Gretchen Skeaton SW Washington Real Estate

This American Life Episode Transcript

Program #355

Ira Glass: So Adam, where are we?

Adam Davidson: I recorded this at the Ritz Carlton in lower Manhattan. It’s a black

tie dinner, just a few weeks ago.

Ira Glass: And you, by the way, are NPR’s International Business and Economics

correspondent.

Adam Davidson: That’s right. I was there for my job. They’re giving out awards for

all these financial securities, including the one that nearly brought down the global

financial system. You know, the whole sub prime mortgage crisis.

Jim Finkel: This guy is a legend. He’s a granddaddy of our industry.

Adam Davidson: I’m sitting at this dinner with Jim Finkel. He’s kind of nervous

because he’s up for CDO of the Year for the CDO he created, Monterrey. Now, the

CDO, that’s what we’re talking about, that’s the financial instrument that was central

to this global credit crisis we’re in.

Ira Glass: And they’re giving awards for this? These guys are giving each other

awards for doing that?

Adam Davidson: Let me just say, they’re aware that there’s a certain irony, giving

awards to the instrument that almost destroyed the world’s economy. They did

consider canceling this year but it’s been a really tough year, it’s been really gloomy

for them.

Jim Finkel: Honestly, I know this sounds...I was happy to see there were no

major suicides, people weren’t jumping off bridges, there weren’t personal

disasters.

Adam Davidson: That same week, a few days earlier across the river in Brooklyn, I

went to a completely different kind of gathering. It was not black tie. It was put on

by the Neighborhood Assistance Corporation of America. It was people on the

opposite side of the mortgage crisis. People facing foreclosure, trying to figure out

how to keep their homes. I met this one guy Richard, he’s a Marine. This big guy,

over six feet tall. When he came back from Iraq a few years ago he bought one of

these fancy new mortgages with an adjustable rate. Recently his rate reset. It’s gone

up by more than $2,000 a month and he’s fallen behind on his payments.

Richard Campbell: At one point, my son had $7,000 in a CD and I had to

break it. That really hurt. I was saving that money for his college. I put

$2,000 back but it’s like you can’t have a future. They put you in a situation

where after a while you’re going to fail. It’s hard.

Adam Davidson: It’s clear these two groups are connected. Jim at the black tie

dinner and Richard the marine. The sub prime crisis has connected them.

Ira Glass: Right. And I know this is what sent you and one of the producers of our

show, Alex Blumberg, on a big reporting mission these last few months. You saw

that. That there’s this long chain of people that starts with these Wall Street guys

and ends with people who stand to lose their houses. All along that chain there were

bankers and brokers and investors and homeowners. Everybody deluded themselves,

thinking they could throw out the old rules of banking.

Adam Davidson: Right. In all the coverage of this we hadn’t heard much from the

people all along the chain. We wanted to know what where they thinking when they

were doing all this? And why did they think it would work? And simply, how did it all

work?

Ira Glass: So, this is what we’re devoting our program to today. From WBEZ

Chicago, it’s This American Life distributed by Public Radio International. I’m Ira

Glass. And today’s show is a special co-production we’re doing with NPR News – your

place of employment Adam.

Adam Davidson: Very proudly so.

Ira Glass: You and Alex Blumberg are going to be explaining step by step how this

all worked and we’ll meet some of the people who created this economic disaster.

Let me turn the show over to the two of you, which is great for me because I’ve

pretty much lost my voice anyway. Alex Blumberg will kick things off.

Music

Alex Blumberg: The thing that got me interested in all this was something called a

NINA loan. Back when the housing crisis was still a housing bubble. A guy on the

phone told me that a NINA loan stands for No Income, No Asset, as in, someone will

lend you a bunch of money without first checking if you have any income or any

assets. And it was an official, loan product. Like, you could walk into a mortgage

broker’s office and they would say, well, we can give you a 30 year fixed rate, or we

could put you in a NINA. He said there were lots of loans like this, where the bank

didn’t actually check your income, which I found confusing. It turns out even the

people who got them found them confusing. For example, a guy I met named

Clarence Nathan. He worked 3 part time, not very steady jobs, and made a total of

roughly 45 thousand dollars a year roughly. He got himself into trouble and needed

money, so he took out a loan against his house. A big one.

Clarence Nathan: Call it 540 for round figures

Alex Blumberg: And you basically borrowed that from the bank and they

didn’t check your income?

Clarence Nathan: Right. It’s a no-income verification loan. They don't do

that. It's almost like you pass a guy in the street and say: lend me 540,000

dollars? He says, what do you do? Hey, I got a job. OK. It seems that casual

even though there are a lot of papers that get filled out and stuff flies all over

Alex Blumberg: As it turns out, Clarence's friends, acquaintances and shadowy

criminal contacts would have been right not to lend him money. At the time I talked

to him, Clarence hadn’t made a payment in almost a year, and his house was in the

process of foreclosure.

