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.

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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.