Posts Tagged ‘AIG’

The Great Read-cession, Part XI

It’s the final post of The Great Read-cession! Just shut up and read!

The End...

The End…

What should the government have done differently?

 

This is a very loaded question. When I first started reading about the issue, while it was going on in 2008-09, I got the sense that this was really a rare case where the government was not at fault. This wasn’t like Watergate or Iraq, where people in power abused that power—it was just a case of private companies going wrong. But it becomes a lot trickier when you look closely at how intermeshed the government and the financial world actually are.

A lot of the conversation about the government’s role in the collapse has surrounded the issue of deregulation, specifically the issue of Glass-Steagall. On the other end of the political spectrum, Republicans have focused on the GSEs as responsible for the decline in lending standards. But both of these issues seem more like scapegoats than real sources of the problem.

As most of the data makes clear, the Community Reinvestment Act of 1992, which directed Fannie and Freddie to purchase more mortgages from certain minority groups, had very little to do with the subprime boom and decreased lending standards. Fannie and Freddie bonds defaulted at a lower rate than those sold to wholly private firms, and there was clear market demand for housing securities absent any government pressure.

The repeal of Glass-Steagall, on the other hand, at least bears some of the blame for allowing companies like Citigroup and Bank of America to get so big. While the law had, since 1933, separated the activities of commercial and investment banks, its repeal allowed the biggest commercial banks in the country to expand their proprietary trading.

With that said, the repeal of Glass-Steagall was mostly symbolic—banking regulators had been allowing more trading at commercial banks for decades before its official repeal in 1999. And the most notable failures of the financial crisis—Lehman, Bear, AIG, Fannie, Freddie—would not have been affected at all by the law. Continue reading

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The Great Read-cession, Part VI

All the Devils are HereWe’re up to Part VI, which means we’re over halfway through the breakdown of financial crisis literature. Today John S looks at what might be the best book about the crisis, and what might be the most fun.

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

by Bethany McLean and Joe Nocera, 2010

 

If I had to recommend just one book about the financial crisis, it would probably be All the Devils Are Here. It’s not necessarily the best-written or most thrilling book on the subject, but it’s the most comprehensive, and perhaps the only book that captures just how nuanced the causes of the crisis were. Instead of focusing on one bank or one cause or one period of time, McLean and Nocera trace the origins of the crisis back decades, and examine precisely how things evolved.

One thing they illustrate well is how Wall Street tends to create something useful, and then, in the course of trying to find new ways to make money off it, turns it into a weapon of wealth destruction. In the 1980s, for example, mortgage-backed securities seemed like a great idea. Grouping mortgages together into one security allowed investors to introduce capital to the industry without being subjected to the inefficiencies or risks inherent in one mortgage or even one region. They also helped the GSEs’ bottom lines, of course.

But as time went on, these securities changed the mortgage market itself. Wall Street’s demand for mortgages to securitize lowered lending standards and increased shady lending practices, like ARMs and NINJAs. Continue reading

The Great Read-cession, Part IV

On the BrinkWelcome to Part IV of our eleven-part breakdown of the books of the financial crisis. Having trouble keeping up? Then check out this page for all previous and future posts in the series.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System

by Henry Paulson 2010

 

The unifying element of the first four books was pessimism: Whether it was Ritholtz’s scorn for those in power, Morgenson’s search for someone to blame, Lewis’s tragic tale, or Sorkin’s narrative of disaster, all four books had decidedly bleak outlooks on the events. Since there is only so much despair one person can read about, I wanted to read the account of someone who would be sympathetic to the policy-makers and CEOs who everyone else blamed.

Henry Paulson was perfect. If the financial panic of 2008 has a face, it’s Paulson’s. As Treasury Secretary during the collapse, he was the one who told Congress of the dangers of Fannie and Freddie (in his infamous squirt gun analogy), who proposed TARP, and who ultimately dispensed the bailouts. And unlike the other figures prominently involved—Geithner, Bernanke—he faded from public view almost immediately after the disaster passed.

Reading Paulson’s book, though, it is hard to dislike him. His prose is straightforward and he comes across as an upstanding, diligent worker with integrity. He’s honest, but polite and gracious to a fault—despite presiding over what many would describe as a complete disaster, he has nothing but kind words for almost everyone involved.* He worked for Presidents Nixon and Bush—two of the least popular Presidents of the last 50 years, if not ever—but says nothing negative about either. He clashed with another prominent public figure, Jon Corzine, for the top spot at Goldman Sachs, but all he says about that is “frankly, the pairing was never right.” Continue reading

The Great Read-cession, Part II

Too Big To FailIt’s Part II of John’s attempt to read every single book on the financial crisis of 2008. Check out Part I here if you missed yesterday’s introduction. Today we talk about the two most famous books the crisis produced.

Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save The Financial System—And Themselves*

by Andrew Ross Sorkin, 2009

 

*See? I warned you about those subtitles…

The first book I read was probably the most famous book on the subject of the financial disaster. Sorkin’s book was an award-winning best seller, and it was adapted into an HBO film. It also has the most iconic name.

It’s easy to understand why TBTF was such a hit: The book is essentially a thriller, depicting the days and months of greatest turmoil. It’s not so much about the causes of the crisis as it is about the disastrous results.

Sorkin embraces the thriller-quality of his narrative, and he does it very well. The book is excellent at setting scenes and introducing a myriad of characters. His scenes are short—rarely more than two pages long—and colorful, with lots of detail and dialogue. Although there are over 150 people introduced (there is a helpful eight-page Cast List in the front of the book), Sorkin does an excellent job of making them all seem unique—a difficult task, since almost all are rich, middle-aged white guys. He includes just enough backstory to provide context and make them seem like real people, without weighing down his narrative.

The narrative begins in March 2008, with the bailout of Bear Stearns. Sorkin doesn’t spend much time on the specifics of that deal—in which the Fed guaranteed $30 billion of assets in exchange for JP Morgan buying the firm for $2 a share*—but instead focuses on the ripple effect of the deal. There is some irony, of course, in this ripple effect: The main reason the Fed intervened in the Bear Stearns failure was to prevent the failure from infecting other firms. Instead, all the Fed did was replace one ripple effect with another. Continue reading

The Great Read-cession: Books of the Financial Crisis

It's been five years since Lehman's demise

Introduction

 

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. Continue reading

The Blame Game

For anyone interested in what happened at AIG last year, Michael Lewis’ Vanity Fair story is a must-read. Lewis, author of Liar’s Poker, is very good at making complicated investment procedures intelligible to the uninitiated.

The most interesting thing about the story is how it illustrates the grand lesson of last year’s economic collapse: Everyone screwed up and no one person is to blame.

Compare, as Lewis does, the AIG collapse, which has largely vanished from the public memory, to the Bernie Madoff case, which arouses everyone’s ire. Madoff is a simple, if tragic, story: One guy conned a bunch of people into giving him money, and then used the money for himself and his family, leaving nothing for his clients. Madoff is a thief and a criminal and deserves to serve every year of the 150 on his sentence. Continue reading