Sometime during 2011, essentially on a whim, I decided that I wanted to read every book written on the subject of the financial crisis of 2007-08.
What would motivate someone to undertake such a project? Eh, who knows why people do the things they do? As far as I can remember, I had two main motives: one general and one specific.
Generally, I’ve always had a vague desire to pick one subject and just read everything I could about it. Whenever I read a work of nonfiction, no matter how good or thorough it is, I have this feeling that I’m only getting some of the story. I’m only seeing reality as filtered through the author. The stories told are the ones the author found interesting; the opinions featured are the ones of this writer’s sources; the quotes are the ones he happened to write down. Even the most evenhanded and objective writer retains some biases, if only due to the natural limitations on research and reporting. When I read nonfiction, I always feel keenly aware of this. As a result, a book that’s supposed to inform me often ends up highlighting what I still don’t know.
This problem doesn’t really have a solution—nobody can be a firsthand witness to everything—but reading the same story multiple times is at least a better approximation of reality than reading it just once. After all, the police don’t stop the investigation after interviewing one witness. Of course, there’s a reason most people don’t read this way: It is, by design, very, very repetitive. You’d end up reading slightly different versions of the same story over and over again, intentionally making a leisure activity less fun.
Nevertheless, the cumulative nagging of years of nonfiction motivated me to at least try this method once. No matter the subject, I felt like the experiment would at least give me a better sense of the systemic biases of nonfiction.
Which brings me to the specific reason of why this subject. The obvious reasons certainly apply: The financial crisis was a huge, important event that continues to be relevant; there are tons of books on the subjects by famous figures and respected writers; there are lots of fascinating stories buried within the larger subject; etc. But the most important factor was something else. Topics like the financial crisis, which have the right combination of complexity, raw emotions, and political implications, often end up discussed a certain type of way. Their complexity means that very few people understand them fully; the raw emotions make conversations very heated; the political implications make them very divisive.
Ultimately, people end up arguing vehemently about something very important, but in the least productive way. Nobody knows enough to really convince anyone else (for every fact or statistic I’ve memorized from a newspaper article, the other side has one to rebut me) and everyone’s beliefs are too important to them for them to change their mind or accept information that conflicts with their predispositions.*
*The Iraq War and Israel-Palestine spring to mind as subjects that are rarely debated intelligently.
The irony is that these subjects—the war on terror, the invasion of Iraq, the financial crisis—tend to have the greatest social significance. It is crucial that people debate them with reason and humility. Unfortunately, that almost never happens.
And so I decided that reading a bunch of books on the financial crisis would address both the “reason” and “humility” sides of the equation. For the former, I could critically examine multiple arguments from various perspectives on the events. In terms of humility, the project would make up for a lack of knowledge and understanding of the subject.*
*I should clarify that I did not consider myself uniquely uninformed about the crisis: I’ve taken basic economics courses and I understood the general concepts of “securitization” and “mortgage-backed securities” (thanks to the Michael Lewis book Liar’s Poker). That alone probably made me more informed than 85% of the population. But obviously the big gap occurs somewhere around the 95th percentile.
In other words, the undertaking—while daunting—seemed like the socially responsible thing to do.
The Reading List
Of course, once I had committed to the project, I needed to assemble a list of books. My original goal was to read “every” book about the crisis. This absolute goal proved impossible not only due to the sheer quantity of books on the subject, but to the vague definition of the term “financial crisis.” Would I have to read every book about housing in America? The history of investment banking? An account of the Glass-Steagall Act of 1933? Since books about the financial crisis sell better, every book that’s even vaguely related to the concept of money purports to be “about” the financial crisis.
Obviously, I should have done some research to pinpoint precisely which topics were most important to the events of 2007-08. Then, I should have scoured reviews and critical literature to find the most well-received books, while factoring in some outliers to account for perspectives beyond the reach of conventional wisdom. Finally, I should have checked my list to make sure it contained a variety of political viewpoints and economic schools of thought.
