Another reader compared this book to THE BIG SHORT, and it’s fitting both in style and in content. Both books tell the personal stories of people invoAnother reader compared this book to THE BIG SHORT, and it’s fitting both in style and in content. Both books tell the personal stories of people involved with highly complex financial crimes to help clarify that complexity to the layperson. (To be honest, Michael Lewis did a better job of it.) More importantly, though, this book answers the question that THE BIG SHORT leaves off with; that is, with all this fraud going on, why wasn’t anybody charged? The answer is right in the title. They were chicken.
The title comes from the now-famous James Comey, who used the phrase to describe prosecutors who’d sooner settle than lose a case. When he was the chief prosecutor at the Southern District of New York, the court with jurisdiction over Wall Street, he told his underlings that it is better to lose while fighting and publicizing injustice than to settle and let the perpetrator get off with a fine and a non-disclosure agreement. The author states that Comey didn’t always practice what he preached, but he’s pretty hard on quite a few highly prominent people in this book, namely President Obama, Eric Holder, and Preet Bharara.
So, how did prosecutors become so chicken? Unsurprisingly, it was a number of factors. For example, in what the author calls “the silver age” of prosecuting white collar crime (there was no golden one), prosecutors invented new ways of getting corporations to cooperate, but eventually, the corporations used those agreements to their own advantage. On top of that, the incentives for lawyers hoping to advance in their careers lead them toward settlements instead of losses. Related to this is the criticism leveled specifically against Preet Bharara. He took down hedge fund managers for insider trading, but he didn’t go after the biggest fish. Taking them down would take more time and effort, so he chose the safer bets. On top of that, there’s the underfunding of the courts as compared to the private firms, and the “too big to fail” problem. President Obama is often blamed for being too cautious, but if taking stronger action ran the risk of making the economic downturn worse, you can see why he and Eric Holder made the choices they did. The big banks are holding the rest of us hostage.
I must admit, my concentration was pretty poor through much of this book. It was definitely not easy. But at the end of it, when I understood just how much time it can take to build an iron-clad case against a white collar criminal, I was willing to be patient with Robert Mueller’s investigation. So what a surprise that on the very same day that I finished the book, I learned that the indictments were imminent. And now they’ve happened. So perhaps the days of chickensh—t prosecutions are over. Go to it, Robert Mueller!...more
Before reading this book, my biggest financial worries were about paying down my credit card and saving for retirement, but now I’m worried if I’ll evBefore reading this book, my biggest financial worries were about paying down my credit card and saving for retirement, but now I’m worried if I’ll ever be so blessed as to reach old age. This book makes the highly plausible argument that the next financial crisis is right around the corner, and not only will it be more devastating than the last one, it may be even worse than the Great Depression. Printing money and deficit spending won’t work anymore, so the next tool in the financial elite’s arsenal is a bank freeze. As the book puts it, everyone’s bank accounts will be like precious jewels behind a locked glass case. You’ll be able to see your money, but you won’t be able to access it. When that happens, people will be looting the supermarkets and rioting in the street. The author’s advice is to keep ready cash around and invest in gold for the long term, but stocking up on gas, water, and canned food seems more within my reach. Gold may be good for preserving wealth, but it’s the basics of survival that I’m worried about.
Now, I’ll admit that there were large sections of this book that flew right over my head. There were also parts that raised my doubts. The author seems to consider almost every American president since Wilson a fascist. He acknowledges that none of them were murderous, like Hitler, but they all believed in a powerful state. He even called President Obama’s community organizing approach fascistic, but to me it seems like democracy in action. Still, in spite of that point of disagreement, I believe him. The next financial crisis will be bad, the sort of thing I’ve read about in history books but never thought would happen in my lifetime. Does reading this book mean I’m more prepared for it? I’d like to think so, but I’m probably kidding myself. So, important book, but a terrible way to end the year. ...more
Ever since reading The Big Short earlier this year, I’ve become a big fan of Michael Lewis, and since he mentioned this, his first book, over there, IEver since reading The Big Short earlier this year, I’ve become a big fan of Michael Lewis, and since he mentioned this, his first book, over there, I thought I’d check it out. Because it takes place in the 1980’s, it shows the beginnings of how home mortgages came to be leveraged in our financial system, but I was just as interested in Michael Lewis’ beginnings as a writer. At the end of the book, he leaves his job at Salomon Brothers, uncertain of his future but pretty sure that his choice means that his chances of ever becoming a multi-millionaire are behind him. He had no idea that his memoir was about to turn him into a best-selling author or that three of his future books would be adapted into movies. That kind of hindsight reading is fun, but the stuff about the financial markets was anything but. Just like with The Big Short, I’m hazy on the details, but one thing I did get: whatever financial crash happened as a result of mortgage-backed bonds in 1987 was just a precursor to the crash of 2008.
