Third Anniversary of the Financial Crisis of 2008: Lessons Learned
This week is the third anniversary of the 2008 financial crisis. This is the week Lehman Brothers declared bankruptcy, and the week the federal government announced it would be infusing AIG with and $85 billion rescue loan.
Coincidentally, I just finished reading “All the Devils are Here” by Bethany McLean and Joe Nocera. It’s the story of the 2008 financial crisis. It reads kind of like Tom Clancy novel: the hard cover book is 400 pages long, with the first 350 pages used to set the table for the huge climax at the end.
I enjoy Bethany McLean's writing. I find her to be very adept at writing about complicated financial issues in a way that's understandable to the reader who is not a financial expert. I also thoroughly enjoyed her earlier book, “The Smartest Guys in the Room,” which is the story of the Enron scandal, which was also excellent.
“All the Devils are Here” is very good and very engaging; but there’s a lot to it. It talks about all the players in the financial crisis: Countrywide Mortgage, AIG, Bear Stearns, Lehman Brothers, Fannie-Mae & Freddie-Mac, Standard & Poor’s, and on and on. It talks about all the complicated investment securities that have become synonymous with the financial crisis: credit default swaps, derivatives, collateralized debt obligations, mortgage backed securities, synthetic default swaps, subprime mortgages, and the like. I found it helpful to read the book with my IPhone handy so I could Google terms, initials, and acronyms as they came up.
The book made several key points that enabled the financial crisis to come about. If I had to boil it down to the central themes, and lessons we should take away while trying to move forward; they would be:
1. "Skin in the game" matters. Mortgages went from being held by the banks and lenders that granted them to being sold as investments immediately after they were closed. So the entity approving and granting the home loans had no vested interest in seeing those loans paid over time; which caused the lending quality and standards to deteriorate more and more.
2. Companies & institutions need to hold to their "core principles," even if it means slower growth and lower profits. In this book, rating agencies(S&P, Moody's,) government agencies (Fannie Mae, the SEC,) banks and mortgage companies (Bank of America, Countywide Mortgage) all compromised their principles to increase profits and growth.
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