All the Devils Are Here: The Hidden History of the Financial Crisis [Hardcover]

 

 

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This book pulls no punches, names the wall street thieves. A good read after " This time is different". Get both these books.

I found the authors did a good job of highlighting many of the factors surrounding the financial crisis. I say good, but not great as they appear to have a misconception regarding derivatives, their uses, personal responsibility in the crisis, and the responsibility of lending institutions. Clearly, Wall Street had a significant problem when dealing with credit default swaps (CDS) and is definitely at fault for part of this crisis, but the authors fail to land responsibility on others which contributed to the problem. These are the points that I felt were not well addressed.

1. The authors imply that derivatives are evil and should be banned or regulated. What they fail to discuss is that derivatives are much larger than the crisis and most derivatives are a zero sum game. They indicate that investors were "idiots" to buy them (to quote from their interview with Jon Stewart). Although this may be partially true due to the fact that investors made decisions without learning the fundamentals behind investing, but this is also human nature. The same thing happened with the Tech Crash of 1999, the 1929 market crash, and the Dutch tulip craze--basic fundamentals behind investing was not considered, only that there was a hot, hyped market for a product. Whether that product is CDSs, stocks, or tulips; history repeats itself. What the authors fail to realize is that there are 10's of thousands of derivative trades made daily. This means that there are 10's of thousands of losers and an equal number of winners. Yet neither the winners nor the losers are ever discussed in the media (these two being reporters by trade and not trained in finance). As renown economist Merton Miller has stated, derivatives serve a useful purpose. So the authors comments on restricting them is a naive and limited view. The best example of a derivative in the form of an option is home fire insurance. You pay a premium to the insurance company. If your house doesn't burn down, you lose your premium and the insurance company wins. The reverse is true if your home burns down. There are many classic examples of "investors" that have no business being in derivatives or take excessive risk that screw it up for everyone (e.g., Orange County, Baring Bank, and a gold firm in Dubai a few years ago). One difference between insurance and the CDS market was that the financial institutions were also market makers and were not diversifying risk.

2. Business risk is a risk and if a financial firm fails because it accepted too much risk, why should the government bail them out as a lender of last resort and what would have happened if the government hadn't stepped in. This is not addressed by these authors.

3. The authors do not pin personal responsibility on individuals who took out loans they could not afford which then made more buyers in the marketplace that should not have been there, thereby driving real estate up quickly based on future earnings. In this case, financial institutions failed to do due diligence and broke credit "rules" by basing loans on future vice current earnings. Canada, for example, has much more rigid guidelines set out by their banks and CMHC which were not affected by CDS problems. The authors wholeheartedly blame Wall Street when in fact the blame should be shared.
4. Fundamentals behind CDSs were not addressed by buyers and market makers. This is partially covered, but still could use improvement. The authors do fail to discuss who held title to the defaulted properties and failed to address workouts with the borrowers by the lending institutions as was done in the 1930s - 1980s. Although title and personal working relationships with borrowers (as the Savings and Loans companies did in the 1930s) does not affect the CDS, it could have mitigated losses.

5. Finally, the authors do address the faulty assumption that real estate prices would not drop. Again fundamentals were not followed and risk not mitigated through the proper use of derivatives. This is not unlike the Australian mining firms who made faulty assumptions in the 1990s and did not reduce their risk. But once again, they deflect personal responsibility by investors who believed this assumption when it was obvious that a rapid rate in real estate prices could only result in a bubble.

The book is a good read if you like finance, but be wary of their take since they are not financial experts themselves, but journalists with their own viewpoints. Although the book may make you mad by the end, look at the larger picture and consider all facets of this puzzle before running out to get your Congress member to change the law.

This is not an unbiased or a scholarly account by any stretch. But neither is it unprofessional. These are business journalists, used to needing to keep the interest up, also used to communicating a lot of information. A lot of people go by and by the end you'll likely be dizzy, if you're not familiar with the material. It certainly is entertaining, in the way of a train wreck, and after its all over you probably won't look at the financial markets the same way again. After the crash of 2008 though, you probably were already cynical. This book won't change that.

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4.0 out of 5 stars Belief doesn't make reality
Events that led up to the 2008 collapse of much of the world banking system is nothing short of fascinating. How could government regulators have let this happen? Read more

Published 17 months ago by L. Ramsey

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