payment after he was fired). By October the losses were figured as at least $7.9 billion. O’Neal and his cronies at Merrill are featured as truly, adjusted for income and position, the dumbest people in the Collapse of 2008. Of course, sitting in your fully paid-for $50 million Greenwich, Connecticut mansion, a couple of journalists accusing you of being dumb might not sting too badly…

Alan Greenspan takes a beating in a chapter chronicling his refusal to look at any of the facts on the ground, i.e., that mortgage brokers were issuing loans to people who would never pay them back, then having Wall Street banks securitize those loans and sell them to unsuspecting pension funds. Greenspan was convinced that if these loans were truly so bad then Wall Street wouldn’t be buying and selling them. The Fed had the authority to deflate the subprime bubble but it did not exercise that authority. By contrast, Hank Paulson, who left Goldman Sachs to become Bush’s Treasury Secretary, is lauded for his practical approach and attempts to improve regulation (all blocked by Congress, basically). If you’re kicking yourself for not having figured out that inflated house prices would eventually wipe out years of growth in the U.S. economy, take heart. Paulson, according to the authors, had a similar blind spot: “Paulson didn’t suspect that housing or mortgages could be the catalyst for a crisis. … he thought the way others on Wall Street did and the way economists did: Housing prices hadn’t declined on a nationwide basis since the Great Depression! … for all of Paulson’s worries about derivatives, he didn’t understand the dangerous potential of credit default swaps on mortgages.”

Are there any fundamental problems identified in All the Devils Are Here: The Hidden History of the Financial Crisis? One them cutting through the book is that consumer-facing finance companies, if given the chance, will always try to cheat consumers with complex contracts filled with fine print. The basis of the subprime industry’s profit was that they gulled consumers who would have qualified for a reasonably priced standard loan into signing up for a subprime loan with vastly higher fees, sometimes more than 20 percent of the value of the house. These fees were rolled into the loan along with the principal, so the consumer didn’t pay the fee all at once. With low teaser interest rates, the monthly payment might be lower than on a standard mortgage even as the consumer was handing over his life savings to the subprime lender and its Wall Street investment bankers. The authors don’t quite come out and say it, but they imply that this is why it is necessary to regulate consumer lending much more tightly than it had been during the 1990s and 2000s.

Another theme is that Wall Street investment banks will, if given the opportunity, cheat “real money” investors with fine print and complexity, supplemented by optimistic ratings purchased from corrupt ratings agencies such as Moody’s, Standard and Poors, and Fitch. Sometimes the complexity gets too much even for a bank’s own employees who, despite their stratospheric salaries, aren’t very good at understanding risk. When this happens, the investment bank fails and shareholders and taxpayers are left to pay for the managers’ mistakes. Again, the authors don’t come out and say it, but they imply that this is why the government needs to regulate investment banks.

Overall the picture painted by All the Devils Are Here is of a nation whose population is nowhere near smart enough to use or operate the financial services industry that we have. Once things get to a certain level of complexity, fraud and confusion dominate.

23 thoughts on “Book review: All the Devils are Here

  1. “…a nation whose population is nowhere near smart enough…”

    How about “moral enough” instead…? The world was always too complex to be “operated” by us. The final guidance comes from morality, not from smarts.

  2. Housing didn’t fall since WWII because deflation is not allowed in
    the system. apparently negative numbers is bad for entrepreneurs.

    American people also don’t know that US has bankrupted itself three times
    in the past. Last being 1970 when dollar become the currency
    of choice for Oil. that other countries have to keep holding dollars
    thus allowing US to pass its inflation to the rest of the world.

    Once the world stops using Dollar no amount of printing of dollar
    will save the last bubble the world will ever see.
    All hell will break loose as US tries to capture its empire.

  3. Emil: I don’t think it is reasonable to make policy based on citizens becoming more or less moral. Anyway, the problem wasn’t that 100 percent of Americans were immoral. All that was necessary for disaster was that there be enough immoral people to serve as mortgage loan officers.

    I’m also not sure that the Wall Street executives are obviously immoral. Cheating the naive “real money” investor may in fact be what people have come to expect from Wall Street. Also, making hundreds of millions of dollars for one’s family by exposing one’s shareholders to huge risks… is that a proper moral act because it shows one’s devotion to one’s family? Or an immoral act because the shareholders have a right not to be wiped out? [As a shareholder, I’d like to label these managers’ actions “immoral”, of course, but that might just be my personal bias!]

  4. Philip:

    I think that the morality (in a very basic sense) of the larger segments of the society is, in fact, a crucial factor. My impression is that most Americans today don’t believe in “fair” competition, achieving without cheating, hard work winning over connections (it’s not what you do, it’s who you know), etc.

    I lived half of my life under a communist regime and my experience is that the predominance (or lack of it) of very simple moral ideas (do not cheat, lie, steal, etc.) in a population is a firm predictor for the future of a society.

