Poor man’s dream that filled US corporate coffer?

By Dr R Balashankar?

All the Devils are Here, Bethany McLean and Joe Nocera, Penguin Books Ltd, Pp 380, £14.99 ?

Fannie and Freddie may sound like cute names of a couple. They are not. They are the first links in the chain of America’s financial crisis. Fannie Mae and Freddie Mac are the acronyms for two US government-backed schemes (Federal National Mortgage Association and Federal Home Loan Mortgage Corporation), set up to bring true the dream of an average American to own a home. Only, these turned out to be nightmares that refused to go away.  

As days pass by, as more and more documents and details are made public, it is becoming increasingly evident that big businesses sacrificed the core ideal of public good for making fast bucks. The book All the Devils are Here by Bethany McLean and Joe Nocera explores the ‘hidden history of the financial crisis’ by going into the day to day developments that took place prior to the crash. The dramatis personae of this sequence are the top-notch people in various financial institutions and controlling agencies who determinedly refused to read the warning signals and the tiny alarm bells that started ringing early enough to save the situation. 

The big businesses adopted new techniques, embraced innovations in financial transactions. Consider the case of JP Morgan. It “hired mathematicians and physicists—actual rocket scientists!—to create complex risk models and products. They were called “quants” because they tried to make money not by examining the fundamentals of stock and bonds, but by using more quantitative methods…. Their risk models were statistical marvels, based on probability theory.” Under this method, the risk shifted from one firm to another. When the transaction completed, the original security remained in the first firm’s books, but the risk it represented had moved. 

Since the risk moved, everybody played without any thought for consequences. A former employee of Moody’s (evaluation company) said back in 1997, the biggest fear of an analyst was that he would contribute to an assignment of a rating that was wrong and damage the company’s reputation. But a decade later, an analyst’s worst fear was that he would “do something that would allow him to be singled out for jeopardising Moody’s market share, for impairing Moody’s revenues or for damaging Moody’s relationships with its clients…” That in essence explains the cause of the boom and the inevitable bust. The values and motivations had changed.

And the price for all this is being paid by the American taxpayer. Fannie Mae and Freddie Mac, AIG, JP Morgan, Merrill-Lynch, Goldman Sachs and many many more are all recipients of rescue doles from American government. And the so-called average American’s dream of owning a home was a sham. Here is the statistics to prove it. Between 1998 and 2006 only about 1.4 million first-time home buyers purchased their homes using subprime loans. “That represented nine per cent of all subprime lending. The rest were refinancing or second home purchases… more than 2.4 million borrowers who had gotten subprime loans would lose or already had lost their homes to foreclosure. By the second quarter of 2010, the house ownership rate had fallen to 66.9 per cent, right where it had been before the housing bubble.”

So now the Americans have a right to know for whom was all this money spent. Who took the booty and scooted? The Wall Street movement is all about getting the answers to these questions. The book discusses the long line of culprits responsible for the bust and the political reactions to it.

Written in story-telling ease, the book leads the reader to the bottom of the story. Bethany McLean has been writing for years, in Vanity Fair and Fortune and worked with Goldman Sachs. Joe Noceara is a business columnist with The New York Times and was a finalist for the Pulitzer Prize in 2006.

(Penguin Book Ltd., 80 Strand, London WC2R ORI, England)?