Dissecting the global meltdown

By Roger Lowenstein

Penguin Press. 368 pp. $27

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Reviewed by Rhonda Dickey

Failure is supposed to be an orphan, but the economic crisis that started with subprime mortgages and morphed into the Great Recession has a lot of fathers.

They include lenders, investment banks, regulators, ratings agencies, and irresponsible (and sometimes defrauded) borrowers. They also include genuinely well-intentioned people who wanted to expand home ownership.

Throw in the excruciatingly complex financial instruments that figured into the meltdown, and you have enough to daunt the general reader.

Happily, Roger Lowenstein is an adept and entertaining guide.

The End of Wall Street may not be the last word on this economic mess, but it's a good start. If you want to know why insurer AIG's imminent collapse inspired so much terror, or how securities backed by rotten mortgages became successively less decipherable, or how politics paved the way for the Fannie Mae and Freddie Mac disasters, Lowenstein can give a clear explanation.

His dissection of this global catastrophe lacks the thriller pacing of House of Cards, William D. Cohan's fascinating, if highly caffeinated, account of the fall of Bear Stearns. But it is more accessible to someone whose line of work isn't mortgage-backed securities.

Lowenstein has written about business for the Wall Street Journal and the New York Times, and is the author of books about the pension crisis and the costly bailout of Long-Term Capital Management, a fund whose founders included Nobel laureates.

In fact, it's depressing to observe how brilliant and talented many of the central figures in this meltdown are.

One of the smart guys was Stanley O'Neal, the CEO of Merrill Lynch and a man with a genuinely admirable life story. The grandson of a freed slave, he worked his way up from modest circumstances to lead the investment bank. But in 2006, late in the game, he was out to snag a subprime mortgage originator to compete with Lehman Bros., a rival that had aggressively entered that market. (Subprime mortgages were issued to people with a troubled or inadequate credit history.)

A Merrill senior vice president, Pete Kelly, was sent to California to look at New Century Mortgage. Kelly was a skeptic and considered subprime "a dirty business." He checked out the executive parking lot, which was filled with Porsches and Maseratis. And he asked the top executives, "What keeps you guys awake at night?"

They slept like babies, they said. To Kelly, that was the wrong answer for a young company that issued no-money-down loans. "Prudent bankers worry about everything - and they do not, at least not before the business has been tested, drive Maseratis."

New Century filed for bankruptcy almost exactly three years ago. Merrill agreed to be bought by Bank of America in September 2008, as Lehman Bros. was collapsing; Merrill feared the same fate. Early last year, the Wall Street Journal said the Bank of America deal "set the land-speed record for disaster," and the parties are still having it out.

O'Neal's career crashed before that, in late 2007, but he left with a package that at the time was worth $161 million.

Lowenstein's tale of wreckage has many fascinating characters: Kerry Killinger, who drove Washington Mutual into the largest bank failure in U.S. history; Angelo Mozilo, whose Countrywide Financial competed with WAMU to see who could issue the flimsiest mortgages; J. Christopher Flowers, the head of a small private-equity firm who "had a way of popping up at critical junctures on Wall Street."

Along with the profiles, Lowenstein provides valuable context. One example: He challenges the common belief that housing prices had never fallen (and therefore never would). But they had fallen. Lowenstein cites data provided by Mark Zandi, of Moody's Economy.com in West Chester, that indicated prices had fallen less than 1 percent in 1963 and by much more in 1941. And of course, they dropped sharply in 1929-33. More than that, "The character of loans written by Countrywide and WAMU was so different from those of earlier eras that the statistics on which their models were based were virtually useless."

In retrospect, that was staggeringly obvious. But as data-driven as so much of modern finance is, it seems every bit as driven by emotion, and even fantasy. Economists Carmen M. Reinhart and Kenneth Rogoff titled their recent book This Time Is Different, and that captures the wishful thinking that has animated too much of financial decision making.

Michael Lewis, who has been promoting The Big Short, his own account of the economic meltdown, said in a recent TV interview that most of the time, knowing more about an issue makes you less angry about it. But in this case, he said, the more you know about what happened, the angrier you are.

The End of Wall Street is a calm, reasoned, and often witty tour of the current financial landscape and how it got that way. But Lowenstein's outrage is clear.