The one thing that the book makes clear, even to a financial novice like me, is the cutthroat, macho culture of investment banking. He uses a much cruder term for it, but I won’t repeat that in my review. In The Big Short, he says that he wrote the memoir to warn students away from financial careers, but he says the book backfired so badly, many people regarded it as a sort of handbook. Ironically, one of the people who did heed the warning was Dr. Michael Burry, one of the main people profiled in The Big Short. “Even if I could go into finance,” he told the graduating class of 2012 at UCLA, “I didn’t think I should.” That’s why he chose medical school; at least there he could help people. And even though his interest and talents brought him back to finance, he never drank the Kool Aid with everyone else. He wasn’t part of that macho culture, so he saw right through it.
All of this reminds me of Douglas Adams’ observation in The Hitchhiker's Guide to the Galaxy: anyone who wants to rule the world should by no means be allowed to do it. He was talking about politics, but it’s even more true for finance, particularly in the U.S., where there seem to be no checks or balances. The traders in this book would regularly screw over their customers, co-workers, employers, and ultimately, the entire financial system, all for their own fees! Even more than The Big Short, this book makes clear just how skewed the incentives in the financial industry are. I finally understand why the banks claim they have to pay such big bonuses: because if they don’t, their employees will go work for a better-paying competitor. They don’t seem to have loyalty to anybody.
Some people say we should break up the banks, and others say we should go back to the pre-Reagan days when savings and loans were separate from investment banks. I’m inclined to agree, but I also think we consumers/investors need more legal protection. If I can sue a doctor or lawyer for malpractice, why not a financial advisor? The more I read of Michael Lewis, the more I see how desperately we need it....more
When an author is researching and writing a book, it can often happen that he comes across something really interesting that just doesn’t fit into theWhen an author is researching and writing a book, it can often happen that he comes across something really interesting that just doesn’t fit into the story. When that happens, it’s usually the birth of an entirely new book, and that is the case here. When Michael Lewis was interviewing hedge fund managers who saw through the financial bubble, he came across Kyle Bass of Dallas. Like the men profiled in The Big Short, he shorted the CDOs and made a fortune after the crash, but what was different about him was that he began focusing on governments afterward. He argued that since governments bailed out the economy, they didn’t really end the crisis; they just moved its center of weakness. So when you see budget cuts to services in your town, now you know why.
Kyle Bass persuaded Michael Lewis, but his message was beyond the scope of The Big Short. In this book, he rescued Bass from the cutting floor. Because Bass took a global approach, Lewis followed the story of the crash around the world, visiting Iceland, Greece, Ireland, and Germany. Only in the last chapter does he return to the United States, and then only to two small cities in California.
The thesis of the book is similar to his other books: the whole world went nuts with the easy credit of the boom years. Each country added its own cultural approach to debt. For example, in Ireland, which has a long history of crushing poverty, the prospect of home ownership was a dream nobody could pass up. In Germany, on the other hand, the average person is too risk-averse to take on an irresponsible home loan, but that didn’t stop investors from buying the CDOs that allowed other people to take out those loans. Either way, in the end, all of us are stuck.
It’s been a few years since this book was published, so perhaps things have improved. That’s what I hear on the news anyway: the economy isn’t doing spectacularly well, but the Great Depression was avoided – at least for now. And with all the resentment at Wall Street that still persists eight years later, perhaps people are more willing to accept slow and steady growth. It may not buy as much as easy credit can, but in the end, it’ll give us a more secure future....more
I’m a big fan of the NPR podcast Planet Money. Its pilot episode explained the causes of the economic collapse of 2008 in terms laypeople like me coulI’m a big fan of the NPR podcast Planet Money. Its pilot episode explained the causes of the economic collapse of 2008 in terms laypeople like me could understand, and I haven’t missed an episode since. Its reporters have veered off into a wide variety of money-related topics over the years, but in the early days, most of the reporting was on the crash and its aftermath. In that time, they recommended two books: The Big Short and All the Devils are Here. I chose All the Devils are Here first, and afterward, I felt I’d learned as much about credit default swaps as I was ever going to be capable of. I figured I’d skip The Big Short because I didn’t believe that any other book, no matter how well-acclaimed, would improve my fuzzy understanding.