Obviously, I didn’t do anything like that.
Instead, I started with a vague sense of which books I’d seen advertised or discounted on Amazon, began by reading the most famous and commercially successful books, and then sort of jumped from book to book based on some nebulous criteria, which included the desire to get all sides of the story, but also factored in which books were shorter, or funnier, or least expensive. Ultimately, the list ended up including 16 books, read in this order:
—Too Big To Fail by Andrew Ross Sorkin (2009)
—The Big Short by Michael Lewis (2010)
—Reckless Endangerment by Gretchen Morgenson and Joshua Rosner (2011)
—Bailout Nation by Barry Ritholz (2010)
—On the Brink by Henry Paulson (2010)
—The Greatest Trade Ever by Gregory Zuckerman (2010)
—House of Cards by William D. Cohan (2010)
—A Colossal Failure of Common Sense by Lawrence McDonald and Patrick Robinson (2010)
—All the Devils Are Here by Bethany McLean and Joe Nocera (2011)
—The Quants by Scott Patterson (2011)
—More Money than God by Sebastian Mallaby (2011)
—Crash of the Titans by Greg Farrell (2011)
—Griftopia by Matt Taibbi (2011)
—The Financial Crisis Inquiry Report by the Financial Crisis Inquiry Commission (2011)
—Confidence Men by Ron Suskind (2011)
—Bailout by Neil Barofsky (2012)*
*Virtually all of these books have obscenely long subtitles that I am here omitting for the sake of brevity.
Now, if you are familiar with the subject, you might notice something about this list: These are not all books about the same thing. Although all of them make various claims about being about the “financial crisis,” they actually cover very different subjects. Some are about the hectic six-week period during which Fannie Mae/Freddie Mac/Lehman/AIG/Merrill Lynch were all bailed out/sold/placed in bankruptcy, Congress passed the TARP bill, and the stock market plummeted (Too Big To Fail, On The Brink); some are about the history of corruption at Fannie Mae and Freddie Mac (Reckless Endangerment); some are about those who actually saw the crisis coming and made money off it (The Big Short, The Greatest Trade Ever); others are about root causes (All The Devils Are Here, The FCIR), or the government bailouts (Bailout Nation), or the efforts to reform the industry and fix the economic fallout (Confidence Men, Bailout).
The point is that the story of the financial crisis is actually made up of several smaller, interconnected stories that are complicated enough on their own. In some ways, this made my goals harder to fulfill—since I wasn’t actually reading books about the precisely the same things. But it also made the process more dynamic. Subjects that were centerpieces of one book were mentioned on the outskirts of another; stories were repeated from different perspectives; details from one book shed light on something from another.
It wasn’t quite like police investigating a crime scene—since not everyone was talking about the same thing—or like putting the pieces of a puzzle together—since not everything fit together neatly. It was more like a bunch of hungover friends trying to piece together what they did the night before. By the end, I wasn’t sure about all the details, but I had a fair sense of where everything went wrong.*
*The project also turned into a kind of nonfiction boot camp. After reading so many nonfiction books in a row, and on the same general subject, I was able to notice what things were glossed over for the sake of the story an author wanted to tell. I could identify which sources the writer liked by how often and the manner in which they were quoted. Errors and oversimplifications were more obvious to me. In short, I became an even more skeptical reader of nonfiction.
The Broad Strokes
There is, of course, a common narrative surrounding the economic collapse of 2007-08, a narrative I was already vaguely familiar with (as you probably are, too). I’ve come to learn that this narrative is oversimplified, imprecise, and incomplete. It’s also mostly correct.*
*Presumably, in the 2,000th episode of The Simpsons, Apu will be asked to explain the cause of the financial crisis when he retakes his American citizenship test, and when he begins his long-winded, thorough answer, the proctor will interrupt with, “Wait, wait… just say ‘Mortgage-backed securities.’”