Stories like this have been in the news for months. They often feature an innocent

homeowner who was duped by a lying, greedy mortgage banker. Or, if you’re more

of a Wall Street Journal editorial page type, an innocent mortgage banker who was

duped by lying, greedy homeowner. No doubt, both categories exist, but Clarence's

case is more nuanced...and much more common:

Clarence Nathan: Nobody came and told me a lie: just close your eyes and

the problem will go away. That's wasn’t the situation. I needed the money.

I'm not trying to absolve myself of anything. I thought I could do this and get

out of it within 6 to 9 months. The 6 to 9 month plan didn’t work so I’m stuck.

If somebody had told me I couldn’t borrow the money I probably would’ve

had to do something else more drastic and dramatic and not be in this

situation now. The bank made an imprudent loan. I made an imprudent loan.

We’re partners in this.

Alex Blumberg: This imprudent partnership is new, and is at the heart the current

housing crisis. For most of the history of banking, bankers wouldn’t have loaned

Clarence their money either. They didn’t let people like Clarence near their money, in

fact, people with part-time employment, and unpaid debts in their past. And then,

suddenly, in the early 2000’s, everything changed, banking turned on its head and

went out looking for partnerships with people like Clarence...loaning him half a

million dollars without even checking to see if he had a job. What happened?

Music

Alex Blumberg: To help explain out what happened, here's my partner for this

hour, Adam Davidson, the international business reporter for NPR. Hey Adam.

Adam Davidson: Hey Alex.

Alex Blumberg: So, I guess the first thing we have to talk about is the global pool

of money, right?

Adam Davidson: Right. The global pool of money. That's where our story begins.

Most people don’t think about it but there’s this huge pool of money out there, which

is basically all the money the world is saving now. Insurance companies saving for a

catastrophe, pension funds saving money for retirement, the central bank of England

saving for whatever central banks save for. All the world’s savings.

Adam Davidson: That is the head of capital market research at the International

Monetary Fund, the place to go if you want know how much money is in the world.

Adam Davidson: How do we pronounce your name?

Ceyla Pazarbasioglu: That will take two minutes at least. It's Pazarbasioglu.

Ceyla Pazarbasioglu. I'm very impressed.

Adam Davidson: And, by the way, before you finance enthusiasts start writing any

letters, we do know that 70 trillion technically refers to that subset of global savings

called fixed-income securities. Everyone else can just ignore what I just said. Let’s

put 70 trillion dollars in perspective. Do this. Think about all the money that people

spend everywhere in the world. Everything you bought in the last year, all of it. Then

add everything Bill Gates bought. And all the rice sold in China and that fleet of

planes Boeing just sold to South Korea. All the money spent and earned in every

country on earth in a year: that is LESS than 70 trillion, less than this global pool of

money.

Alex Blumberg: Wow, that is a lot of money.

Adam Davidson: It is a lot of money. And that money comes with an army of very

nervous men and women watching over the pool of money: investment managers.

This army is nervous because they don't want to lose any of that money and they

also want to make it grow bigger. But to make it grow, they have to find something

to invest in. So, for most of modern history, they bought really, really safe, really

boring investments: things called treasuries and municipal bonds. Boring things. But

then, right before our story starts, something changed, something happened to that

global pool of money.

Ceyla Pazarbasioglu: This number doubled since 2000. In 2000 this was

about 36 trillion dollars.

Adam Davidson: So, it took several hundred years for the world to get to 36

trillion. Then, in six years, to get another 36 trillion.

Ceyla Pazarbasioglu: Yeah. There has been a very sharp increase.

Adam Davidson: How's the world get twice as much money to invest? Lots of

things happened, but the main headline is all sorts of poor countries became kind of

rich making TVs and selling us oil: China, India, Abu Dhabi, Saudi Arabia. Made a lot

of money and banked it. China, for example, has over a trillion dollars in its central

bank, and there are office buildings in Beijing filled with math geniuses-real math

geniuses-looking for a place to invest it. And the world was not ready for all this

money. There's twice as much money looking for investments, but there are not

twice as many good investments. So, that global army of investment managers was

hungrier and twitchier than ever before. They all wanted the same thing: a nice low5

Alex Blumberg: So, this is where we have to talk about Alan Greenspan, right?

Adam Davidson: We have to.

Alex Blumberg: Alright. But I'm going to promise the people here that this is the

last time you're going to hear Alan Greenspan in this story. So bear with us.

Adam Davidson: Here is one of his speeches that really drove that army of

investment managers crazy.

