390: Return To The Giant Pool of Money
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Prologue
Ira Glass
So, Adam, where are we?
Adam Davidson
I recorded this at the Ritz Carlton Hotel in Lower Manhattan. It's a black tie dinner. This was about a year and a half ago.
Ira Glass
And you, by the way, are part of the Planet Money team of economics reporters who did stories here on our program and on the NPR news shows.
Adam Davidson
That's right. I was there for my job. And this was spring 2008. We already knew the economy was heading downward. The subprime mortgage crisis was well underway.
Ira Glass
And so what was this dinner?
Adam Davidson
It was like the Oscars, but for a small group of specialized financial experts on Wall Street. They were giving out awards to the people who actually invented and created all these financial securities, including the kind that was already, back then, destabilizing the global financial system.
Woman
At this time, I'd like to ask all of our stars to please assemble over here on the left side of the stage.
Adam Davidson
This guy is a legend. He's a granddaddy of our industry. I was sitting at the dinner with Jim Finkel. He was really nervous because he was up for CDO of the year. It was for a CDO he created. Now, CDOs, we already knew back then when we were having this dinner, were the one financial product, more than any other, that had led to this subprime mortgage meltdown and the financial crisis that had already begun.
Ira Glass
That is so crazy that they're giving each other awards for this.
Adam Davidson
Now, I do want to say it that they did know that there was a certain irony here, that they were giving out awards to each other for what was already clearly one of the most spectacularly unsuccessful financial instruments in human history. It was costing them a lot of money. It was costing the world a lot of money.
Jim Finkel was doing this math while we were sitting there, and he was estimating how much money had been lost by the people in that room right there. And he said the products they had created, just the people in that room, had already lost $300 billion in value.
Ira Glass
Wow.
Adam Davidson
But he said-- and, again, this was April of 2008-- he said that the good thing was the worst was over.
Jim Finkel
People are, I think, have already turned the corner a little bit. Spring has sprung. People are sensing some positive motion in the equities markets, and people are starting to realize a lot of these problems have been put behind us already. A lot of the losses have been taken. A lot of the downsizing and the shifts in the banks have happened. And everyone's starting to say, OK, the dust has settled.
Ira Glass
So I'm just going to take a wild guess here. When he said that 18 months ago, that didn't turn out to be true?
Adam Davidson
No. Look, we all got it wrong. Nobody saw what was coming. Almost nobody. But yes, when Jim Finkel said that, he was so totally, shockingly, completely wrong. The dust had not settled. The problems were not put behind us. In fact, it was five months after this dinner, after he said those words, that Lehman Brothers collapsed. In fact, the federal government had to step in and basically bail out the entire US financial system.
Still in the future, the stock market was going to plunge. It lost more than half of its value eventually. The debt markets were going to freeze. And for Jim personally, his company, before the crisis started, was managing more than $5 billion in investments. And by the time of the awards dinner, those investments had already lost about 30% of their value.
Adam Davidson
Now, I caught up with him recently, and I asked him, how are things now?
Jim Finkel
I'd say we've probably lost 60%, probably 3 billion. And in retrospect, doing the transactions we did were not a good idea. That's just a fact.
Adam Davidson
A humbling fact. And it's made him reevaluate the business he's in and the very basics of how Wall Street works.
Ira Glass
And we'll get to that later in today's program. This month is the one-year anniversary of Wall Street's biggest crisis since 1929. Lots of news outlets are looking back in various ways, and we thought that we would do it here on our show by going back to one of the most popular programs that we have ever put on the air, a show that tells the story of how the crisis started, step by step. We called that show "The Giant Pool of Money."
And today on our program, in the first half of the show, we're going to play you a lot of that original report, where we hear from the bankers and the mortgage dealers and the investment managers and the homeowners, who together, without meaning to, created the economic disaster we're in today. And in the report, they explained what the hell they were thinking when they did all the things that brought down the global economy.
Ira Glass
And then in the second half of the show, Adam, you and your partner in this reporting, Alex Blumberg, one of our This American Life producers--
Adam Davidson
And also part of Planet Money.
Ira Glass
Right. Track down the people who were in your original story-- now, I guess a year and a half later-- to find out, how did the crisis that they helped bring on, how did it change them?
And so from WBEZ Chicago, it's This American Life distributed by Public Radio International. I'm Ira Glass. Today's show is a co-production that we're doing with NPR News.
And let me just turn things over to the two of you, Alex Blumberg and Adam Davidson. Alex is going to kick things off. This investigation began when Alex heard about something. It was a home loan that just didn't make any sense to him.
Act One: Spring 2008
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 to see 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 can 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. And it turns out even the people who got them found them confusing.
For example, a guy I met named Clarence Nathan, he worked three part-time, not very steady jobs, and made a total of $45,000 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
You basically borrowed $540,000 from the bank, and they didn't check your income?
