Ten years ago, Wall Street crashed the economy.
After a 1999 deregulation law allowed risky investment banks to speculate with the cheap money held by taxpayer-backed insured banks, Wall Street went wild. Reckless, fraudulent conduct inflated a housing bubble whose rupture meant ruin for millions of Americans. People lost their homes, their jobs and their savings, and Washington bailed out the banks, let the bankers keep their bonuses (and kept them out of jail). American memories of the pain and bailouts remain vivid, as evidenced in polls.
Appropriately, at this 10 year juncture,the media is now reflecting on what happened and why. For those looking for a deeper analysis, many have written books. Authors include reporters, regulators, scholars and official government investigators
For an overview of the tumultuous months in 2008, New York Times reporter Andrew Ross Sorkin’s Too Big to Fail provides a gripping account. It’s told through the lens of leading decision-makers. Those decisions, including massive bailouts along with mergers that made already too big banks even bigger, were highly consequential and often wrong. While depicting several bankers as craven, Sorkin doesn’t judge the regulators much; in fact, he celebrates them.
The End of Wall Street by Roger Lowenstein covers some of the same territory with appropriate cynicism about the actors’ motives. While Sorkin’s book moves like an action thriller based on personalities—and it was turned into an HBO movie—Lowenstein’s delves more in policy.
Thirteen Bankers by Simon Johnson and James Kwak tells the story of Wall Street’s grip on Washington, beginning with a call by bullies in the Clinton administration to Brooksley Born, then chair of the Commodity Futures Trading Commission. Born wanted to examine the risk of certain derivatives trading, but the Clinton White House shut her down. President Bush continued this policy and even Obama didn’t stray far from this Wall Street line.
Chain of Title by David Dayan tells the story of the crash from the ground—the victims of mortgage fraud, robo signing, and other scams in the catastrophe wrought by the Wall Street titans as they wrestled for their multi-million dollar bonuses. Told through three individuals, with details about exactly how mortgage law and fraud work, this is really the big story, representative of the millions of Americans who suffered. On any short list of crash books, this must be one.
Jennifer Taub’s Other People’s Houses shows the perniciously consistent history of Washington’s bank bailouts and simultaneous oblivion to the victims of bank predatory and abusive lending. While policy makers toss out home owners of good faith, they reward bad bankers with more power. Why, Taub demands, can’t mortgage holders win protection under bankruptcy laws? Taub traces one couple over decades whose problems begin with one bank that’s sold to another with government subsidy, to another, and finally to JP Morgan. This mega-bank, in other words, is a serial bail-out winner.
For those in search of an in-depth, authoritative treatment, the best single account of the crash comes from the government-funded Financial Crisis Inquiry Commission report. Issued in 2011, it’s built on interviews with 700 witnesses and countless public hearings. Here’s a detailed treatment of the major problems, from the collateralized debt obligations, the credit default swaps, to the inflated credit ratings. Its central finding: this was a preventable crisis. Regulators slept as Wall Street partied. This report is really a library of material. There’s the 662-page report, but there are also transcripts and videos of the interviews (check out Greenspan). There’s even a dissent, (which we would of course take issue with), arguing that low income Americans exploited Wall Street by forcing them to hand out bad loans.
The Big Short by master story teller Michael Lewis views the crash from the vantage of a few clever investors who detected the flawed core of the mortgage securitization frenzy. It’s the best-selling book connected to the crash even if it’s not the most thorough account of its causes. Lewis provides an accessible explanation of the otherwise self-mystifying mortgage securities whose structure proved financially fatal. In the forward, Lewis notes that he meant his first book on Wall Street –Liar’s Poker—as a cautionary tale to youth who might be drawn by the high banker salaries, which he argued were built on screwing Main Street. He laments that the book simply inspired more to seek the easy booty of Wall Street. Indeed, the characters of The Big Short come across as laudable, even though they’re profiting on the demise of others. American public opinion rightly holds Wall Street bankers in low esteem, but neither that nor Lewis’ latest book has eliminated the flood of job applications from college graduates.
Many of the principal policy makers of the crash time period have also written their accounts.
Stress Test by Obama Treasury Secretary Timothy Geithner walks through his rationale for mega-bank bailouts. Geithner worked his career fighting international financial fires, and his solution was always the same: hose the problem with easy credit for the banks. His justification: plan beats no plan. What he doesn’t explain: what if it’s a bad plan? For example, Geithner ignores the plight of victims. A plan that ignores the true problem is a bad plan.
Bull by the Horns tells Sheila Bair’s story as head of the Federal Deposit Insurance Corp. Bair shows herself to be a progressive heroine, in contrast to bank apologist Geithner, an irony since she’s Republican and he’s a Democrat. While the FDIC’s mission is to prevent failures and a drain on taxpayer-backed deposits, she tried numerous ideas to provide forbearance to troubled homeowners. Geithner swatted down these initiatives.
On the Brink is Bush Treasury Secretary Hank Paulson’s recounting. The former Goldman Sachs CEO defies stereotype as a bird-watching, Christian Scientist who makes a beguiling case that the bailout of his former firm wasn’t self-serving. The facts, however, are compelling. Paulson convinced Congress to bailout Goldman and the other banks with cheap money. (Banks at last should have paid a penalty interest rate.) Paulson made good on the money owed Goldman by AIG. (They should been repaid less.) He helped engineer easy credit from the Federal Reserve by converting Goldman into a bank holding company. (Restrictions should have applied, such as shedding their commercial interests.) He blocked attempts to reduce executive compensation.
We see largely the same story from Paulson’s compatriot at the Federal Reserve in Chair Ben Bernanke’s account The Courage to Act. No doubt Bernanke faced few easy choices. But, like Paulson, he chose the Wall Street over Main Street. Rather than press for real reforms when Congress considered legislation, such as the separation of commercial and investment banking, he largely promoted a restatement of Fed powers. Banks committed massive frauds leading to the crisis. But the Department of Justice brought no criminal cases against individual senior bankers. And Bernanke’s Fed sanctioned none of them.
Of note, few bankers have committed their story to long form narrative. There are no books by the CEOs of bankrupt Lehman Brothers, or failed Bear Stearns. There are no books by the CEOs who nearly sank Bank of America, Citigroup, Goldman Sachs and JP Morgan. Instead, these bankers populate Washington with an army of lobbyists who argue for relaxation of the post-crash rules and supervision, shading the 2008 story behind closed doors.
But the bookshelves are now fairly stocked with an ample reservoir of horror stories that must not be re-enacted by an unbridled Wall Street. Whether the accounts are self-serving or immolating, all of these authors agree that police and policy must join to ensure there’s not another Wall Street crash to write about.