Alan Greenspan: The FOMC stands prepared to maintain a highly

accommodative stance of policy for as long as needed to promote satisfactory

economic performance.

Adam Davidson: You might not believe me, but that little statement: that is Central

Banker speak for “Hey, global pool of money - screw you.”

Alex Blumberg: Come on, that’s not what he said

Adam Davidson: It is! I speak central banker and that’s what he’s saying.

What he’s technically saying is he’s going to keep the Fed Funds rate at the absurdly

low level of one percent. It tells every investor in the world: you are not going to

make any money at all on US treasury bonds for a very long time. Go somewhere

else. We can’t help you.

And so the global pool of money looked around for some low-risk, high-return

investment. And among the many things they put their money into, there was one

thing they fell in love with. To get it, they called Wall Street - a guy like this:

Mike Francis: My name is Mike Francis. During the beginning of the mortgage

implosion, I was an executive director at Morgan Stanley on the residential

mortgage trading desk.

Adam Davidson: Mike was one link in a chain that connected the global pool of

money to its new favorite investment, these residential mortgages, the US housing

market, and guys like Clarence Nathan.

Think how attractive a mortgage loan is to that 70 trillion dollar pool of money.

Remember, they're desperate to get any kind of interest return. They want to beat

that miserable 1 percent interest Greenspan is offering them.

And here are these homeowners, they're paying 5, 7, 9 percent to borrow money

from some bank. So what if the global pool could get in on that action?

Alex Blumberg: The problem was, to make a mortgage backed security, you

needed mortgages, lots of them. So for Mike Francis to satisfy his demand, and take

his quite hefty fee from the global pool of money, he needed to buy up as many

mortgage pools as possible.

And to do that, he called a guy one link below him, on the mortgage backed security

chain, a guy named Mike Garner, who worked at the largest private mortgage bank

in Nevada, called Silver State Mortgage. And to give you a sense of how fast this

business was growing, Mike got into the mortgage business straight from his

previous job as a bartender.

Mike Garner: One of my regulars in the bar, he actually hired me from the

bar. He said he needed some guys, and we started talking about how much I

made. He beat what I was making. I didn’t know anything about the

mortgage business. I was as green as you could be.

Alex Blumberg: Mike Garner’s job was to buy up individual mortgages, mainly from

brokers, bundle two or three hundred of them together, and sell them up the chain

to wall street, to guys like Mike Francis.

Adam Davidson: Too many Mikes here.

Alex Blumberg: So many Mikes. Actually just two. Mike Francis on Wall Street and

Mike Garner, the guy we’re talking about now.

Adam Davidson: He’s in Nevada.

Alex Blumberg: And in the beginning, he'd only buy mortgages that were pretty

standard and pretty safe. Mortgages where people had come up with a down

payment and proven they had a steady income and money in the bank.

And they sold so many mortgages that there came a point in 2003 where just about

everybody who wanted a mortgage and was qualified to get one .... had gotten one.

But the pool of money had just gotten started. They wanted more mortgage backed

securities.

So Wall Street had to find more people to take out mortgages. Which meant lending

to people who never would’ve qualified before.

And so Mike noticed that every month, the guidelines were getting a little looser.

Something called a stated income, verified asset loan came out, which meant you

didn't have to provide paycheck stubs and w-2 forms, as they had in the past. You

could simply state your income, as long as you showed that you had money in the

bank.

Mike Garner: The next guideline lower is just stated income, stated

assets. Then you state what you make and state what’s in your bank account.

They call and make sure you work where you say you work. Then an

accountant has to say for your field it is possible to make what you said you

make. But they don’t say what you make, just say it’s possible that they

could make that.

Alex Blumberg: It’s just so funny that instead of just asking people to prove

what they make there’s this theater in place of you have to find an

accountant sitting right in front of me who could very easily provide a W2, but

we’re not asking for a W2 form, but we do want this accountant to say yeah,

what they’re saying is plausible in some universe.

Mike Garner: Yeah, and loan officers would have an accountant they could call

up and say “Can you write a statement saying a truck driver can make this

much money?” Then the next one, came along, and it was no income, verified

assets. So you don't have to tell the people what you do for a living. You don’t

have to tell the people what you do for work. All you have to do is state you

have a certain amount of money in your bank account. And then, the next

one, is just no income, no asset. You don't have to state anything. Just have

to have a credit score and a pulse.

Alex Blumberg: Actually that pulse thing. Also optional. Like the case in Ohio where

23 dead people were approved for mortgages.

Adam Davidson: An interesting fact, here. Mike Garner's bank did not care how

risky these mortgages were. This was the new era: banks didn't have to hold on to

these mortgages for 30 years. They didn’t have to wait and see if they’d be paid

back. Bank's like Garner's just owned them for a month or two and then sold them

on to Wall Street. Wall Street would sell them on to the global pool of money.