Clarence Nathan
Right. It's a no income verification loan. They don't call me up and say, how much money? They don't do that. It's almost like you pass a guy in the street and say, will you loan me $540,000? He said, well, what do you do? I ain't got a job. OK. It seems as if it's that casual. Even though there are a lot of papers that get filled out and stuff flies all over with the faxes and the emails and all like that, essentially, that's the process.
Alex Blumberg
Would you have loaned you the money?
Clarence Nathan
I wouldn't have loaned me the money, and nobody that I know would have loaned me money. I know guys who are criminals that wouldn't lend me that money, and they'd break your kneecaps. Yeah, I don't know why the bank did it. I'm serious. They gave $540,000 to a person with bad credit.
Alex Blumberg
As it turns out, Clarence's friends, acquaintances, and shadowy criminal contacts would have been right not to lend him the 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.
But stories like this have been in the news for months, and they often feature an innocent homeowner who's 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 a lying, greedy homeowner. And 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 and told me story and said, oh, just close your eyes and all your problems will go away. That wasn't the situation. The situation was that I needed the money. And I'm not trying to absolve myself of anything. I had a situation, and I thought that I could do this and then get out of it within six to nine months. The six to nine month plan didn't work, so I'm stuck.
But if somebody had told me, you couldn't borrow the money, I probably would have 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. So the bank and I are partners in this deal.
Alex Blumberg
This imprudent partnership is new, and it's at the heart of 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 2000s, 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?
Well, to help explain what happened, here's my partner for the hour, Adam Davidson. Hey, Adam.
Adam Davidson
Hey, Alex.
Alex Blumberg
How's it going?
Adam Davidson
Good.
Alex Blumberg
Good. So I guess the first thing we have to do is talk about 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 savings.
Ceyla Pazarbasioglu
A lot of money. It's about 70 trillion.
Adam Davidson
That's the head of capital market research at the International Monetary Fund, the place to go if you want to figure out how much money is in the world.
Adam Davidson
So, first off, how do we pronounce your name?
Ceyla Pazarbasioglu
That would probably take, if this goes on air, probably that would take two minutes, at least. It's Pazarbasioglu, Ceyla Pazarbasioglu.
Adam Davidson
Jay-luh Puh-zar-buh-sho-loh.
Ceyla Pazarbasioglu
I'm very impressed.
Adam Davidson
And by the way, before you finance enthusiasts start writing any letters, we do know that 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 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 in every country on earth in a year, that is less than 70 trillion, less than the global pool of money.
Alex Blumberg
Wow.
Adam Davidson
We're talking about a lot of money.
Alex Blumberg
That is a lot of money.
Adam Davidson
And that money comes along with armies of very nervous men and women watching over the pool of money. Investment managers, they don't want to lose a penny of that. They don't want to lose any of that money, and even more so, they want to make it grow bigger.
But to make it grow, they have to find something to invest in. So most of modern history, what they did was they bought really safe, and frankly really boring, investments, like 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.
Adam Davidson
So it took several hundred years for the world to get to 36 trillion, and then it took six years to get another 36 trillion?
Ceyla Pazarbasioglu
Yeah. There has been a very sharp increase.
Adam Davidson
How does the world get twice as much money to invest? There are lots of things that happen, but the main headline is that all sorts of poor countries became rich, making things like 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 new 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, low-risk investment that paid some return. But then something happened that makes matters worse. At this precise moment, one guy took one of that army's favorite investments and made it a lot less attractive.
Alex Blumberg
This is where we have to talk about Alan Greenspan, right?
Adam Davidson
Yeah. We have to.
Alex Blumberg
All right. But I'm just going to promise people that this is the only time you're going to hear Alan Greenspan in this story, so bear with us.
Adam Davidson
Here's 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 may 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. Believe me, that's what he said. What he's technically saying is he's going to keep the fed funds rate-- that's when you hear the fed interest rate-- at the absurdly low level of 1%. And that sends a message to 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, which does speak central banker, they understood what he was saying. They looked around for some low-risk, high-return investment. And among the many things they put their money into, there's this one thing that 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 employee, 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: residential mortgages, the US housing market, and guys like Clarence Nathan. Think how attractive a mortgage loan is to that $70 trillion pool of money. Remember, they're desperate to get any interest return. They want to beat that miserable 1% interest Greenspan is offering them. And here are these homeowners paying 5%, 9% to borrow money from some bank. So what if the global pool could get in on that action?
There are problems. Individual mortgages are too big a hassle for the global pool of money. They don't want to get mixed up with actual people and their catastrophic health problems and their divorces and all the reasons that might stop them from paying their mortgages. So what Mike and his peers on Wall Street did was to figure out a way to give the global pool of money all the benefits of a mortgage-- basically higher yield-- without all the hassle and risk.
So picture the whole chain. You have Clarence. He gets a mortgage from a broker. The broker sells the mortgage to a small bank. The small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street. Then Mike takes a few thousand mortgages he's bought this way, he puts them in one big pile.