    I came to this country ONLY because it was perceived to be more “moral” than old Europe. At some point, my wife and I moved from Paris (where I worked as an architect) to Twin Falls, Idaho. That should tell you something about idealism.

    I am super angry with the “folks” that changed America in the last 30 years – to make it this rather sad place where the only thing that counts is how much money you make – and not what you do to make money.

    You can’t teach your children that the only thing that matters is winning (at all costs) – without ending up with a morally bankrupt majority.

    Can’t you imagine a morally bankrupt majority? It has happened before. How about the US Congress (oh sorry… most of them are good folks stuck in a bad system).

    And Wall Street executives are obviously immoral. Don’t forget that communists, fascists, and mafia types are all models of family values.

    Anyway, talking morals is always a dubious exercise that leaves only a bad aftertaste. I don’t even know why I am writing this.

  5. “Overall the picture painted by All the Devils Are Here is of a nation whose population is nowhere near smart enough to use or operate the financial services industry that we have. Once things get to a certain level of complexity, fraud and confusion dominate”

    Two anecdotes from that time (circa 2004-2005).

    1) Discussing the housing market with G., one of the most intelligent, well educated, well read and nice people I ever met:

    Me: Have you seen these crazy price increases? The Boston area prices went up 15% since last year. Did you get a15% raise?

    G: No, my income didn’t go up by that much. But I wish there was a way, perhaps a mutual fund, I could use to invest in this.

    2) Water cooler discussion with K., the very friendly fellow who was in charge of the office building I was working in. K. was in his late fifties, married and had no children.

    K: I just got back from Miami – I bought a condo there two years ago. The price went up by 20% since then so I figure you can’t go wrong!
    Me: ?!

    Conclusion: sure, the government’s intervention via Fannie and Freddie, the banksters’ manipulations of the mortgage securities, the subprime loans, the predatory lending practices and so on have played a role but the root cause was that the ordinary people all bought into the idea that the only way was up. It’s important to keep in mind that housing bubbles have occurred in other parts of the world (e.g. France) without the catalysts mentioned above.

  6. Why do Americans continue to believe housing is an investment? Why would a pile of wood, susceptible to rotting, burning, termites and aging in general appreciate in value so much over many decades? Maybe the land may appreciate, but does anyone seriously believe their pile of wood and stucco will be that attractive after being exposed to so many years of weather?

    Also, should financial products really require that much regulation? If we all eventually accepted that the govt can’t protect us from evil sociopaths with contracts we can choose to accept or not, wouldn’t we all just adapt and become incredibly skeptical of anyone promising a return on something much beyond inflation? Seems like a more permanent solution to the convoluted regulations.

  7. From your review, I take it that the book hasn’t much to say on the banking crisis, which was the real disaster.

    Estimate of subprime losses on loans and securities by 2007/10: $250 billion;
    Estimate of cumulative world GDP loss in 2008-2015: $4700 billion;
    Decline in world stock market capitalisation between 2007/07 and 2008/11: $26400 billion.

    From: Olivier Blanchard’s paper “The Crisis: Basic Mechanisms, And Appropriate Policies” (at, asking the question: “How could such a relatively limited and localized event (the subprime loan crisis in the United States) have effects of such magnitude on the world economy?”

    I don’t think the answer is in Blanchard’s paper. John H. Cochrane is probably closer, when saying that it was the announcement of TARP that scared everybody out of their wits (Philip had a post on it). Anthony de Jasay’s 2008/10 column on “Cheap Talk: A Weapon of Mass Destruction: Asset Values, Expectations and the Apocalypse” also follows that line of reasoning (at:

  8. Typo in paragraph 4: stave off Bush administration hospitality –
    s/b “hostility”

  9. I think the biggest hoax was the one pulled on Congress and ultimately the American taxpayer that coerced them into believing that our entire financial system was going to totally collapse unless we bailed out a ten or so large companies.
    That, in my opinion, was the biggest fraud perpetrated on the American people. Had these businesses not been bailed out through huge capital injections I do not believe the U.S. would have experienced another Great Depression.
    They (big banking) got us going and coming.

  10. I’m not sure that this is correct: “The basis of the subprime industry’s profit was that they gulled consumers who would have qualified for a reasonably priced standard loan into signing up for a subprime loan with vastly higher fees, sometimes more than 20 percent of the value of the house.”

    It is no doubt true that some prime borrowers were sold subprime mortgages but I’m not convinced this was the basis of the industry’s profits, or the cause of the crisis. Wasn’t the real problem that the mortgage brokers gulled consumers who would have never qualified for any reasonably priced loan? Or any loan at all in saner times…

    Prime borrowers presumably would have had much lower default rates than subprime borrowers, because they at a pinch they could stretch to make the payments. Whereas a sub-prime borrower has no ability to do this and has much less to lose by just walking away from the loan and leaving the keys in the mailbox.