Alex Blumberg: Which is how we get half-million dollar, no income, no asset loans.

Adam Davidson: And loans to dead people. So there's another thing going on:

housing prices were rising, fast. Lots of people in the mortgage industry had this

faith that housing prices, in the US, simply never go down. So, from the bank's

perspective, even if the worst happens and someone defaults, the bank would then

own the house which is now worth even more than when they gave out the loan.

So, All Mike cared about was whether or not his customers--the Wall Street

investment banks--would buy those mortgages from him. And he was under

pressure to approve more and more loans. Because other guys in his company--the

actual guys cruising strip malls all across Nevada buying mortgages from brokers,

their commission depended on selling more loans. And occasionally, those guys

would hear about some loan that some other mortgage company offered that they

weren’t allowed to offer. And they'd complain to Mike.

Mike Garner: Three of them would show up at your door first thing in the

morning and say, I lost 10 deals last week to Meritius bank. They've got this

loan. Look at the guidelines for this loan. Is there any way we can do this?

We're losing deals left and right. I'd get on the phone and start calling all

these street firms or Countrywide and say “Would you buy this loan?” Finally,

you’d find out who was buying them.

Alex Blumberg: So, Merrill Lynch would say no. And Goldman Sachs would

say no. And you'd finally hit on somebody and they be like “Yeah, we’ll buy

that loan.”

Mike Garner: Yeah, and once I got a hit, I'd call back and say, “Hey, Bear

Stearns is buying this loan. I’d like to give you the opportunity to buy it too.”

Once one person buys them, all the rest of them follow suit.

Music

Alex Blumberg: So, what were you thinking when you're turning around and

selling those to Wall Street. Were you ever thinking, “What are you guys

doing?”

Mike Garner: Yeah. And my boss was in the business for 25 years. He hated

those loans. He hated them and used to rant and say, “It makes me sick to

my stomach the kind of loans that we do.” He fought the owners and sales

force tooth and neck about these guidelines. He got same answer. Nope,

other people are offering it. We're going to offer them too. We’re going to get

more market share this way. House prices are booming, everything’s gonna

be good. And ... the company was just rolling in the cash. The owners and the

production staff were just raking it in.

Alex Blumberg: This is Glen Pizzolorusso, who was an area sales manager at an

outfit called WMC mortgage in upstate New York. Just to repeat, he was making 75

to a 100 grand a month. That's over a million dollars a year. Glen was just out of

college. His job was a lot like Mike Garner's, he was the same link in the chain, and

Glen loved his job.

Glen Pizzolorusso: What is that movie? Boiler Room? That's what it's like. I

mean, it's the cooling thing ever. Cubicle, cubicle, cubicle for 150,000 sq.

ft. The ceilings were probably 25 or 30 feet high. The elevator had a big

graffiti painting. Big open space. And it was awesome. We lived

mortgage. That’s all we did. This deal, that deal. How we gonna get it funded?

What’s the problem with this one? That's all everyone's talking about.

Alex Blumberg: And when Glen wasn't working, he was doing his next favorite

thing, spending ... preferably in the company of, and this is his term, b-list

celebrities:

Glen Pizzolorusso: We rolled up to Marquee at midnight with a line, 500

people deep out front. Walk right up to the door: Give me my table. Sitting

next to Tara Reid and a couple of her friends. Christina Aguilera was doing

some, I’m-Christina-Aguilera-and-I’m-gonna-get-up-and-sing kind of thing.

Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle

Drive. What was that kids name? Fabian Barabia? We ordered 3, 4 bottles of

Cristal at $1000 per bottle. They bring it out, you know hey're walking

through the crowd, they're holding the bottles over their heads. There's fire

crackers , sparklers. You know, the little cocktail waitresses. You know so you

order 3 or 4 bottles of those and they’re walking through the crowd and

everyone’s like: Whoa, who's the cool guys? We were the cool guys. They

gave me the black card with my name on it. There’s probably 10 in

existence. You know? And that meant that I spent way too much money

there.

Alex Blumberg: Glen had five cars, a 1.5 million dollar vacation house in

Connecticut, and penthouse that he rented in Manhattan. And he made all this

money making very large loans to very poor people with bad credit.

Glen Pizzolorusso: We looked at loans. These people didn't have a pot to piss

in. They can barely make a car payment and we're giving them a 300, 400

thousand dollar house.