Now he's got thousands of mortgage checks coming to him every month. It's a huge monthly stream of money, which is expected to come in for the next 30 years, the life of a mortgage. And he then sells shares of that monthly income to investors. Those shares are called mortgage-backed securities. And the $70 trillion global pool of money loved them.
Mike Francis
It was unbelievable. We almost couldn't produce enough to keep the appetite of our investors happy. More people wanted bonds than we could actually produce. That was our difficult task, was trying to produce enough. They would call and say, we're looking for more fixed rate. What have you got? Do you have anything coming? What's going on? Tell us what you're trying to do.
From our standpoint, it's like, there's a guy out there with a lot of money, and we have to find a way to become his sole provider of mortgage bonds to fill his appetite. And his appetite's massive.
Alex Blumberg
The problem was, to make a mortgage-backed security, you needed mortgages, lots of them. So for Mike Francis to satisfy this demand and take his quite hefty fee from the global pool of money, he needed to buy up as many mortgages as possible.
And to do that, he called a guy one link below him on this 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 Garner got into the mortgage business straight from his previous job as a bartender.
Mike Garner
One of my regulars, he actually hired me from the bar. He just said he needed some guys, and if I was interested in working for him. And then we started talking about how much I made and that, and he beat what I was making, so. I didn't know anything about the mortgage business. I was as green as you could be.
Alex Blumberg
Mike Garner's job, the guy in Nevada, was to buy up individual mortgages, mainly from brokers, bundle 200 or 300 of them together, and then sell them up the chain to Wall Street, to guys like Mike Francis.
Adam Davidson
There's just too many Mikes here.
Alex Blumberg
I know. So many Mikes. There's actually just two Mikes. There was Mike Francis, the guy on Wall Street, and Mike Garner, the guy we're talking about now.
Adam Davidson
He's in Nevada.
Alex Blumberg
He's in Nevada, right. 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 that they had a steady income and money in the bank. And they sold so many of these 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 have qualified before.
And so Mike Garner in Nevada noticed that every month, the guidelines were getting a little looser. Something called a stated income, verified asset loan came out, which meant that people didn't have to provide a paycheck stub or W-2 form to get a loan, as they had in the past. They could simply state their income, as long as they showed that they had money in the bank.
Mike Garner
The next guideline lower is just stated income, stated assets. That came out. So then you basically state what you make, and then you state what's in your bank account. They call and make sure that you work where you say you work, and then an accountant has to say that, for your field, it is possible to make what you say you make. But they don't say what you make. They just say, it's possible that he could make that. And loan officers would have an accountant that they could call up and say, oh, can you write a statement saying that a truck driver can make this much money? Or whatever.
Then the next one came along, and it was no income, verified asset. 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 that you have a certain amount of money in your bank account.
And then the next one that came out is just no income, no asset. So you don't have to state anything. You just have to have a credit score and a pulse.
Alex Blumberg
Actually, that pulse thing, also optional, like this case in Ohio where 23 dead people were approved for mortgages.
Adam Davidson
An interesting fact here: Mike Garner's bank did not care all that much how risky these mortgages were. This was a new era. Banks did not have to hold onto these mortgages for 30 years like they used to. They didn't have to wait and see if they'd be paid back. Banks like Garner's would just own the mortgages for a month or two, and then they sold them on to Wall Street. And then 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 this whole other thing going on, as well. Housing prices were rising fast. I think we all remember that. 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 a house which is now worth even more than what they gave out in 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 ten deals last week to Meridias Bank. And they've got this loan. Look at the guidelines for this loan. Is there any way we can do this? Because we're losing deals left and right. And either they would find out who they're selling it to, or I'd get on the phone and start calling on all these street firms or Countrywide and say, would you buy this loan? And finally, you'd find out who was actually buying them, and they would say, yes.
Alex Blumberg
So like Merrill Lynch would say, no, and Goldman Sachs would say, no, and then you'd finally hit on somebody. And they would be like, yeah, we'll buy that loan.
Mike Garner
Yeah. And then once I got a hit, then I called the other peoples back and say, listen, Bear Stearns is buying this loan, and I would like to give you the opportunity to buy these loans, too. And once one person buys them, usually, all the rest follow suit.
Alex Blumberg
So what were you thinking when you're turning around and you're selling those to Wall Street? Were you ever thinking to yourself like, what are you guys doing?
Mike Garner
Yeah. And my boss had been in the business for 25 years, and he hated those loans. He hated them. And he used to rant and just say, it makes me sick to my stomach, the kind of loans that we do. And he fought the owners and the sales force tooth and neck about these guidelines, and we got the same answer every time: Nope, other people are offering it, and we're going to offer it, too. And we're going to get more market share this way. House prices are booming. Everything's going to be good. And the company was just rolling in the cash. The owners and the production staff were just raking it in.
Glen Pizzolorusso
At the height, I was making between 75 and 100 grand a month.
Alex Blumberg
This is Glen Pizzolorusso, who was an area sales manager at an outfit called WMC Mortgage in Upstate New York. And just to repeat, he said 75 to 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's the same link in the chain. And Glen loved his job.
