The Financial Crisis Reading List

Do we really need an official government report telling us how we got into this mess?

Elsewhere in Slate, Bethany McLean analyzes  the “primer” on the financial crisis issued by the Republicans on the commission.

FCIC. Click image to expand.
Phil Angelides, left, and  Bill Thomas of the FCIC

In December 2007, the United States entered a recession. In October 2008, its financial system nearly collapsed, requiring massive and unprecedented federal intervention. And in May 2009, President Obama named a blue-ribbon commission to figure out why. The Financial Crisis Inquiry Commission was meant to follow in the lofty footsteps of the Pecora Commission, a hard-hitting investigative team that uncovered major fraud in explaining the 1929 stock market crash. It also nodded to the 9/11 commission, the bipartisan group that authored a best-selling book on the terrorist attack.

But the FCIC has hardly had an awe-inspiring run, perpetually dogged by allegations of partisan bickering and staff attrition. The early publication of a minority report  from the FCIC—a lazy, hazy conservative dissent that starts with Fannie Mae and ends with the specter of deficits—didn’t help its credibility. Still, the impending release of the full commission’s report—coming soon to a bookstore near you, as they say—raises the question: Why do we need a congressionally appointed, bipartisan panel to write the definitive history of the financial crisis?

For one, most all of the information going into the report has been public and pored over by economists, Wall Street types, and politicians for a couple of years already. In addition, there are a lot of pretty definitive takes already out there. For anyone unfamiliar with Wall Street and looking for a single shot, New York Times reporter Andrew Ross Sorkin’s Too Big To Fail is a good place to start. It’s the financial crisis as if penned by John le Carré, a detailed but riveting narrative, filled with stories of the panicked missives and billion-dollar late-night calls that led to the collapse of Lehman, the forced marriage of Bank of America and Merrill Lynch, and the near-death of a number of other firms. Sorkin does fantastically on the how of the financial crisis. But he does not delve as deeply into the why—and the why is the question the FCIC was really tasked with answering. For that, the master narrative perhaps does not exist in a single book yet—but anyone looking for the answer can find it in a few.

Let’s start with the housing bubble: the massive uptick in housing prices that the banks stoked and that ultimately brought them to their knees. Where did it all that money come from in the first place? That answer lies, at least in part, in the “global savings glut,” a term coined by Federal Reserve Chairman Ben Bernanke and explained rather clearly, if dryly, here. Industrializing economies, normally net borrowers on the global markets, became net lenders—letting the United States and a number of other industrialized economies run up big debts.

Thus, Asian savings ended up facilitating the building and sale of a whole lot of million-dollar McMansions on the outskirts of Phoenix. But how exactly did that happen? How did the United States end up with its particular cocktail of low interest rates, indecipherable loan products, and rising house prices—then, how did it all fall apart so quickly? To answer that question, look to author and former Slate columnist Michael Lewis in The Big Short.

Lewis explains how the government-sponsored enterprises, investment banks, hedge funds, and other financial firms built a housing bubble—though one that could last only as long as people kept paying their mortgages on those McMansions. (That turned out to be about five years.) He walks through the invention of mortgage-backed securities and other derivatives, showing how investment firms concentrated risk. And he tells the tale through the stories of the big characters who took the opposite side of the bets—auguring the crash in house prices, and profiting from it.

The mortgage-backed securities debacle played a major role in tipping the financial system into crisis. But why couldn’t the banks just absorb the losses? And why did they all redline at the same time? To understand the actual moment and mechanism of crisis, the definitive take is Yale economist Gary Gorton’s, in the delightfully titled Slapped by the Invisible Hand.

Gorton’s is a challenging book for a non-finance type, but there is no better technical explanation of the panic. The professor, who helped build AIG’s credit-default swaps model, explains that between the 1930s and this recession, there were no bank runs in the United States. People almost forgot they existed. Nobody ever worried that their bank might fail, erasing their savings, because the government insures deposits. The financial crisis, Gorton argues, was nothing more or less than a bank run—it just happened invisibly, with the financial firms acting like panicked depositors.

This panic occurred in the “repo market,” a multitrillion-dollar market where companies trade assets—often government bonds, but sometimes corporate bonds or securities—for cash, often supplied by financial firms like hedge funds, overnight. In normal times, lenders got a little cash, as the banks would buy back their assets at a small premium. The banks, meanwhile, were able to meet their reserve requirements. But everything went haywire in the crisis. Lenders understandably refused to trade cash (a perfectly safe asset) for anything else. The banks could not meet their reserve requirements. Everything froze, and the banks teetered on the edge of collapse.

To stop the panic, the Federal Reserve initiated an enormous, unprecedented, highly experimental lending program. To explain its actions, look to David Wessel, the Wall Street Journal columnistand editor, in his masterful In Fed We Trust. Wessel clearly explains how the central bank and its New York outpost actually work—what they do for banks, how they interact with Treasury, and the levers they pull to aid banks and manage the economy. Then, during the crisis period, he shows how Bernanke essentially invented new levers to restore some calm to the financial system, within—and possibly outside of—the Fed’s mandated parameters.

With those books, you’ll never need to read anything that emerges from the FCIC. But if you do, read the good stuff: the interviews in which it grilled executives from Wall Street and the housing industry. The commission called in the loan-makers and bankers that caused the crisis and forced them to answer questions about their businesses—all for the public record. (It also subpoenaed thousands of pages of documents from Wall Street firms, though it is not clear if it will make those public.) There’s no need to get the narrative from the FCIC. But if you want, say, to hear former Lehman CEO Dick Fuld try to defend himself, that’s the place to go.

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