Alex Blumberg: But Glen didn't worry about whether the loans were good. That's

someone else's problem. And this way of thinking thrived at every step of this

mortgage security chain. A guy like Mike Francis, from Morgan Stanley, he told me

Alex Blumberg: It's easy to ignore your gut fear when you are making a fortune in

commissions. But Mike had other help in rationalizing what he was

doing. Technological help. Mike sat at a desk with six computer screens, connected

to millions of dollars worth of fancy analytic software designed by brilliant Ivy league

math geniuses hired by his firm, which analyzed all the loans in all the pools that he

bought and then sold. And the software, the data ... didn’t seem worried at all:

Mike Francis: All the data that we had to review, to look at, on loans in

production that were years old, was positive. They performed very well. All

those factors, when you look at the pieces and parts. A 90% NINA loan from

3 years ago is performing amazingly well. Has a little bit of risk. Instead of

defaulting 1.5% of the time it defaults at 3.5% of the time. That’s not so bad.

If I’m an investor buying that, if I get a little bit of return, I’m fine.

Adam Davidson: Wait Alex. I want to step in for a moment because this is a very

important piece of tape. A big part of this story, of this whole crisis, is that a lot of

really smart people, people who knew better, fooled themselves with this data. It

was the triumph of data over common sense. Can you play that tape again?

Mike Francis: All the data that we had to review to look at, on loans in

production, that were years old, was positive.

Adam Davidson: As we now know, they were using the wrong data. They looked at

the recent history of mortgages and saw that foreclosure rate is generally below 2

percent. So they figured, absolute worst-case scenario, the foreclosure rate may go

to 8 or 10 or 12 percent. But the problem with is there were all these new kinds of

mortgages, given out to people who never would have gotten them before. So the

historical data was irrelevant. Some mortgage pools, today, are expected to go

beyond 50 percent foreclosure rates.

Music

Alex Blumberg: To be fair, they knew there were risks. But investors have a system

to assess those risks. They’re these special companies. Credit rating agencies.

Moody’s, Standard & Poor’s, Fitch. Their job, their main job, is to assess risk for Wall

Street and the global pool of money. They rate every kind of bond according to its

risk. Triple A is the safest, then there’s double A, single A, all the way down to single

B and below.

Adam Davidson: And then things got even worse. The thing that took this problem

and turned it into a crisis was something else that was new, something called a

Collateralized Debt Obligation. A CDO. And that brings us back to the guy we met at

the awards dinner in the beginning, Jim Finkel.

Jim Finkel: We’re heading to the trading floor of Dynamic Credit, where we

have all of our mortgage analysts, our head trader, our CIO.

Adam Davidson: Jim Finkel runs this CDO shop, Dynamic Credit. It takes up three

modified apartments on the upper East Side of Manhattan. The trading room is like a

factory floor for CDOs, it’s where they make the things. And this is what it sounds

like:

ROOM TONE.

Adam Davidson: Maybe factory is the wrong term. But this is where he makes

CDOs. But what is a CDO? He shows us on a computer screen.

Jim Finkel: Here’s our deal Monterey...

Adam Davidson: To start with, every CDO has its own name. Finkel loves his

country house in the Berkshires, so he always names his CDOs after towns in

western Mass. Like Monterey.

Jim Finkel: Monterey CDO limited. 189 assets...189 tranches of different MB

pools

Alex Blumberg: Let’s translate some of that. A mortgage-backed security, you

remember, is a pool of thousands of different mortgages. These are all put together

and divided into different slices. Jim used the word tranche. Tranche is just French

for slice - some of these slices are risky, some are not. OK, a CDO is a pool of those

tranches. A pool of pools.

Adam Davidson: There's another term the industry uses, no joke, they call these

lower-rated tranches toxic waste. They're so high-risk, they're toxic.

Alex Blumberg: So, a CDO is sort of a financial alchemy. Jim takes that toxic stuff,

these low-rated, high-risk tranches, puts them all together. Re-tranches them, and

presto: he has a CDO whose top tranche is rated AAA, rock-solid, good as money.

If this seems too good to be true to you, you're in good company. Guys like

billionaire investor Warren Buffet said the very logic was ridiculous. But back in

2005, 2006, the global pool of money couldn't get enough of these things.

And the CDO industry was facing the same pressures everyone else was at every

other step of this chain. To loosen their standards. To make CDOs out of lower and

lower rated pools. This is Jim's partner, Tonko Gast.

Tonko Gast: In 2005, we had an internal debate here because there were

two banks coming to us, why don’t you do a deal with us, BBB securities, you

get paid a million bucks in management fees per year. Very clear, just like

that, in 2005. And we declined those deals. We just don't believe those BBB

RMBS assets are money-good. And we thought if we do a CDO of those, that's

gonna blow up completely. We were early in '05 by not wanting to do those

deals. People were laughing at us. Saying you're crazy. You’re hurting your

business. Why don’t you want to make ... Per deal, you could make a million

dollars a year.

Adam Davidson: Did someone do that deal?

Tonko Gast: Absolutely! Everybody. Not everybody, but a lot of people did.