Glen Pizzolorusso
What was that movie, Boiler Room? You ever see that movie? That's what it was like. It was the coolest thing ever, just cubicle, cubicle, cubicle for 150,000 square feet. The ceilings were probably 25-, 30-feet ceilings. The elevator had this big graffiti painting on it that was awesome.
Alex Blumberg
A graffiti painting that had been there since before you guys moved in?
Glen Pizzolorusso
Yeah, yeah, yeah.
Alex Blumberg
So they had not done any amenities to this place? There wasn't--
Glen Pizzolorusso
No, no, no. It was just a big, open space, and it was awesome. We lived mortgage. That's what we did. That's all we did. All of us, we just lived it. This deal, that deal, what's going on here? How are we going to get this one funded? What's the problem with this one? You get there, and that's all everybody'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 would roll up to Marquis at midnight with a line 500 people deep out front, walk right up to the door, and, give me my table. We were sitting next to Tara Reid and a couple of her friends. Christina Aguilera was doing whatever, like, I'm Christina Aguilera, and I'm going to get up and sing. So Christina Aguilera and all her people are there.
Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle Drive. What was that kid's name? Fabian? I don't remember. We order probably three or four bottles of Cristal at $1,000 a bottle. They bring it out. They're walking through the crowd. They hold the bottles over their head. There's firecrackers and the sparklers. The little cocktail waitresses. So you order four bottles of those. They're walking through the crowd of people. Everybody's like, whoa, who's the cool guys?
Well, we were the cool guys. You know what I mean? They gave me a black card, this little card with my name on it. There's probably 10 of them in existence. And that meant that I just spent way too much money there.
Alex Blumberg
Glen had five cars, a $1.5 million vacation house in Connecticut, and a 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
Loans we were doing, we looked at loans, these people didn't have a pot to piss in. They could barely make their car payment, and now we're giving them a $300,000 to $400,000 house.
Alex Blumberg
But Glen didn't worry about whether these loans were good, either. That was 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 he bought loans, lots of loans, from Glen's company. And he knew in his gut that they were bad loans, like these NINA loans.
Mike Francis
No income, no asset loans, that's a liar's loan. We are telling you to lie to us, effectively. We're hoping you don't lie, but-- tell us what you make, tell us what you have in the bank, but we're not going to actually verify it? We're setting you up to lie. Something about that transaction feels very wrong. It felt very wrong way back when, and I wish we had never done it. Unfortunately, what happened, we did it because everybody else was doing it.
Alex Blumberg
It's easy to ignore your gut fear when you're 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 graduates hired by his firm. And the software analyzed all the loans in all the pools that Mike 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 that were in production that were years old was positive. They performed very well. All those factors, when you look at all the pieces and parts and you say, well, a 90% no-income loan three years ago is performing amazingly well. It has a little bit of risk. Instead of defaulting 1.5% of the time, it defaults 3.5% of the time, well, that's not so bad. If I'm an investor buying that, if I get a little bit of additional return, I'm fine.
Adam Davidson
Wait, Alex. I want to step in here, because this is a very important piece of tape. A big part of this whole story, 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?
Alex Blumberg
Yeah, sure. Here you go.
Mike Francis
All the data that we had to review, to look at, on loans that were 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 the foreclosure rate is generally below 2%. So they figured, absolute worst-case scenario, the foreclosure rate might go to 8 or 10 or even 12%. But the problem with that is that 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% foreclosure rates.
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
Well, we're heading to the trading floor of Dynamic Credit, where we have all of our mortgage and CEO 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. But what is a CDO? He shows us on a computer screen.
Jim Finkel
I'm going to show you. 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 CDOs after towns in western Mass, like Monterey.
Jim Finkel
Monterey CDO limited. We had 189 assets in Monterey, 189 tranches of different mortgage-backed pools.
Alex Blumberg
Let's translate some of that. A mortgage-backed security, remember, is a pool of thousands of different mortgages. These are all put together and divided into different slices. Jimmy used the word "tranche." "Tranche" is just French for "slice." Some of these slices are risky, and some are not. A CDO is a pool of these tranches, a pool of pools. And Jim and most companies like his weren't buying the top-rated tranches, the safest ones, the triple-As. They were buying the lower-rated stuff, the high-risk stuff.
Adam Davidson
There's another term the industry uses. This is not a joke. They call these lower-rated tranches "toxic waste." They're so high-risk, they're toxic.
Alex Blumberg
And so basically, Adam, a CDO is a financial alchemy, right?
Adam Davidson
Right.
Alex Blumberg
Jim takes this 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 triple-A, rock-solid, good as money.
Now, if this seems too good to be true to you, you're in good company. Guys like billionaire investor Warren Buffett said the very logic was ridiculous. But back in 2005, 2006, the global pool of money, they 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 rated tranches.
This is Jim's partner, Tonko Gast.
