Monday 23 January 2017

Digging at roots of crisis to expose devil in the detail

All the Devils are Here: The Hidden History of the Financial Crisis

Published 21/04/2011 | 05:00

THREE years into the global economic downturn, it would be fair to say that most people have an opinion on how it happened.

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While Ireland's problems have been unique, the general belief seems to be the crisis which began in the US and moved across the world was sparked by the big Wall Street banks greedily luring poor people into signing for mortgages they could never afford to pay back.

While that is true in part, Bethany McLean and Joe Nocera find there are many more people and institutions to blame in this excellent book on the roots of the financial crisis.

The tale is a classic case of hubris followed by nemesis. From the 1990s on, various mortgage companies were originating mortgages to people who patently could not afford them.

Those mortgages were then sold to Wall Street firms who securitised them into "tranches" and sold them to investors. The system was predicated on housing prices going up, thus allowing homeowners to refinance their mortgages every few years and so keep making payments.

When house prices fell, the system collapsed, and the banks that had been making billions of dollars in profits were left holding the bag.

The authors go well beyond The Street and find horrendous misjudgments, if not dereliction of duty, everywhere.

Long-time chairman of the Federal Reserve Alan Greenspan is excoriated for his belief that the markets should be allowed take their course. The ratings agencies are condemned for doing what the banks told them to do, rating as investment grade products which would be junk months later.

Wall Street chiefs are portrayed as aggressive, out of touch and incompetent.

Merrill Lynch boss Stan O'Neal fires the best trader his firm has, replaces him with a far more aggressive dealer, and is shocked when a risk manager he had allowed to be sidelined tells him the firm could lose billions on mortgages.

It is implied that Goldman Sachs saw the crisis coming and then ruthlessly peddled junk securities to its clients to de-risk its balance sheet.

Ultimately, 'All the Devils are Here' is a warning. If this happened before, it can happen again, and the authors lay out just how easily it can be done. If you want to understand how the world economy got to where it is, this is a must-read.

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