Ira Glass: Coming up, how 5 million dollars can get you into 100 million dollars of

trouble. In a minute, from Chicago Public Radio and Public Radio International, when

our program continues.

ID BREAK

Ira Glass: Well it’s This American Life. I’m Ira Glass. And although I feel fine, I have

lost my voice this week. Today’s show, a special co-production with NPR news. A

step-by-step look at what exactly happened during the sub-prime mortgage crisis.

One of our producers Alex Blumberg co-reported this story with NPR reporter Adam

Davidson. The story continues.

Alex Blumberg: From 2003 to 2006, the housing market was in a classic

speculative bubble. Home loans were easy to get, so more and more people were

Alex Blumberg: This is A&E’s “Flip this House,” Discovery had the cleverly titled

“Flip That House.” There were other ones. “Property Ladder,” “Design to Sell.” Bravo

came late to the game, debuting their show, “Flipping Out,” in November of 2007,

well after the bubble popped.

Tape: more promo

Alex Blumberg: The problem was that even though housing prices were going

through the roof, people weren't making any more money. From 2000 to 2007, the

median household income stayed flat. And so the more prices rose, the more

tenuous the whole thing became. No matter how lax lending standards got, no

matter how many exotic mortgage products were created to shoehorn people into

homes they couldn't possibly afford, no matter what the mortgage machine tried, the

people just couldn't swing it. By late 2006, the average home cost nearly four times

what the average family made. Historically it was between two and three times. And

mortgage lenders noticed something that they'd almost never seen before. People

would close on a house, sign all the mortgage papers, and then default on their very

first payment. No loss of a job, no medical emergency, they were underwater before

they even started. And although no one could really hear it, that was probably the

moment when one of the biggest speculative bubbles in American history popped.

Strangely, the first people in the mortgage-backed security chain who noticed, were

the ones near the top. The people on Wall Street, like Mike Francis. He can

remember almost to the day:

Mike Francis: It would be somewhere around Halloween of 2006. We started

seeing our securities that were 6, 7, 8 months old start to perform poorly. We

started to dig into the details. Wow, property values stopped increasing.

Something is turning around bad here. What do we do?

Alex Blumberg: The problem was that once property values starting going down, it

set off a reverse chain reaction, the opposite of what had been happening in the

bubble. As more people defaulted, more houses came on the market. With no

buyers, prices went even further down, and as prices declined, Mike Francis cleared

up a mystery. Remember, even though he didn’t trust these NINA loans, the bonds

that he turned them into, they performed well. Well, there was a reason.

Mike Francis: it’s obvious that they performed well, now, because their

property kept increasing in value. Over time, they could take cash out to pay

the bill.

Alex Blumberg: In other words, they could take out another loan from the bank,

against the value of their house, which because of the bubble, was now worth more

than they bought it for. These loans, called home equity lines of credit, became very

popular in the early to mid 2000's. Partly because they were easy to get. But partly

because people needed them to continue making their original mortgage payments.

To pay off their debts, they went into more debt.

And in late 2006, early 2007, as prices began their plunge and alarm was spreading

across mortgage backed securities desks all over Wall Street, the people on Wall

Street, like Mike Francis, started backing away from some of the riskiest mortgages

that they would accept in their pools. Which had a devastating effect on the

mortgage companies, which had proliferated to sell them loans, a devastating effect

on people like Mike Garner, the mortgage banker in Nevada. For one simple

reason.

Mike Garner: All these mid-sized companies like us, we're not using our own

money to fund these loans.

Alex Blumberg: The way it worked was that a small bank, like Silver State

mortgage, where Mike Garner worked, would borrow money from a big bank, say

Citibank, or Washington Mutual. Silver State would use this borrowed money to buy

up a bunch of loans, and then pay back the big bank once it sold the pools to Wall

Street. Now these smaller banks were highly leveraged, in most cases 20 to 1.

Alex Blumberg: For Mike and his company, that meant that they’d borrowed tens of

millions of dollars to buy loans, that now, they couldn’t sell. And since they had very

little of their own money, (just like the homebuyers whose mortgages they’d

purchased) they had no choice but to default on their loan. Silver State Mortgage's

nearly 600 employees were out of work. Quite suddenly.

Mike Garner: It was February 14th the email went out and said “Silver State

Mortgage might be going out of business, but we think we can work

something out so we’d encourage you to come in and work tomorrow and

give us one more day.” The next day, people came in and the e-mail went

out. “Unfortunately we were not able to work anything out. We’re closing our

doors today.” That's how most of these lenders go under. Everybody’s

working thinking everything’s great. Chugging along. All of the sudden, the

bank says you're done. People started grabbing their computers, copy

machines, started rolling them out the door. It was a mess. My thoughts were

“Holy crap. Everyone’s just stealing their stuff.”