Tonko Gast
Actually, in 2005 already, we had an internal debate here. Because there were two banks coming to us saying, why don't you do a deal with us of triple-B securities, and you get paid a million bucks in management fees per year? Very clear, just like that. In 2005.
And we declined those deals. We said, we just don't believe that those triple-B ARM assets are money-good. We don't think they're well underwritten, and we think if we do CDO of those, that's going to blow up completely. We were a little early in '05 by not wanting to do those deals, and people were laughing at us, to be honest, to say, well, 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. Well, not everybody, but a lot of people did.
Alex Blumberg
Let's go back all the way to the other end of this mortgage chain and meet one of those people in one of these poorly underwritten mortgages that Tonko Gast just referred to, that the global pool of money was eagerly buying up. This guy's name is Richard, and we met him at a foreclosure prevention conference in Brooklyn.
Adam Davidson
He's a Marine, a big guy, over six feet tall. And when he came back from Iraq a few years ago, he bought a house with one of those fancy new mortgages with an adjustable rate. Recently, his rate reset. His mortgage payments have gone up by more than $2,000 a month, and he's falling behind.
Richard Campbell
It got to the point where my son had $7,000 in a CD, and I had to break it. That really hurt, because I was saving up money for his college. I put $2,000 back, but-- it was like you can't have a future. They put you in a situation where, after a while, you're going to fail. And if you don't have anything saved, you can't do anything. It's hard.
Alex Blumberg
Richard, like more than 4 million Americans at this point, is fighting to keep his home. And we actually tagged along with him one day as he did that.
Kerry Campbell
How's it going? Kerry Campbell. Nice to meet you. Good, how you doing, sir?
Adam Davidson
The offices of NACA, the Neighborhood Assistance Corporation of America in Newark, New Jersey, were short on frills. Kerry Campbell, who's helping Richard today, is a counselor here. Kerry shows Richard the loan documents he filled out when he bought the house by his original broker. And Richard's pretty surprised when he sees the numbers that his mortgage broker filled in on the forms.
Kerry Campbell
Here it's saying your base employment income was $16,250 a month.
Richard Campbell
What?
Kerry Campbell
$16,250 a month, which means your salary on a yearly basis, you're making just under $200,000, 195, to be exact.
Richard Campbell
I wish. In 2005, right-- are they using my 2005 taxes?-- I was making $37,000 a year.
Adam Davidson
Did you know that number until now?
Richard Campbell
No.
Adam Davidson
So he stated $16,000 a month? To me, that is shocking. To you, it's not that shocking?
Kerry Campbell
Oh, that's outrageous, but it's a common thing. It's worlds apart from the reality and what's on a lot of these documents.
Adam Davidson
Another thing the papers reveal? How much that creative broker made: $18,500. 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.
Ira Glass
Coming up, we travel in time from May 2008, when this was all recorded, to the present, to answer what happened to Richard? Did he keep his house? And when the economy collapsed, which of these other guys kept their houses? In a minute, from Chicago Public Radio and Public Radio International, when our program continues.
Act Two: Fall 2009
Ira Glass
This American Life. I'm Ira Glass. Each week in our show, we choose some theme, some topic, and bring you stories on that topic. Today, we return to the giant pool of money. In the first half of our program today, we heard a story first broadcast in May 2008, before the worst of the economic crisis. And over just the last few weeks, Adam Davidson and Alex Blumberg have been checking in with various people in that story to see what has happened to them, what has changed for them in the last 18 months.
And to find out how they see things now, here's Alex.
Alex Blumberg
Let's start with some good news. Richard Campbell, the Marine we spoke to, a year and a half ago, he wasn't sure if he was going to keep his house. And he was working with NACA, a housing advocacy group, to see if they could convince the bank to lower his mortgage payments.
Richard Campbell
With the help of NACA, the payments were cut in half. It's very manageable now.
Adam Davidson
So that's the good news. He went from paying nearly six grand a month to just under three grand. But the bad news is, it's taken up most of the last year and a half to get this done. The problem was, Richard, like a lot of people, bought his house with two mortgages, and the second mortgage, NACA couldn't help him with.
Alex Blumberg
And so Richard has spent a year and a half battling his mortgage servicing companies, waiting on hold, getting transferred to different supervisors. He says he got within two days of getting foreclosed on. And it's taken its toll.
Richard Campbell
Your body just goes through weird things. I didn't know stress was so powerful. Your body goes through a lot.
Adam Davidson
Wait, wait, wait. You fought in Iraq as a Marine, and this was more stressful?
Richard Campbell
Yeah. Believe it or not, yeah. It was. It's a lot harder to deal with than shooting at people and having people shoot back at you, believe it or not.
Alex Blumberg
It's hard to believe. Having come back from Iraq, I'm sure you would've thought, well, that was the most stressful thing I'll ever do, right?
Richard Campbell
Yes. I definitely thought, once I had beat that, I could beat anything. But it's a different type of feeling. Because they train you for combat in the military. Nobody trains you for this type of stress, no one. And it's different when, in this situation, I felt totally alone. I had no one to turn to, so that's a totally different feeling.
