December 16, 2010
All The Devils Are Here: The Nocera Interview
Posted by David Zaring

Joe Nocera, my favorite Times columnist, was willing to answer some questions about All The Devils Are Here, the subject of the Conglomerate's latest book club.  Your interviewer (that would be me) was probably trying a little hard on the questions (they are very long!), but the answers do try to make the best of them:

All The Devils Are Here pays a lot of attention to the way that government policy and regulation facilitated the crisis, as opposed to corporate misconduct (though you talk about plenty of that, especially in the mortgage industry).  Is it fair to say that one of the themes of the book is that misguided government policy was the sine qua non of the crisis?  And if so, do you think that government policy can be rejiggered to prevent this sort of thing from happening in the future?

Misguided government was a big factor, no question, in all sorts of ways, some known, some not so well known.  For instance, it was the government that gave the big three ratings agencies, Fitch, Moody's and S&P, their special status, meaning that pension funds, money market funds and others could invest in securities that had an investment grade rating from any one of the big three.  Government looked the other way at the subprime abuses.  And government refused to do anything as derivatives became increasingly important in finance, and created systemic risk that had never existed before.  But even so, government was only one leg of a three legged stool.  The other two legs were the rise of the subprime companies, which handed out loans that borrowers could never hope to repay, and Wall Street's voracious appetite subprime mortgages it could bundle into Triple A securities.  There is also another factor: the universal belief that housing prices could only go on one direction: up.

Business law scholars think a great deal about how the corporate form can facilitate good business decisions.  But financial institutions tend to use corporate governance best practices (no poisons pills, dual class stock structures, plenty of outside, if not always qualified, directors), and yet have extremely high levels of insider compensation, regularly exercise poor risk management, and so on.  You’ve looked at the way the banks were run during the crisis; how did you think their corporate organization affected their performance, if at all? 

It is important to remember that most Wall Street firms were partnerships before they became corporations.  When they took investment risk, they did it with the partners' money; when they reaped rewards, it was the partners who put those rewards in their pockets.  Once the partnerships became publicly traded corporations, they were suddenly freed from the fear that losses would come out of their own pockets--it was now shareholders' money they were putting at risk.  Yet their view of compensation never changed: the vast majority of the gains they made went not to the shareholders, but to themselves.  Most Wall Street firms put aside more than 50 of revenues--not profits, but revenues--for compensation, an astounding figure.  That is why there was so little brake on the riskiness, and even the foolishness, of the risk-taking:  all the incentives went in the opposite direction.  Having a corporate structure, in no small measure, created those warped incentives.

Economists almost always write collaboratively, legal scholars sometimes do, and it seems pretty uncommon in business journalism.  How did the collaborative process work for you two?

Bethany and I are like a tennis doubles team that has been playing together for a long time.  We know each other so well, we can anticipate where one is going, and we each know the others' strengths and weaknesses.  We have been working together, on and off, for some 15 years, most of that time at Fortune, where I was an editor and Bethany was a writer.  We worked together on The Smartest Guys in the Room, which I helped to edit.  And this time around, we divvied up the reporting--she took on the subprime companies, Goldman Sachs, Fannie and Freddie, among other topics, while I covered Merrill Lynch, AIG, the Clinton era in Washington and so on.  Bethany is a great reporter and a brilliant thinker, who is also one of the fairest journalists I know. I am a better editor and stronger on narrative,   She pushes me to think things through better; I push her to write her chapters in a more story-telling fashion.  And since we both know that about each other, we never fight.  (Well, almost never.)


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