Alex Blumberg: That happened on Feb. 14th?

Mike Garner: Yup. My boss calls it the valentine’s day massacre.”

Music

Alex Blumberg: For Glen Pizzolorusso, the mortgage sales manager who - not to

dwell on this detail - was living the live of a B-list celebrity, the end came more

slowly.

Alex Blumberg: So you’re at WMC, what was the turning point?

Glen Pizzolorusso: This sounds obscene, but it was first month I got a

$25,000 paycheck. That didn’t even cover my expenses.” So you’re sitting

here and you’re like I made 25,000 this month, which is more than most

people make in six months and that doesn’t cover my expenses. Now what do

I do? The next couple months I made 30 or 40 grand, then it went down to

10. You could just feel it winding down. The good old days were over. It was

scary.

Alex Blumberg: So give me your situation now. Can you pay all your bills

now?

Glen Pizzolorusso: Not really. I borrowed some money from friends...from

dad. Living in my house right now, we’re working with the bank to try to

avoid foreclosure. At this point I’m dealing with an attorney. Trying to figure

out if it just makes sense for me to walk away from the house.

Alex Blumberg: And have you made mortgage payments?

Glen Pizzolorusso: No. No.

Alex Blumberg: When was last time you paid your mortgage?

Adam Davidson: This brings us back to Richard, the Marine we met at the very top

of the show. He, like more than 4 million Americans, at this point, is fighting to keep

his home. He's giving me a tour.

And I wanted to talk to him about what now? What happens next? Now that the

housing bubble has turned into a nationwide crisis.

If he defaults on his mortgage, nobody wins. He doesn't want to leave his house,

and the investors who own his mortgage, the last thing they want is to own a house

in East Flatbush, in a declining market with no buyers.

So you think it'd be easy for both sides to modify Richard’s mortgage, do something

he can afford. You’d be wrong.

Kerry Campbell: Hi I’m Kerry Campbell nice to meet you...

Adam Davidson: The offices of NACA, the Neighborhood Assistance Corporation of

America, in Newark, New Jersey, are short on frills. Kerry Campbell, who’s helping

Richard today, is a counselor here.

The goal today is to figure out how big a mortgage payment Richard can actually

afford to pay. So, Kerry needs to know everything Richard spends money on. They

go through his medical bills, his clothing budget. Kerry gently nudges Richard to be

realistic. Like when he asks Richard how much he spends on gifts for his family.

Kerry Campbell: Gifts to family? How much would you say on average?

Richard Campbell: 300, Christmas time?

Kerry Campbell: January through December. Mother's day. Father's day.

Sisters brothers. Nephews, nieces? Significant other. If you celebrate

Christmas. Whole enchilada.

Richard Campbell: Around $1000.

Kerry Campbell: That sounds about right.

Adam Davidson: The process now, how does it compare to when you bought

the house?

Richard Campbell: This is totally different. Brand new to me. When I bought

the house, it was just your credit score and can I pull a credit report?

Adam Davidson: Not to say the original broker didn't have a process. It just had

nothing to do with reality. Kerry shows Richard the original loan documents, filled out

by his broker.

Kerry Campbell: Here it's saying your base employment income is 16,250 a

month.

Richard Campbell: Laughs. Wha?!

Kerry Campbell: That means your salary, on a yearly basis, would be

$195,000 to be exact.

Richard Campbell: I wish. In 2005, right, and they used my 2005 taxes, I

was making $37,000 that year.

Adam Davidson: Did you know that number until now?

Richard Campbell: no

Adam Davidson: To me, that is shocking. It's not shocking to you?

Kerry Campbell: That’s outrageous. But it's a common thing. It's worlds

apart, reality and what's on these documents.

Adam Davidson: Another thing the papers reveal: How much that creative broker

made. $18,500 dollars. As Kerry says, that's 18,000 reasons to falsify Richard's

mortgage documents and to put him in a house he can't afford. Richard actually

qualified for a Veterans Administration loan at a really good rate, and he had money

to put down, but the broker convinced him to take a mortgage that turned out to be

much worse, with a much higher commission.

Mortgage brokers were walking around East Flatbush, knocking on doors, telling just

about anybody: Hey, we can get you a house. If you have a house, we can get you a

big home equity line of credit. This happened in poor neighborhoods all over the

country. And, while the FBI and other law enforcement folks, say they don't have the

exact numbers, it's clear that fraud--like the fraud on Richard's application--was

ubiquitous.

At the end of Richard's budget process, the math they come up with is fairly stark.