Adam Davidson
Richard's luck started to change, actually, while he was watching one of those local morning shows, Good Day New York. They were doing a segment on President Obama's mortgage relief plan. Richard realized, hey, they're talking about me. I have a mortgage I can't afford. I have a history of trying to pay but not being able to because of a ridiculously high interest rate. I qualify for that plan.
Alex Blumberg
But even after that, it was still months trying to convince his mortgage company that he actually qualified, months of arguing with people on the phone and sending in different documents. Until finally, one day, he got a call from a guy named Peter at his mortgage servicing company.
Richard Campbell
They said, Mr. Campbell, we have good news. We're able to modify your loan, and these are the terms. And they started telling me the terms. Tears started coming to my eyes when he said, we're going to go from 11 and 1/4 down to 3%. And then I said, is it fixed, or will it still balloon? He said, there's no balloon. It'll be fixed for the life of the loan. You pay this mortgage for 30 years, the house is yours. When I talk about it now, I still get that warm and fuzzy.
Adam Davidson
What'd you do? Did you call your fiance, or how did you--
Richard Campbell
Oh, yeah. I ran around the living room. And then I went and I grabbed her and I picked her up. And she was like, what's going on? And then I told her. And then we started jumping up and down. It was a beautiful feeling, beautiful feeling.
Clarence Nathan
Simply, the situation is the same. Inexplicably, the situation is the same.
Alex Blumberg
This is Clarence Nathan. He's the guy from the beginning of the program who got that $540,000 loan that he wouldn't have given himself. You remember him.
Clarence Nathan
It's almost like you pass a guy in the street. Will you loan me $540,000? He said, well, what do you do? I ain't got a job. OK.
Adam Davidson
When we met Clarence in March of 2008, he was living in that house, the one that he'd gotten the loan on, and he hadn't paid a mortgage payment in about a year. When we caught up with him last week, he wasn't so eager to call attention to his situation.
Alex Blumberg
So current living situation?
Clarence Nathan
Is the same as it was at the time of the last program and our initial interview.
Alex Blumberg
The same house?
Clarence Nathan
The same house, the same conditions.
Adam Davidson
And at that point, you hadn't paid a mortgage bill in a while, and you just didn't know what was going to happen.
Clarence Nathan
Right. Still don't.
Alex Blumberg
And still haven't paid?
Clarence Nathan
Right.
Alex Blumberg
Wow. That's very mysterious, isn't it?
Clarence Nathan
Yeah. Like I said, nobody's made any efforts to negotiate it out.
Adam Davidson
This is something we hear about a lot. There's so many more mortgages in default right now, it's overwhelming the system. The Wall Street Journal recently reported that there are 1.2 million homeowners with seriously delinquent mortgages where the lender has made no effort to start foreclosure. In July of this year, there were more than 200,000 mortgages where borrowers hadn't made a payment in over a year, and the lender still hadn't started to foreclose.
Alex Blumberg
And so homeowners like Clarence are actually benefiting from the fact that the economy is doing so badly, that this crisis is so big. If it was just Clarence in trouble, the bank would probably have taken his house by now. But since there're so many people like him flooding the system, he's gotten a reprieve. Looked at one way, this hasn't gone so badly for Clarence. He's lived in a house for free for nearly three years.
Adam Davidson
But on the other hand, he's 64 years old, and the bank could come for the house at any moment. He told us he doesn't think it's likely he'll ever get out of the debt he got into in this crisis.
Alex Blumberg
Now, what about the guys who made it so easy for Clarence and Richard to get into these bad mortgages, the guys who took those mortgages and lots of other mortgages like them, packaged them up, and sold them to the giant pool of money? Take Jim Finkel, the guy at the CDO factory. Intellectually, he knew that he was making his CDOs out of loans to people like Clarence. But it took him a long time, even after this huge crisis hit, to really understand what that meant.
Jim Finkel
I always like to say that the people in our world, which is this narrow world within Wall Street, the people that are involved in derivatives, with complex financial engineering, they work in a very narrow, focused area. And I like to sometimes call them bark watchers. They don't just miss the forest for the trees. They miss the tree, they're looking at things so closely. And I think that was the problem. It was incredibly hard for people in the structure of finance world to step back far enough to see what was really going on out there.
Adam Davidson
What was really going on out there was a lot of loans to people like Clarence. But by the time those loans got to Jim, they were just numbers and data in a spreadsheet, credit scores and appraisal values and down payment amounts.
Alex Blumberg
Which is why Jim Finkel believed that the CDOs he was making were good investments, investments that he himself wanted in on.
Jim Finkel
We put three years of all of our profits as investments in the riskiest parts of our own deals. Why would we do that if we didn't believe they'd work?
Adam Davidson
Where's that money now?
Jim Finkel
We wrote all that money off. It's gone. It's gone. And we've had to completely rebuild.