The common narrative goes like this: Some time in the beginning of the last decade, fueled in part by Alan Greenspan’s decision to keep interest rates low after the tech bubble burst in 2000 (and then after 9/11), credit became really cheap. As a result, people started borrowing more money, and using that money to buy houses. As the demand for homes went up, so did housing prices (remember the laws of supply and demand?). Since housing prices were going up and since they have historically always gone up, people began to see housing as a sound investment. This led to an increase in second-home purchases, house flipping, and securitization.
“Securitization” is the process by which any kind of financial payment (credit card payments, student loan bills, insurance premiums, etc.) is turned into a security. Mortgage-backed securities—in which the money from dozens (or hundreds, or thousands) of mortgages is pooled into one security (which operates like a bond) and sold off to investors—had been around since the 1980s (Michael Lewis wrote about their invention in his very first book, Liar’s Poker). In the last decade, though, rising home prices made them an even more attractive investment.* Even more important was the addition of collateralized debt obligations, or CDOs, to the mix. CDOs combined mortgages and mortgage-backed securities with any other type of payment to create a new security. This security could be made up of Ross’s mortgage, Rachel’s credit card payments, Monica’s car loan payments, and a mortgage-backed security comprising the mortgages of Joey, Chandler, Phoebe, and Gunther.*** (All these securities that were derived from other assets were referred to as “derivatives.”)
*As the value of the homes increased, so did the value of the securities backed by those homes.**
**Is this obvious? I can no longer tell how much of this is obvious…
***The point of a CDO is to diversify risk. If your loan (a bond, after all, is basically just a loan) is guaranteed by a variety of different things, then your investment is protected if the value of any one of those things happens to drop.
The point of all this is that Wall Street was investing massive sums of money in housing prices via mortgage-backed securities and CDOs. This did two important things: First, it kept driving housing prices up by increasing demand for mortgages. Even more important, though, it lowered credit standards in the housing market.
How did it do that? Well, since Wall Street wanted mortgages it could turn into securities and CDOs, it started buying up mortgages that local banks and thrifts had granted. Traditionally, banks and thrifts would grant a mortgage and then hold it. In other words, they’d loan money to the buyer, and the buyer would make payments back for however many years. In this scenario, the lender has an obvious interest in making sure that the borrower is a sound credit risk: If he doesn’t, he might not get paid back. But if he is just going to sell the loan the Wall Street firm, that incentive disappears.
In fact, it goes in the other direction. Many companies realized that if Wall Street was willing to buy mortgages (and pay fees to the banks that granted them), then it made more sense to increase the volume of mortgages by loosening credit standards. This is what led to rampant fraud and abuse: loans with phony documentation, or no verification at all,* adjustable-rate mortgages that would adjust to rates the borrower had no way of paying, negative amortization loans in which borrowers actually paid less than the interest payment and therefore increased the loan’s principal with each payment, etc.
*There was indeed something called the NINJA Loan, which stood for “No Income, No Job/Assets.” In other words, the bank would lend money to someone who had absolutely no way to pay it back.
Eventually, of course, people simply couldn’t pay their mortgages anymore. As a result, housing prices plummeted, and so did the value of the securities and derivatives backed by them. By this point, though, Wall Street had issued and purchased so many mortgage-backed securities and CDOs that a decline in their value meant a significant drop in the balance sheets of Wall Street. Lehman Brothers, Merrill Lynch, and Bear Stearns all recorded record losses during this time. Eventually, none of Wall Street’s investment banks could withstand the losses: Bear Stearns had to be “sold” to JPMorgan for next to nothing, Lehman went bankrupt, Merrill Lynch was bought by Bank of America in a move that was essentially ordered by the government, and Morgan Stanley and Goldman Sachs eventually got designated as “bank-holding companies,” which granted them access to the discount window at the Fed.
