When the devil went down to Wall Street

The Washington Post Sunday - - OUTLOOK - BY DANIEL GROSS Daniel Gross, the author of “Dumb Money: How Our Great­est Minds Bankrupted the Nation,” is a colum­nist at Ya­hoo Fi­nance.

ALL THE DEVILS ARE HERE The Hid­den His­tory of the Fi­nan­cial Cri­sis By Bethany McLean and Joe No­cera Port­fo­lio/Pen­guin. 380 pp. $32.95

You could fill an iPad with all the books, doc­u­men­taries, pod­casts, slide shows and tweets that have been pro­duced on the Great Fi­nan­cial Melt­down of 2008. So weary read­ers could be for­given for think­ing that we need an­other fi­nan­cial cri­sis book like we need an­other Web site de­voted to pol­i­tics. But we do need “All the Devils Are

Here.” Be­cause even as the cri­sis con­tin­ues to un­fold — in De­cem­ber, a civil

law­suit was filed against ac­count­ing firm Ernst & Young for its al­leged role in the col­lapse of Lehman Broth­ers— some in Washington are en­gaged in will­ful at­tempts to mis­read events. All four Repub­li­can-ap­pointed mem­bers of the fed­eral Fi­nan­cial Cri­sis In­quiry Com­mis­sion voted last month against us­ing words such as “Wall Street” in the group’s fi­nal re­port. And af­ter the Novem­ber elec­tions, bank­ing lob­by­ists be­gan to scheme with the in­com­ing 112th Congress to undo the luke­warm post-cri­sis re­forms. So in many ways, this highly read­able and in­struc­tive his­tory of the events and mind-set that lit the kin­dling for Septem­ber 2008 ar­rives just in time.

Bethany McLean and Joe No­cera, for­mer col­leagues at For­tune, take their ti­tle lit­er­ally: The cast of char­ac­ters listed at the be­gin­ning of the book is a nice, round 100 devils. McLean, a con­trib­u­tor to Van­ity Fair and Slate, and No­cera, a colum­nist for the New York Times, were will­ing to sac­ri­fice speed and buzz for the sake of qual­ity writ­ing and a tex­tured, mul­ti­lay­ered story. Un­like many of the quickie books on the cri­sis, “All the Devils Are Here” is tightly writ­ten, me­thod­i­cal and un­sen­sa­tion­al­is­tic. But its rev­e­la­tions are just as shock­ing as those in most of its less-wellaged pre­de­ces­sors.

Over the course of 30 years or so, mort­gage lend­ing and the in­creas­ingly fren­zied ac­tiv­i­ties sur­round­ing it came to in­fect and cor­rupt the whole sys­tem— banks, reg­u­la­tors, govern­ment-spon­cri­sis

sored en­ter­prises and politi­cians on both sides of the aisle. There are good por­traits of the devils we al­ready know: An­gelo Mozilo, the founder and life force of Coun­try­wide Fi­nan­cial, a bun­dle of re­sent­ments, will-to-power and ar­ro­gance; Stan­ley O’Neal of Mer­rill Lynch, the first black chief ex­ec­u­tive of a big bro­ker­age, who was im­pa­tient for his firm to rack up the prof­its earned by other Wall Street jug­ger­nauts; and Jim John­son and Franklin Raines, the po­lit­i­cally savvy chief ex­ec­u­tives of Fan­nie Mae, the gi­ant govern­ment-spon­sored mort­gage com­pany.