Adam Davidson
There's certainly a perception that, oh, the guys who created all this mess are now making lots of money. And you're saying you've lost lots of money. Are you typical of the guys who created CDOs, or are there guys who found a way to somehow profit from this period?
Jim Finkel
Well, I think you have to distinguish between the investment banks and the capital markets people and the investment managers.
Alex Blumberg
And just to explain, investment managers like Jim are subcontractors to the investment banks on Wall Street. A big Wall Street firm like Merrill Lynch would come to Jim and say, we have some people who want to buy a CDO, can you put one together for us? And then Jim and his company would go about buying up various mortgage-related securities and putting them together into the CDO.
Adam Davidson
But those investment bankers who hired him to put those deals together, they got paid in fees.
Jim Finkel
Every deal would get a 1 or 2% fee. So let's just keep doing billions of dollars of deals, and that'll rack up the tens and twenties of millions of dollars in fees. Those guys took a lot of upfront fees of those deals, and they took bonuses out of those upfront fees. And even though their banks went belly-up, those bonuses were never called back. A lot of people made enormous amounts of money and moved on.
Some of the mentors I've had who are more experienced and older than me, they all tried to convince me all the time that people on Wall Street were bad. I started my career, pretty much, on Wall Street. And I thought all the colleagues around me-- no one seemed to be bad. Everyone seemed to be trying their hardest. And this set of events did convince me that people on Wall Street generally are bad, and that the customer does not come first.
And it's not a client-driven business. It is a business driven much more for the bank. Because I saw how quickly the banks turned on their customers, including how the banks have turned on us. How they withdrew their credit lines, how they traded against us. They've done anything they can. And that was dispiriting. And it just proved that my mentors were correct, and I was overly idealistic.
Alex Blumberg
Of all the people we caught up with, Glen Pizzolorusso was the most transformed. Remember, he was the guy who used to party with B-list celebrities like Tara Reid, with all the cars and houses. When we last spoke to him in spring of 2008, the company he worked for had gone out of business, and he'd lost almost everything. He had one house left, but his loan on that house was for a lot more than the house itself was now worth.
Glen Pizzolorusso
I was way upside-down on the house, not able to make the payments. And we let the house foreclose. It made no sense to fight it.
Alex Blumberg
In other words, both of the guys in our story who got home loans that they couldn't pay back, Richard and Clarence, they're still living in their houses. And the guy who made millions making loans like the ones that they got, he's the one who lost his house. Glen says he can't afford to rent, so he and his wife and three kids ARE living now in a place that his dad owns.
Glen Pizzolorusso
Actually, where I grew up. Well, I lived there till I was nine years old. It's crazy. I send my kids to timeout, and it's the same place that I got sent to timeout. So it's actually really cool. I know where everything goes. I didn't have to really think about where to put things. My wife asked me where to put things, and I said, well, it was there when I was growing up, so let's put it there.
Alex Blumberg
If it sounds like Glen is doing strangely OK, he is. Losing a few million dollars has actually made his life better, in ways we'll get to in a minute.
Adam Davidson
But first, things got a lot worse. For starters, he became a villain on the internet. People who heard our original story singled him out as someone to blame.
Alex Blumberg
Which seemed unfair to us, because Glen was certainly not responsible for this crisis. We've interviewed dozens of people who made much more money than Glen did and played much bigger roles. Glen was just more honest than anybody else we talked to, and he was honest about things that he knew would make him look bad. But he says we didn't help him any, either. There was one line in particular, the one where I said he made all this money making very large loans to very poor people.
Glen Pizzolorusso
I think that maybe in the in the vein of the story, that statement got a little carried away.
Alex Blumberg
Right. I think it came across as that you and everybody out there was out there preying on poor people.
Glen Pizzolorusso
Right. There was no malice, and I never set out to hurt anyone. I just did what I saw everyone else doing.
Adam Davidson
Talking to Glen now, he seems like a guy in the early stages of a major life change. He's going back to college. He loves school now. He used to always hate it.
Alex Blumberg
In fact, he does a lot of things he never used to do, like listen to the news and read books. He spends a lot of time with his kids now, no time at all with B-list celebrities. He wants to get his degree in theology and law and then go into politics. He says he really wants to do some good in the world.
Adam Davidson
But he points out, his big life change, at first, anyway, it was not his choice.
Glen Pizzolorusso
I have been humbled. I've been forced to be humbled. I used to look at mortgage applications, and the people, their income was $2,500 a month, $3,000 a month. And I used to think, how can people live on that? And I would welcome it now. I would be able to live on it so comfortably. I'm driving a car that has no payment on it. It's a piece of junk. And I used to think that it mattered. But it doesn't.
Adam Davidson
I'm picturing an alternative Glen, the Glen from the world where there was no bubble bursting, where the Glen who's still making $100,000 a month, who still has that lifestyle. And I am picturing meeting that Glen today, and I feel like I like this Glen a lot more.