Superficial as it sounds, what changed my mind was the movie. Adam Davidson, the founder of Planet Money, served as a consultant on the film, and he and director Adam McKay are now co-hosting a new podcast together. I’ve become such a fan of both of them, I knew I had to see the movie. And since I always prefer to read the book first, I went into The Big Short with relish.
The main difference between the two books is this: All the Devils are Here is about the perpetrators of the crash while The Big Short tells the story of the people who foresaw it. The most important new insight I gained is right in the title: the concepts of “short” and “long.” When investors take the “long” position, they expect the investment to last, grow, and give pay-outs over the long term. “Shorting” an investment means you expect it to go belly-up. In this case, the people who bought short actually bought insurance policies on home loans that they thought the borrowers would inevitably default on.
It all seems so obvious now, but the vast majority of people in the finance industry didn’t see it coming. Part of the reason is simply that they didn’t understand credit default swaps much better than I do. They were designed to confuse and trick the customers, and then the salespeople were hoisted on their own petard. Another part of the reason was the inaccuracy of the credit ratings agencies. Think of it like nerds and jocks. The jocks in the banks strong-armed the nerds in the ratings companies to say what they and their customers wanted to hear, and the nerds went along with it because they needed the jocks to keep their business alive. But if credit agencies operated as they did when they were founded, which basically amounts to spying on people, that would have been awful, too. (For that history, check out Born Losers: A History of Failure in America by Scott A. Sandage.)
All in all, this is the story of a handful of individuals who saw through the mass delusion of the money culture that has gripped us since the 1980’s. The origins and personal journeys of these individuals, particularly Steve Eisman and Dr. Michael Burry, make it an especially absorbing book. It will definitely shake you up, but worst of all is what author Michael Lewis has been saying since the book came out: not enough has changed, and the economy WILL crash again.
Between this book, Wild Ones, and The Sixth Extinction, which are about the environment, I think we humans have no time to lose in strategizing to prevent mass disaster. We’re just as delusional about our monetary wealth (which I understand is merely imaginary and is really nothing more than representative numbers in our banks’ computers) as we are about our natural resources, which, arguably, amount the only genuine, concrete source of wealth that exists. Right now, the numbers in my bank account are accepted as a fair trade for food in my supermarket, but it won’t do me any good if the food that farmers are growing becomes too toxic to consume. I think the do-it-yourself, off-the-grid people have got the right idea. Our interconnected financial system is rigged against us, and since everything else is connected to it, the best thing anyone can do is disconnect and learn to live independently.
I know I sound like a pessimist. I’m sorry. But at least I’m saying we should find a solution before it’s too late. It may not be too late yet. ...more
Every time I read a book about Wall Street, I have two basic reactions. 1) I don’t quite get all the details of the scam here, but I understand that tEvery time I read a book about Wall Street, I have two basic reactions. 1) I don’t quite get all the details of the scam here, but I understand that there is one. 2) All those bullying business majors who made my first few weeks of freshman year so miserable went and did the same to the world’s economy. Luckily, this book isn’t just about the self-entitled financial middlemen who profit at their clients’ expense. It’s about a small group of Wall Street guys who tried to reform the system from the inside. From what I gather, they’ve been successful.
The leader of the reformers is Brad Katysuma, but I thought the people he assembled for his team were much more colorful. There was Ronan Ryan, an Irish tech with a mouth like a sailor, Zoran Perkow, who on 9/11 decided that he was at his best in a crisis so made a career change to the high-stress environment of Wall Street, and a former military man with the unique gift of mapping out complexities, whether on the battlefield or the stock market. Even though I didn’t get all those complexities, the focus on the personal made the book more accessible. The book also details the biography of one man not on Brad’s team: Serge Aleymov, the only Goldman Sachs employee to serve time since the crash of 2008.
