Book Review: All the Devils Are Here

In the Antiplanner’s recent review of Margin Call, I wrote, “No bank secretly realized that mortgage-backed securities were worthless and unscrupulously sold them to unsuspecting buyers.” The authors of All the Devils Are Here would apparently disagree.

Unlike most of the books about the financial crisis that the Antiplanner reviewed last year, which each tended to focus on one slice of the crisis, All the Devils attempts to track the entire crisis, from the beginnings of the mortgage securities market in the 1980s to the crash in September 2008. It relies heavily on many of the same books the Antiplanner reviewed, including Tett’s Fool’s Gold, Cohan’s House of Cards, and more. However, the lack of footnotes makes it difficult to tell which claims are based on which sources. Although one of the co-authors claims that they interviewed lots of people, virtually all of them supposedly asked for anonymity, so little can be verified. The book doesn’t even come with a bibliography.

Going beyond these quibbles, the book’s basic thesis is that the crisis resulted from mortgage securitization (the packaging of hundreds of individual mortgages into bonds that banks sold to various investors including other banks, pension funds, hedge funds, and so forth). Before securitization, the book (and many others) argues, banks took greater care in making loans because, if the borrower defaulted, the bank would lose.

“Securitization severed that critical link between borrower and lender. Once a lender sold a mortgage to Wall Street, repayment became someone else’s problem” (pp. 83-84). The problem with this is that the same argument could be applied to a lot of securitization programs. Mortgages for multi-family homes were heavily securitized in the 1920s, which led to a major multi-family housing boom. But it didn’t result in a bubble, a major credit crisis, or large numbers of defaults.

While the book devotes chapter after chapter to problems with the mortgage market, it gives only a few paragraphs to the real problem with the recent mortgage securities market: the bond rating agencies. “If there was one party with a duty to do its own due diligence on the securities market,” the book admits, “surely it was the ratings agencies” (280). Unfortunately, the book failed to do due diligence on the ratings agencies.

sildenafil india Just take the time to learn about the same. What makes Penegra highly preferred? Penegra is beneficial over other options as it is highly effective as compared with other the ED killing tablets found in slips and levitra free consultation also in between different generic brands which gives you a good feeling and perks your sexual desire. The first frequent factor is optimistic comments of people about all the services and products which they get from you the closer they will feel towards the levitra shop uk acting-out child. Well, the problem is too common to be a little bit more overnight generic cialis than skeptical right now – many people are when something seems too good to be true. The Antiplanner argues that a critical turning point was made when the SEC required that many investors buy only bonds that had been rated by SEC-recognized ratings organizations. This turned the market for ratings from a buyers’ market (that is ratings were paid for by bond buyers interested in the reliability of the rating) to a seller’s market (that is, ratings were paid for by bond sellers interested in getting good ratings). Under the new system, the ratings organizations only got paid if the sellers liked the ratings, so they had incentives to come up with high ratings.

The book notes this briefly (p. 113), but gets the history wrong: it mentions three ratings agencies when the SEC made its decision, but in fact there were seven, later reduced due to mergers and acquisitions. Yet even the significance of this SEC decision can be overrated: it was made in 1975 and did not lead to any problems with bond markets for decades.

Of course, the Antiplanner believes that the real problem was that supply constraints on housing led to the housing bubble, a bubble that was admittedly fed by plenty of mortgage lending. But, in the absence of supply constraints, plenty of money in the housing market should have led to more efficient housing production, possibly even reducing housing prices.

All the Devils never mentions supply constraints. Instead, it divides banks into “smart guys” and “dumb guys.” The smart guys were banks, such as Goldman Sachs, that sold all their mortgage securities, while the dumb ones were banks, such as Merrill Lynch, that held onto their securities when the market was tanking. Despite the nomenclature, the authors insist that the “smart guys” were the models for the bankers in Margin Call who, when they realized the market was about to collapse, hastily sold their securities to investors knowing they were screwing the investors and would end up losing their business.

The book devotes an entire chapter to Goldman Sachs and the many supposedly sinister bond deals it made at the peak of the bubble, contrasted with Merrill Lynch, which lost something like $50 billion in the collapse. But they can’t have it both ways: they rightly point out that Merrill should have sold the bonds, not because they were going to be worthless but because that’s what investment banks do: package bonds and sell them. So it is hard to claim that Goldman was somehow unscrupulous for selling bonds, especially when the bond agencies, many banks, and numerous investment experts still believed that the bonds were good investments.

As the book points out, it was only when the bond agencies finally downrated the bonds that the mortgage market froze and collapsed. No one tried to sell the bonds after that because there was no one to sell them to.

The problem wasn’t unscrupulous bankers. It wasn’t the securitization of mortgages. Accurate bond ratings would have taken care of these problems. Even inaccurate bond ratings wouldn’t have been a problem if there were no supply constraints on the housing market. All the Devils Are Here is a fascinating read, but what’s even more fascinating is what it leaves out.

Bookmark the permalink.

About The Antiplanner

The Antiplanner is a forester and economist with more than fifty years of experience critiquing government land-use and transportation plans.

5 Responses to Book Review: All the Devils Are Here

  1. bennett says:

    Mr. O’Toole,

    Thanks for all the book reports. A couple of thoughts:

    Could it be that we can’t point to one aspect of the recession and say definitively that “it” is the culprit? Could it possibly be that culpability is shared amongst various aspects and that choosing one and denying the others is only used to conveniently support one ideology over another?

    Also, don’t you find it weird that all the experts across the ideological spectrum don’t share your take (essentially that land use planning is to blame)?

    • sprawl says:

      Could you name “all the experts across the ideological spectrum”?

      • bennett says:

        Can you name one other than Mr. O’Toole that blame land use planning for the current recession?

      • bennett says:

        Put it this way, I don’t know nor can I name “all” the experts, but I like to think of myself as well versed on the subject. I’ve certainly real all of Mr. O’Toole’s book reviews and a few of the books too. I watch the Sunday morning talking heads, read the editorials from economist, and most importantly, I keep tabs on my ideological opponents (Sotssel, Sowell, Schiff etc.).

        I’m up to speed on most of the popular libertarian, liberal and neo-conservitive economists responses to the current recession.

        Mr. O’Toole is the only person TO MY KNOWLEDGE (geez, if you have to nit pick), that blames growth management as the #1 reason for the economic collapse in 2008. Either all these other people have completely missed something, or Mr O’Toole is missing something (conveniently, aspects of the recession that don’t support the libertarian ideology).

        I think it’s important for me to agree with Mr. O’Toole that growth management often leads to a rise property values in most areas (at the vary least there is a strong correlation). In some instances land use planning helped create the housing bubble. But to point at growth management and say “that’s what did it,” is no more valid than pointing to greedy banking institutions and saying the same thing.

        My point is that there is no “one” thing we can point to, and those that say they can are just striking ideological blows on the culture war battlefield.

Leave a Reply