Glen Pizzolorusso
Without a doubt. Well, because, how do I explain this, other than that Glen was about Glen. And this Glen is about what I can bring to-- trying not to sound cliche-- to society, what I can bring to my family, what I can do to make sure that we don't keep creating that Glen?
Alex Blumberg
I feel like you're really emotional talking about this now. Why?
Glen Pizzolorusso
I don't know why. I think part of it is shame that I let the money take me over. I should've helped people when I was making that money. I should've done things that I could sit here and be proud of with it. And I didn't. I didn't do anything that I can really be proud of with it.
Adam Davidson
So another character in our story that we wanted to check in on is the giant pool of money itself, all that money global investors have that they're looking to invest somewhere.
Alex Blumberg
When we last met the giant pool of money before the financial collapse, it was big, $70 trillion. And it was growing fast. It had doubled in six years.
Adam Davidson
So we checked back in. We called the International Monetary Fund and found out a few interesting things. One, that 70 trillion number, that was wrong. The IMF had underestimated how much money there is and how fast it had grown. Back in 2007, that number really should have been almost $80 trillion.
Alex Blumberg
And today, two years later, we talked to the very same person, Ceyla Pazarbasioglu.
Adam Davidson
Very nicely done.
Alex Blumberg
Thank you. After nearly two years of recession, the collapse of housing prices all over the world, the giant pool of money has, according to her, grown. The IMF thinks it is now about $84 trillion.
Adam Davidson
Now, we were shocked that it grew at all.
Alex Blumberg
Of course.
Adam Davidson
But here's the context. The bursting of the housing bubble did do some damage to the giant pool of money. The IMF thinks investors in subprime securities and the like lost at least $3 trillion. That's like losing all the money spent in a year in Russia and Canada combined.
Alex Blumberg
So given all that, how did the giant pool of money get bigger? Well, two major things happened. One, investors pulled money out of stock markets all around the world and added it to the giant pool of money. Two, government stepped in. The Federal Reserve and central banks all over the world actually created trillions of new dollars and euros and yen. It's more new money than ever before, and much of that has made its way into the giant pool.
Adam Davidson
In other words, the giant pool of money would probably have shrunk by a good amount, except the world's governments and the world's central banks have been pumping out trillions of dollars to keep the world economy from complete collapse.
Alex Blumberg
But while the size of the giant pool of money has gotten bigger, its attitude has gotten a lot smaller. Remember that army of investment managers?
Adam Davidson
The nervous guys?
Alex Blumberg
Yeah. Well, two years ago, there wasn't anything in the world they wouldn't throw money at. They'd take any risk for a bit of return. Now, they're terrified. They want to invest in solid, safe, boring, low-interest government bonds. The safer, the better. One of the hottest items out there right now, one-month treasury bills, paying effectively 0% interest.
Adam Davidson
Meanwhile, as you've probably noticed, credit is tight everywhere. People with great credit scores and a lot of money in the bank have a hard time getting approved for home loans. Businesses can't convince anyone to lend them money to build new factories. Cities can't borrow money to build schools and hospitals. That's a big part of why we've been stuck in this recession.
Alex Blumberg
The world's governments have tried to step in to supplement the giant pool of money, but the annual budgets of all the world's governments combined is less than $15 trillion.
Adam Davidson
That's less than one fifth the size of the world's investments. It turns out, there's just not enough government in the world to replace the lending the giant pool of money used to do.
Alex Blumberg
And that is the reason nobody can say with certainty when the economy will get better again. Because we're waiting for investors everywhere to feel safe to invest again. We're all waiting on the giant pool of money.
Ira Glass
Alex Blumberg and Adam Davidson. It was after they did the first giant pool of money broadcast that our show and NPR News decided that lots of economics reporting like this might be a good idea as we headed into tough economic times. And we started this project, Planet Money. If you liked today's program, check out their thrice-weekly podcast-- you're going to be getting this three times a week-- and their blog at www.npr.org/money.
Credits
Ira Glass
Alex Blumberg produced today's show with Jane Feltes, Sarah Koenig, Lisa Pollak, Robyn Semien, Alissa Shipp, and Nancy Updike. Our senior producer was Julie Snyder. Our special guest editor for today's show was Les Cook of NPR News. Adrianne Mathiowetz runs our website. Production help from Seth Lind, Emily Youssef, and Aaron Scott. Music help from Jessica Hopper.
[ACKNOWLEDGEMENTS]
Our website, where you can listen to our show for absolutely free or sign up for our free weekly podcast, or you can also listen to any of the shows-- there's almost a half-dozen now that we've done with the Planet Money team explaining all aspects of the economy-- www.thisamericanlife.org.
This American Life is distributed by Public Radio International. WBEZ management oversight for our program by our boss, Mr. Torey Malatia. He and I, we like to go out at night together sometimes. He's pretty chill. Torey describes it like this.
Glen Pizzolorusso
Everybody's like, whoa, who's the cool guys? Well, we were the cool guys.
Ira Glass
I'm Ira Glass. Back next week with more stories of This American Life.
Man
PRI, Public Radio International.