With the banks in so much peril, credit dried up, sending the stock market into a panic. Four of the five largest single-day drops in the Dow’s history occurred between September 29th and December 1st of 2008. By March 2009, the Dow would fall to 6,600, 54% lower than it had been 17 months earlier. It was the effort to unfreeze credit and stabilize the markets that eventually led to the Troubled Asset Relief Program, or TARP, the now-infamous bailout.
Does all that make sense?
That story omits far more than it includes. It completely omits Fannie Mae and Freddie Mac, the government-sponsored housing entities that had to be bailed out in the summer of 2008, or AIG, which ended up receiving more TARP money than any other company. It doesn’t mention credit default swaps, which helped spread the risk, or the Community Reinvestment Act, which helped lower credit standards. There’s no mention at all of the credit-rating agencies and their role in the crisis. It doesn’t go into the “repo” markets or the nefarious accounting practices that constituted a “shadow banking” system. It doesn’t really touch on the political implications of each step, or the tumult surrounding each investment bank’s failure. None of the key players—Hank Paulson, Tim Geithner, Lloyd Blankfein, Joseph Cassano, Jamie Dimon, Stanley O’Neal, John Thain, John McCain, Barack Obama, George W. Bush, etc.—are mentioned by name.
That’s because once you start going into those details, you start to run into disagreement. When you start to talk about Fannie and Freddie, the political implications drown out reasonable discussion: Republicans like to say they always knew those companies were a disaster waiting to happen while Democrats say they weren’t a significant cause of the crisis at all. When you talk about banks’ accounting practices, some see a case crying out for more regulation while others see a perfectly legitimate system that was abused by bad companies. The broad picture lacks many important details, but most of what it does include is agreed upon by almost everyone involved.
The broad picture is also noteworthy because, in the course of reading 16 books, I’ve read 16 different versions of it. Each book omits some specifics and includes some others, but I’ve read 16 different descriptions of a CDO. This reveals a lot about the nature of nonfiction, specifically what level of complexity is tolerable.
CDOs are really complex. I know this because every single book that mentions them says so. Each book then proceeds to offer a very simple description of a CDO, more or less like the one I gave above. Now, this raised a lot of questions for me: Did the explanations only seem simple after I read a dozen of them? It’s possible my explanation was indeed complicated, and that it only seems obvious to me because I know it by heart now.
Or is it possible that CDOs are not really all that complex? Authors do have an incentive to exaggerate the complexity of their subject—it makes their work seem harder, and it provides cover if their conclusions don’t seem obvious. Or is it that CDOs really are complex, and the explanations I’ve read are just watered down versions, along the lines of a “Slavery caused the Civil War”-type explanation? If this is true, then it raises another question: If the true nature of the CDO is deemed too complex for the reader, can I be sure that the author really understands it? And what about his subjects?
It’s very troubling to realize that an author’s authority on his topic is so questionable—after all, doubts of this authority were one of my reasons for this project. But reading so many accounts of the same general story helps a lot in this regard. It may seem boring to read 16 descriptions of the same financial instrument (and it is), but it provides a helpful gauge of the author’s understanding of the instrument. Similarly, the amount of detail an author includes on a specific topic is a good proxy for how much research he did on that topic.
This is another general lesson from my project: If you read a lot of nonfiction (even on disparate subjects), it becomes very easy to identify the author’s sources and, as a result, his biases. It is somewhat pathetic—if understandable—how much nonfiction authors pander to their sources: They are always the heroes of the stories, the unappreciated geniuses, the tragic figures, or deserving winners. By the end of the project, I found myself detesting anyone who I felt the author showed undue affection toward, if only to balance the scales.
Of course, some authors are better than others, and the best books I read were the ones with an air of impartiality. But which books were the best?
Over the next few days, NPI will be publishing reviews of all these books, followed by general thoughts on what they all mean. Check back tomorrow, when we start with Too Big To Fail and The Big Short!