ALL THE DEVILS ARE HERE
Authors: Bethany McLean and Joe Nocera
Published by Portfolio (Penguin Aust)
THE GLOBAL Financial Crisis did not start in 2007. In their detailed look at the origins of the GFC, McLean and Nocera trace its origins back to the early 1980s, with the creation and sale of the first mortgage backed securities.
The interaction between Wall Street, the US Government and US financial institutions is examined in detail, and the development of financial derivatives is explained in layman's terms. Far from reducing risk, the derivative explosion actually increased it, as the greed-driven mania for higher-yielding investments led the back-room boys to develop even more unintelligible and convoluted products.
Alongside this, the American dream of home ownership provided the fuel for the eventual firestorm. By making it possible (legally or otherwise) for families to purchase homes on which they could not afford to meet the repayments, and allowing these mortgages to be on-sold under the guise of AAA investments, the US Government was a participant (albeit unwilling) in the proceedings by not providing appropriate oversight to ensure their own laws were not being violated.
But it was the creation of derivatives based on other derivatives which turned the US financial system into a giant casino. Financial institutions had created such tight interconnections via their derivative books that a failure of any one of them had the ability to bring the world financial system to its knees. That is what we saw in September 2008.
Did the world learn anything from the GFC? The jury is still out, and the authors in their examination of Obama's 2010 financial reform bill give no definitive answer. In fact they sum it up in just two words: "Well, maybe."
We will have to wait and see.
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