Bethany McLean: a history of the financial crisis

Marketplace Staff Nov 16, 2010

Bethany McLean: a history of the financial crisis

Marketplace Staff Nov 16, 2010


JEREMY HOBSON: New warnings today from the Congressional panel that oversees the government’s Wall Street bailout. In a report out this morning it says all the problems we’ve heard about foreclosure documents could cause a new wave of bank losses. The things that led to the first wave — more than two years ago — are the subject of a new book. It’s called “All the Devils are Here” and it’s by Joe Nocera of the New York Times and Bethany McLean of Vanity Fair, who joins us now.

Thanks for being with us.

BETHANY MCLEAN: Thanks for having me.

HOBSON: I want to start on June 29, 2001 — a dramatic point in your book. Josh Rosner who was working at a research firm at the time, starts to discover that people are taking out a lot of sub prime mortgages using smaller down payments and he writes a paper called “A Home Without Equity is Just a Rental with Debt.” And he gets a call.

MCLEAN: He gets a call from a man named Charles Kindleberger and Charles is a famous guy in Wall Street lore. He wrote a book called “Manias, Panics and Crashes.” And Josh doesn’t realize who this is at first. And Josh thinks, “OK, well fine I’ll meet with him when I have time.” And then Kindlerberger says his name, and it’s really this great moment because it shows you that people who understood bubbles recognized what was forming here as early as 2001.

HOBSON: And all along the way in the book, there are people that catch on to what’s going on, and the warnings seem to go unheeded.

MCLEAN: It’s so often the story in our business world particularly where skeptics simply aren’t valued. And that’s certainly the case here.

HOBSON: Do you think it was regulators not paying attention to what was going on, or did they know what was happening and they just chose to ignore it?

MCLEAN: I think regulators chose to ignore the crisis for a couple of reasons. One was this ideology that the market is always right. Secondly, the regulators were extremely susceptible to the arguments that the industry put forward. “Derivatives are innovation, innovation is good, we don’t want to squash innovation” to home ownership “We need to extend credit to people, we don’t want to do anything to stop the flow of credit, now do we?”

HOBSON: If the financial reform law that passed this year had been in place, could this whole thing have been avoided?

MCLEAN: If the new consumer protection agency had done its job and had seen that people were getting loans they couldn’t pay back and said, “We’re going to stop this,” then the tool, the mortgage — which was at the root of this financial crisis — that wouldn’t have happened, but I guess what makes me a little bit worried about the future is that in many ways, this wasn’t so much a failure of existing regulation as it was a failure of regulators to use the powers they had. I don’t know how you are argue that past won’t be prologue.

HOBSON: The book is “All the Devils are Here: The Hidden History of the Financial Crisis.” It’s by Joe Nocera of the New York Times and Bethany McLean, who’s been talking to us this morning. Bethany McLean, thank you so much.

MCLEAN: Thank you so much.

HOBSON: And Joe Nocera will talk to Kai Ryssdal about the book and the events that led to the financial crisis
tonight on Marketplace.

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