The au­thors also in­tro­duce us to some in­trigu­ing new ac­tors, such as Roland Ar­nall, whose ex­ploits have un­til now re­mained largely hid­den. “ Though his com­pa­nies never got the blame that would later be heaped on Coun­try­wide, Ar­nall was the real sub­prime pi­o­neer,” the au­thors write. Born in Paris in 1939, Ar­nall sold flow­ers on the streets in Cal­i­for­nia be­fore start­ing sev­eral busi­nesses. Among them was Long BeachMort­gage, a sub­prime lender whose shoddy busi­ness prac­tices brought fed­eral scru­tiny in the 1990s. Ar­nall cut a deal with De­val Pa­trick, a Clin­ton ad­min­is­tra­tion as­sis­tant at­tor­ney gen­eral (and now Mas­sachusetts gover­nor), un­der which Long Beach de­nied the al­le­ga­tions and agreed to give $1 mil­lion to non­prof­its that spe­cial­ized in con­sumer ed­u­ca­tion. Af­ter Long Beach faded away, Ar­nall founded a bunch of sub­prime len­ders, in­clud­ing Ameriquest and Ar­gent, which typ­i­fied the worst prac­tices in the in­dus­try: ex­plod­ing prod­ucts, boiler-room in­cen­tives to bro­kers, a cal­lous dis­re­gard for reg­u­la­tory re­quire­ments.

By 2005, Ar­nall, who kept his com­pa­nies pri­vate, was worth $3 bil­lion and ranked 73rd on the Forbes 400 list. He plowed some of this sub­prime lu­cre into pol­i­tics, do­nat­ing heav­ily to Repub­li­can causes. He also named Pa­trick to a well-com­pen­sated cor­po­rate board post. In 2006, when Ar­nall’s sub­prime em­pire again came un­der reg­u­la­tory and jour­nal­is­tic scru­tiny, it didn’t stop him from get­ting fund­ing from Cit­i­group or from be­ing nom­i­nated by Pres­i­dent Ge­orge W. Bush as am­bas­sador to the Nether­lands. A young black sen­a­tor from Illi­nois was ini­tially wary of sup­port­ing the nom­i­na­tion but noted: “I’ve got a let­ter from De­val Pa­trick, who ac­tu­ally is a good per­sonal friend of mine.” In Fe­bru­ary 2006, a month af­ter Ameriquest an­nounced a $325 mil­lion set­tle­ment with state attorneys gen­eral and four months be­fore the com­pany es­sen­tially shut down, Ar­nall was con­firmed.

In the­ory, Ar­nall’s com­pa­nies were sup­posed to be work­ing for the peo­ple and the govern­ment — how else could they jus­tify the enor­mous sub­si­dies they re­ceived in the form of tax breaks and quasi-govern­ment-guar­an­teed fund­ing? In re­al­ity, as McLean and No­cera demon­strate, the czars were work­ing for the Cos­sacks. While the au­thors push back against the ab­surd right-wing meme that Fan­nie and Fred­die were solely re­spon­si­ble for the sub­prime mort­gage cri­sis, they show in damn­ing de­tail how the com­pa­nies were able to fend off reg­u­la­tory pres­sure. They con­vinc­ingly ar­gue that those charged with safe­guard­ing the sys­tem re­mained will­fully blind to the risks. (Alan Greenspan’s mem­oir, they note, didn’t con­tain the phrase “sub­prime mort­gage” or “preda­tory lend­ing.” And they say the sys­tem mo­bi­lized to smack down any­one who protested or raised tough ques­tions.)

Ar­nall died in March 2008, but many of the devils are still with us. Their most di­a­bol­i­cal act may be leav­ing be­hind prob­lems that defy easy (or even dif­fi­cult) so­lu­tions. Not­ing that the Dod­dFrank fi­nan­cial re­form bill did noth­ing to change the sta­tus of Fan­nie Mae and Fred­die Mac, McLean and No­cera con­clude: “ The rea­son that the leg­is­la­tion makes no men­tion of [Fan­nie and Fred­die] is that no­body can fig­ure out what to do.”

Like a book about Pearl Har­bor that ends in late Novem­ber 1941, “All the Devils Are Here” closes just be­fore the ac­tion re­ally starts. But it’s very much worth read­ing for its damn­ing con­clu­sions and its crafts­man­ship. McLean and No­cera weave seem­ingly un­re­lated strands of the story into a co­her­ent ta­pes­try. While chap­ters fre­quently be­gin like news mag­a­zine fea­tures—“Stan O’Neal wanted to see him. How strange.”— this nar­ra­tive was con­structed by skilled pro­fes­sion­als with great care and at­ten­tion. It’s a shame the same can’t be said for our mort­gage in­dus­try.


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