The devil may be in the details, but when it comes to the financial crisis of 2008, scores of people seemed hell-bent on bringing the country to the brink of economic disaster. The fallout is still evident with unemployment close to 10 percent and foreclosures at an all-time high. The banking industry, which is gearing up to fight the new financial regulation bill, is not exactly chastened by what they wrought.
A new, meticulously written book by journalists Joe Nocera and Bethany McLean, All The Devils Are Here: The Hidden History of the Financial Crisis (Portfolio/Penguin), sheds light on the people and events leading up to the crisis. The Fiscal Times (TFT) spoke with Nocera.
The Fiscal Times (TFT): Despite Dodd Frank, you say human nature dictates that another financial crisis is inevitable. Not if, but when. Why?
Joe Nocera (JN): Dodd Frank fiddles on the margins with derivatives. It’s tepid. The Consumer Financial Protection Bureau could be important if implemented correctly, but it's hard to know if that will happen. And the idea of systemic risk regulators makes me a little nervous: Are they really the right guys to tell us what's coming next? Here’s the bottom line: If somebody wanted to start making synthetic CDOs [collateralized debt obligations] again, there's nothing in the regulations to stop them.
TFT: Care to put a time frame on when another crisis might happen?
JN: It might be in five years or in 50 years. We don’t know. But I’ll say without hesitation that it will happen. After the Great Depression, with the establishment of the SEC and Glass-Steagall, it was a really long time before the structure of modern finance began to crumble again — more than 50 years. With regulation, that's about the best you can hope for. Eventually, the financial market will find its way around regulations. The regulations start to seem outmoded, sleepy, out of step with the times. Because the essential building blocks and structure of finance are still in place this time, the only thing that's really holding everything back is that fear has overtaken greed in the marketplace right now.
TFT: Yet some banks may start to pay dividends again, including JPMorgan Chase.
JN: Yes, but the flip side is: They're achieving their record earnings by taking money from their reserve funds. So I think the jury is still out on that.
TFT: Let’s discuss the people and the institutions you consider most at fault for the financial crisis. Who tops your list of so-called bad guys — devils, as you call them?
JN: The credit rating agencies were the institutional devils — they were the most duplicitous. They fundamentally changed the way they did business. When they gave an AAA rating to junk, they did so holding their noses, using models even they didn't believe in. And they got pushed around by Wall Street and let themselves get pushed around by Wall Street. Really, the whole artifice depended on those AAA credit ratings, and without that, we wouldn’t have even had the subprime mortgage securitization business.
TFT: Who are some of your personal “devils”?
JN: Alan Greenspan, for one. He refused to look the problems squarely in the eye, in terms of subprime mortgages and the damage they were doing to the country, even though a large part of his job was as a regulator of the banking industry. He was such an important force in Washington and had such moral suasion that he carried everybody else along with him.
TFT: And who would be next in line?
JN: Well, so many different things were happening all at once and then coalescing. So it would be hard to actually impose a kind of order. Roland Arnall was making the worst of the worst subprime loans on Main Street, at AmeriQuest. Stan O'Neal was hiring the wrong people at Merrill Lynch in a quest for taking bigger risks and making more profits. Joe Cassano at AIG was ensuring mortgage-backed securities, so that big banks would buy them. Rates were going down so that everybody was stretching for yield, and there was a delusional belief that housing prices were going to go up forever — so it didn't matter if you got somebody into a mortgage they couldn't pay back, because they would just refinance.
TFT: You write that it was a point of pride for many in the financial industry to be able to sell subprime mortgages — knowing full well those mortgages wouldn’t be paid back.
JN: And the federal government looked the other way so assiduously. Then, similarly, on Wall Street, you had people saying, ‘Well, yes I'm buying all these lousy subprime loans, but they're rated AAA and they're all bundled together, so even if a few of them default, we'll be fine.’ And the regulators were saying, ‘We should just leave this to the market, because all we’ll do is muck things up.’ Which also got to be equally delusional.
TFT: Clearly someone, at some point, should have said, ‘Stop the madness.’ Do you feel bubbles are inevitable?
JN: I feel they are. But what caused this to spiral out of control was that there was nobody anywhere in society who tried to put the breaks on. For all the financial sophistication and innovation, at its core this bubble was no different than the Dutch tulips. Still, I believe there are times when societies lose their heads, and I think this was one of those times.
TFT: Has the American dream of owning a home now shifted, given the difficulties so many in this country are now having?
JN: I don't think so. Basically, government policy encouraged the idea that the American dream and homeownership were one and the same. And that policy, in the form of the home mortgage deduction and other things, still exists, though it’s been tarnished with the failure of Fannie and Freddie. I think that many people feel chagrined, in that they thought they were going to partake of the American dream and buy a home but now feel burned and angered by what has happened. But what will change is the notion that anyone can own a home, whether they can afford it or not. And that should change.
Bethany McLean’s and Joe Nocera’s All The Devils Are Here (Washington Post)
Welcome to the Casino: All the Devils Are Here (New York Times)