GPOM

THE GIANT POOL OF MONEY [continued]
THIS AMERICAN LIFE EPOSODE TRANSCRIPT # 355
IRA GLASS

[VERY LIGHTLY EDITED Google This American Life Ira Glass Public Radio]

This American Life Episode Transcript
Program #355

The Giant Pool of Money [Part 2]

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
buying houses.

page 13
The increased demand for houses caused the price to increase.
The rising prices created even more demand, as people started to look at homes as
investments --investments that never went down in value. In 2003 and 2004, 2005,
they didn't. You could buy a house with no money down, turn around and sell it a
year later for in some areas double what you paid. People who'd never invested in
real estate before started buying multiple properties as investments. There were
shows on TV about how to do it. Here's a promo.

Insert Tape: Promo from “FLIP THIS HOUSE” with song.

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.

Insert 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.

page 14
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.

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.

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.
Meaning, in Silver state’s case, even though it only had 5 million of its own dollars, it
could borrow 20 times that, 100 million, to buy loans with. So in late 2006, Mike is
busily at it, borrowing, buying, selling, paying back, and borrowing again, when the
e-mails started coming:

Mike Garner: We’d get an e-mail from a street firm, just say Credit
Suisse/First Boston. It’d say, after whatever date, “As of December 29th, we
are no longer buying Stated Income with a FICO less than whatever.” It’d say
“There will be no exceptions. Pleas do not call the pricing desk.” And you
just start flipping out. Can't just say you're not going to buy this with no
notice. Well, we're saying it and there's no notice. Then you start to scramble
trying to get this stuff out of the door as soon as you can.

Alex Blumberg: Because you’ve already been assembling a bunch of those
loans with those characteristics in place somewhere.

Mike Garner: You've got 20 million sitting there, and you say oh crap, I better
get those out the door. Within a week, you can expect to see the same email
from all them. A lot of time you’ll get two of those the same day. You're
scrambling to sell them, going off sheer relationships. Like okay, I’ve still got
10 million of these. I know you’re not buying them anymore. But come on ...
you can't just leave me like this. There comes a point where all of them said,
we’re not buying anything.

page 15
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.”

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
ten. 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?

page 16
Glen Pizzolorusso: January? I’ve been making em spotty, as I can. Just
enough to keep them off my back. I have to watch every penny.

Richard Campbell: As you can see this is my living room, I have no furniture.
And it's either buy furniture or pay my 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?

page 17
Adam Davidson: So in this whole process, when’s the first time someone
looked at your finances?

Richard Campbell: Today. Today.

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
assistance, his girlfriend, and his brother.

page 18
Kerry runs his software which says that if Richard is going to stay in his house, he
needs a much cheaper mortgage. The interest, currently at around 10%, would have
to be lowered a lot. To 3%. Kerry wants to propose this to whoever own loans the
loan. But this brings him to this peculiar problem mortgage owners now face: they
have no idea who that is. Richard's loan has been bought and sold, and re-sold and
put into one of those pools, owned by investors. Maybe an investor like Jim Finkel.

Jim Finkel: You know, 150 times, what did we say? 3000.

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 that
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?

page 19
Steve Pennington: It means they’re 90 days, basically delinquent on their
loan.

Adam Davidson: Is this the matrix? Where the guy is looking at the green
digits, and says there's the redhead and the blonde. Are you, Steve, seeing
lives here?

Steve Pennington: I definitely see lives.

Adam Davidson: For the record, I see cccc36c36. I do not see a human
drama.

Steve Pennington: The drama here is you have someone paying their loan,
then something happened. They’ve gone 3 months, delinquent...They got to
this point of 6, then fought back to current.

Adam Davidson: Now that I've learned the code, I see it. Like here, he was on
time for a bunch of months. This one, he was on time, 30 days, 30 days, then
he went two months behind, came back. And now he's just behind.

Steve Pennington: And what’s really hard about this, is you can watch people
cycle on and off.

Adam Davidson: You guys are more sympathetic. And maybe it’s just cuz
we’re reporters and you want to make us think you’re good guys –

Tonko Gast: We’re human beings

Adam Davidson: But these guys are hurting you. Their irresponsibility is
costing you money and work.

Tonko Gast: That was up to us to think about 3 years ago.

Adam Davidson: Do you have any anger when you look at this?

Tonko Gast: Not at all. This is pure sadness.

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.

page 20
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 to 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

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