    @Seven: Look at what the NEAR collapse of the financial system did to the broader economy. Now multiply that by 10 and imagine what the ACTUAL collapse of the financial system would have looked like. Lehman’s uncontrolled bankruptcy very nearly achieved this. Think about how much worse the broader economic damage would be if AIG, Citi, Morgan Stanley, Goldman Sachs etc had all also been allowed to fail. Arguably Morgan and Goldman didn’t need more capital as they found private investors but they certainly would have if AIG and Citi had come crashing down without making their counterparties whole.

    We may not like but these institutions were (and to some extent still are) too big to fail – as Lehman proved.* On the plus side a total collapse of the financial system would have meant that Occupy Protesters would now all be collecting scrap metal to exchange for rations at the supermarket instead of heckling bankers.

    * Perhaps today under the new SIFI framework it be possible to conduct an orderly wind-down of an investment bank, sort of in the same way the FDIC takes down a failed commercial bank. This didn’t exist back in 2008

  11. I railed at the bankers for a while, and of course am reluctant to trust anyone in finance because, well, all the criminals are still there. But like some others have said, I come to realize that the real cause of America’s troubles is moral decay. Institutions with immoral leadership, be it government, companies, churches, armies, universities, banks, hospitals, the red cross, or any other are profoundly damaging. The decay comes from many causes. The main causes are 1) the loss of religious authority that has been the result of evolution denial, irrationally claiming that a fetus is a human being, putting emotional irrationality (faith) over reason, and general immorality in the ranks of church officials (such as priests raping alter boys) and 2) the loss of governmental authority that has been the result of obtaining civil rights (a moral thing that unfortunately more erodes governmental authority the more moral it is) and waging perpetual and unjust war.

  12. @Alex C,

    So you truly believe that had Congress not agreed to bail out these banks, there would have been food lines and bankers on the street corner selling apples? Because the claims they made were thst we’d experience an economic depression WORSE than ever before.
    It was almost humorous that the people making these claims were the very ones whose on lack of oversight got us into the situation to begin with. It sounded as if they were trying to cover their own rears (in vain, I might add).
    No, I do not think we’d have seen soup kitchens or Phil on a corner hawking peaches.

  13. @Alex,
    The broader economy was done in by a huge housing market bubble that popped. The US taxpayer bailing out a group of big banks hasn’t assisted that burst bubble one iota.
    I always thought we would have been much better off letting the crooks, pardon me, the banks in question go under and instead giving bailout cash to severely underwater home owners so they could pay down their mortgages to a manageable level.
    But of course THOSE folks didn’t have the ear of Congress like the billionaire fat cat bankers, did they?

  14. Alex: You’re not convinced that charging fees in excess of 20 percent of the value of a house would lead to big profits? Please let me arrange your next mortgage! I will charge you a very reasonable 19-percent fee that we can roll into the principal of the loan and then sell the whole thing to Wall Street! So if your next house costs $300,000, I will immediately put $57,000 into my pocket to compensate me for having to fill out a few forms.

  15. You should check “what has government done to our money” from Rothbard. All what what was done is just possible with fiat-money and defraud.

  16. May I make a few points?

    1) All those big-profit loan arrangers went bankrupt early in 2008. Obviously their profits were not big enough, given the huge exposure they had to sub-prime credit.

    2) If the “greedy, immoral” Wall Street types had broken the law, they would have been prosecuted.

    3) We may say that hindsight is 20-20, but there is still lots of disagreement over exactly what happened. One conclusion is certain: regulators were not arguing for more stringent credit standards.

  17. Tom: Excellent points. The authors aren’t explicit about exactly how much exposure the mortgage originators retained. I think they did say that at least some of the companies managed to sell mortgages outright and not retain any exposure. Such a company could still have gone bust in 2008 if only because subprime mortgages could not longer be rolled together into bonds.

    As far as the last two points go, I was trying in the original posting to summarize the authors’ point of view. I’m not necessarily agreeing with everything they say.

  18. Tom: I thought about it a little more. I don’t think that there is a contradiction between your point of view (#1) and the book. The high fees were the source of the profits that the subprime companies were reporting on a quarterly basis. As it happens, many of these companies later had to report losses that exceeded those profits due to the exposure you highlighted. So you could argue that they were never in fact profitable but of course they had some great(-looking) quarters/years.

  19. Many people say many things and spend too much time and brain power disecting the financial crisis. I could give you a million reasons why or who is responsible, but at the end of the day, it boiled down to one thing, and everyone is responsible…good old fashioned greed!

  20. Many of the so-called subprime lenders went out of business due to the lack of funding after the credit markets froze. They simply had no more product to peddle.

  21. The more I research this subject, the more it seems that many of the subprime banks/mortgage companies simply ran out of product, i.e. their funding dried up, knocking them right out of business.

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