Richard makes more money now--he got a new and better job, so he makes an

average, before taxes, of 8,000 dollars a month. Which means, after taxes, he brings

home exactly enough to pay his mortgage and nothing else. All of his living

expenses, he says, are paid with money he gets from his mom who is on public

Alex Blumberg: So now we’re back in Jim Finkel's office. He's surrounded by

expensive computers, but he's typing on a cheap calculator. And he's trying to figure

out for us how many individual mortgages--how many homes like Richard's--does he

own part of. The calculator method fails him, and he turns to one of his number

crunchers, a guy named Alex.

Jim Finkel: I can't even imagine. Alex do you have any idea...

Alex Blumberg: Alex gets on the phone with Steve--the IT guy.

Alex: How many loans are you running in that loan performance? All

together? For all of our deals ... 16 million loans.

Alex Blumberg: This one CDO factory--this one office, owns a share of 16 million

homes. And each of those homes has lots of other owners--people in other CDO

offices around the world--there are lots of them. And other investors. You start to

see what a crazy web of confusing interconnections this whole process is.

Now, until this moment we had a theory that these two groups--the homeowners

and the people at the top of the chain, the investors--had no idea about each other.

We actually learned they know quite a lot about each other. They just see each other

through a computer screen.

TAPE: Hey Steve.

Adam Davidson: We find that out when we go downstairs to see Steve Pennington,

the IT guy. Steve’s actual title is the head of financial engineering. He's created his

own software program that actually looks at every one of the 16 million loans

Dynamic owns part of. It's a spreadsheet. Each line is one loan. It says how much

the house sold for, what the interest rate is. He points to one field--the most baffling

one--that is just twelve letters and numbers in a row. Every letter represents a

month.

Adam Davidson: What does the 9 mean?

Alex Blumberg: This is where the partnership of borrowers like Clarence Nathan

and investors like Jim Finkel has ended up.

Tonko Gast estimates that most of AAA rated mortgage-backed CDO's that the

industry created since 2006, are now worth less than half their value. Some are

worth close to zero. But remember to all the investment managers in the global pool

of money who bought them, AAA meant safe as government bonds. AAA was called a

cash equivalent, money in the bank. It's as if the global pool of money put trillions of

dollars in a savings account, came back one year later, and found out that half was

gone. Put another way, it's as if the global pool of money thought it was putting

trillions of dollars in a savings account, but really, half of it was going into a furnace.

The money is gone, burned up, never to come back.

And that's what's led to the new term you've been hearing.

Adam Davidson: Maybe you've noticed that the press and others don't call it a sub

prime housing crisis as much anymore. They call it a credit crisis. The global pool of

money still has no idea how much money they lost. How much went into the furnace.

And because of that, they’ve totally changed their thinking. They used to be

obsessed just with getting some profit, trying to make a slightly higher interest rate

return. Now the global pool of money has the exact opposite obsession. It wants no

risk whatsoever. It just wants safety. Suddenly, those US government treasury

bonds--still near historic lows of 1 and 2 percent--are beautifully attractive. Because

they're safe. They won't blow up like sub-prime CDOs did.

The global pool of money is avoiding anything with even the slightest hint of risk and

that affects everybody, no matter who you are. It's harder to borrow money to buy a

house, or build a factory, or bring your country boldly into the 21st century. Take

Iceland. A year ago it was easy for them to borrow billions. Now, they're seen as too

risky. Their central bank has to pay more than 15 percent interest get anyone to loan

them money. They could do better putting their national debt on a credit

card. Hungary, Kazakhstan, Turkey, are all in similar situations. You might have

heard about problems in student lending. Companies that needed credit to survive

are shutting down. The US expects more than 1.1 million bankruptcies this year:

twice the 2006 number.

This freezing of credit all around the world is something new, the world has never

seen anything on this scale. When the crisis hit, last August, central bankers and

finance economists couldn't figure out how bad things might get. There was this

question people would ask: will things get like the 1930s or the 1970s? There was

real fear that, just like in the '30s, hundreds of banks would collapse, there would be

massive unemployment, there was talk of a new Great Depression.

Alex Blumberg: That talk seems to have faded and there's more talk that the next

few years will feel like the 1970s. There are lots of technical differences between

this crisis and Jimmy Carter's malaise. But for the average person, it could feel the

same. It's not an out-and-out depression. Everything's just kind of crappy. And not

just in housing or banking but for the economy as a whole. It’s barely growing. There

aren't a lot of new businesses, new jobs. Unemployment keeps creeping up. We're

just sort of stuck, in neutral, for a while.

Anyone under, say, 45 probably doesn't remember that 1970's malaise too well.

Anyone under 30 has barely known a US economy that wasn't growing. Now there's

a decent chance we'll all get to see what life felt like in the '70s. Which isn't great.

It's pretty bad, actually. Unless you're comparing it to the 1930’s.

END