If I had a significant amount of money, I’d invest it with Brad Katsuyama. But since I don’t, I can content myself with knowing that at least one guy on Wall Street actually has integrity. ...more
I’ve given this a 5 because it’s excellent journalism that made the complex causes of the financial crisis about as clear as they probably can be, butI’ve given this a 5 because it’s excellent journalism that made the complex causes of the financial crisis about as clear as they probably can be, but I must admit, plenty of it confused me and I nearly gave up in the middle. I guess this review will show whether or not I really understand mortgage-backed securities and CDOs, but as another GR reviewer said, even the people selling them didn’t fully understand them, which is part of the reason they got so out of hand and imploded the economy. Another big factor was plain old greed.
I’d say this book is part financial history and part psychology. The authors delve into the personalities and ideologies of the heads of many of the major players – the CEOs of Goldman Sachs, Merrill Lynch, AIG, Fannie and Freddie, even Alan Greenspan himself – and that humanizes the topic. Reading about these men (they were almost all men) reminded me very much of the business chapter in Mindset by Carol Dweck. Here was a bunch of people who measured their worth as human beings by how much they earned. If they became multi-millionaires, that meant they were “smart.” In the words of one trader: “We’re not trying to outsmart the smart guys. We’re trying to sell bonds to the dumb guys.” Who are the dumb guys? Their customers.
So to begin where the book does, once upon a time, banks had strict standards for loans, and a 20% down payment on a home was an accepted minimum. The trouble was, this meant slow growth. To illustrate, I want to borrow from a source outside the book, the documentary film “Art and Copy.”
Hal Riney, who later wrote the “Morning in America” ad for Ronald Reagan, said that one of his early jobs was for a bank whose average investor was 80 years old. The customers were slowly dying, and so was the bank, so he was hired to create a commercial that would bring in the young folks. He got Paul Williams to write the song “We’ve Only Just Begun” and created a commercial showing wedding scene and ending as the couple drives away in a “Just Married” car as a voiceover says, “You’ve got a long way to go. Let us help you get there.” The ad was so effective that thousands of young couples flocked to the bank and applied for loans. But none of them had any collateral, so they were all turned down, and the bank killed the ad.
That was the situation of the savings and loan industry, which these authors call “the thrifts.” If there was growth at all, it was slow as a tortoise.
Then, the investment banks got into the act. They decided that instead of “thrifts” being the only lenders, they could loan people money and then sell those loans as securities to investors. The investors would get payments just like a regular stock dividend. And this would spread some of the risk around. A win-win situation for everybody! And now, with less risk, they could afford to loosen their standards a bit and give loans to people who might not have qualified under the old thrifts. And that sat perfectly fine with the government because increasing home ownership in America seemed like such a positive goal. Win-win!
So why did it all go wrong? Several reasons. For one thing, the main bond rating company, Moody’s, loosened its standards on what was considered a risky investment. I think of it like a school giving out easy A’s. Due diligence? Who needs it? Naturally smart people don’t have to work hard.
Then, the company Ameriquest began soaring ahead of everyone else in profits, all because of subprime mortgages, which would later turn out to be fraudulent. The chapter on Ameriquest was called “I Like Big Bucks and I Cannot Lie.” The descriptions of its staff living the high life reminded me of all those business major/frat guys I knew in college dancing to Peter Gabriel’s “Big Time,” not even understanding that the song was sarcastic. I suppose we all dream of making it to the “big time," so Ameriquest probably had no problem recruiting staff. Meanwhile, rivals like Countrywide and even Fannie and Freddie didn’t want to be left behind. Their leaders might normally have been more risk averse, but hey, Ameriquest was doing it successfully. It reminds me of some nag of a mother saying, “So if Ameriquest jumps off a cliff, does that mean you’re going to do it, too?” “But, Mom, if I don’t get rich, everyone will think I’m dumb.”
And finally (for this review anyway), there was the decline in government regulation. Alan Greenspan was a student of Ayn Rand who believed in “market discipline.” In other words, self-interested entities will always do whatever is in their own best interest so they are their own best regulators. Thus, he scaled back many laws that might have stopped the excesses. And so, to sum it all up with one telling quote from the book: “The last and most painful irony is that the two longtime rival armies in the securitization market – the investment banks and the GSEs [Fannie and Freddie] – would end up magnifying each other’s sins rather than keeping each other in check.” ...more