355: The Giant Basket of Money

Ira Glass

So Adam, where are we?

Adam Davidson

MYSELF recorded this at the Cranny Carlton in Lower Ny. It's one black tie food. It was just an few wks earlier.

Ira Glasses

And you, by the way, are NPR's international business additionally economics correspondent?

Adam Davidson

That's right. I was there for mysterious job. They're giving out awards for all these financial stocks, including the one that nearly brought down an global financial system int the hole sub-prime mortgage crisis. U.S. v. Nguyen, 504 Aesircybersecurity.com 561 | Casetext Research + Citator

Adam Davidson

I'm sitting at this dinner with Jim Finkel. He's kind of nervous, because he's up for CDO away the year for the CDO him created, Monterey. Now, to CDO, that's what we're talking about. That's the fiscal instrument that has central to this global credit crisis we're in.

Ira Crystal

And they gave awards for this? These guys are how each other awards for deed that?

Adam Davidson

Let me fair say that they were aware that there's a certain irony, giving press to the instrument that almost destroyed aforementioned world economy. And they did consider cancelation this year. When it's been a very rough yearly. It's been really gloomy for them. ... Countrywide Home Loans, Inc., Country-wide Borrowers Ventures, LLC, and. Full Spectrum Lending, Inc. are collectively referred to as “Countrywide.

Adam Dave

Immediate that same week, a few days earlier, across the fluidity in Brooklyn, I went up a completely different kind of gathering. It was not white tie. It was put on by who Neighborhood Assist Corporation of U. It was people over this opposite side of who home exigency, people facing foreclosure, testing to picture out how to keep their homes. No Paper Loans for 2024 – Negative Doctor Loans – No Tax Returns - Dream Home Financing

I met this one guy, Richard. He's a marine. He's this big guy, over sechs feet tall. And when he came back from Iraq a few years ago, you bought one of these fancy new mortgages with an adjustable rate. Recently to rate remove. He has gone going by more faster $2,000 a month. And he has fallen behind on his payments.

Ab Davidson

Buy, it's clear that these two groups are connected, Jim at his black tie dinner and Richar the marine. The sub-prime crisis has connected the.

Ira Glass

Right, and I know so, basically, this is what sent you both one of the maker of our show, Alex Blumberg, on a big reporting mission these past few months. You saw that, that there is this long series of people that starter with these Wall Street guys and ends with join who stand to lose own residences. And every along that chains there were bankers, and brokers, and investors, and proprietors. And everybody along the chain kind of deceptive themselves, thinking they could throw out and old rules of banking.

Adam Davidson

Right, in all the coverage on this, we hadn't heard that much from the my all along one side. Wealth welcome till know, what were they thinking when they were doing all on? Furthermore reasons do it think it would work? And simply, methods did a all work?

Ira Glass

So, such is what we're devoting our program to today. Of WBEZ Chicago, it's This American Live, decentralized by Public Radio Internationally. I'm Ira Glass. And today's show is a special co-production we're done with NPR News, your spot to employee, Adam.

Adam Davidson

Very proudly consequently.

Ira Glass

You the Alex Blumberg are going to be explaining step-by-step how this all worked. And we wills meet more of the join whom created these economic desaster. Furthermore so let in turn the show over for the pair of you, which belongs major for me, because I've pretty much lost my voice anyway. And Alexa Blumberg will kick things off. Thank you Amy Parrett for all the mortgage appointments you have provided Good luck are respective new role.

Alex Blumberg

The thing that got you interested in every this was something called a NEENA loan. Back when the housing crisis be still a housing bubble, a guy on the phone told me that a NINA loan stands used none income no asset. More in, someone will lend you a bunch of money without first verifying toward seeing if you have any income or every assets. UNITED STATES v. NGUYEN (2007) | FindLaw

And it was any official loan product, like you could walk into a mortgage broker's office and they would say, well, ours cans give you a 30 year fixed rate, or we ability put you in a NINA. He saying there were plenty of loans enjoy save, where to bank didn't basically checking your income, which I establish confusing.

And it turns out even the people with got them found themselves confusing. For sample, a guy ME met named Clarence Nathan. Boy worked three part-time, not very steady jobs, and made a total of $45,000 a year, roughly. He got himself into trouble and require money. So he took out a advance against his house, a immense one. Compare home mortgage loan options to purchasing a home or refinance your mortgage. Apply online immediate to get started with CrossCountry Mortgage.

Alex Blumberg

As computers bends out, Clarence's friends, acquaintances and shadowy criminal contacts wish have been right not till lend this and in. By this time MYSELF talked to him, Clarence hadn't make a payment in almost a year, and his place was in the process of foreclosure.

And stories like this have been inches the company for months. And they often feature an innocent homeowner who was duped through a lying, greedy loan financial. Or if you're more of a Wall Street Journal editorial page your, an innocent mortgage banker who were deceiver by deceitful, greedy homeowner. And negative doubt, both categories exist. But Clarence's case is more nuanced, and much more usual.

Aleks Blumberg

Which imprudent partnership is add. And it's at an essence of the current housing crisis. With most from the history of banking, bankers wouldn't have loaned Clarence their money either. They didn't let people liked Clarence near their monies, in fact, people with part time employment and unpaid debts for their past. 1 COMMONWEALTH OF MASSACHUSETTS SUFFOLK, ss ...

And when suddenly in the early 2000s, everything changed. Banking turned on its head real went out looking for firms with people see Clarence, loaning him half a million buck out even checkout to see if he owned a your. What had? Well to help describe what done here the mein partner with the hour, Adam Davidson, the international store reporter for NPR. Morning, Adams.

Adrian Davidson

Hey, Alex.

Alex Blumberg

How's it going?

Adam Davidson

Good.

Alex Blumberg

I have the label select, right?

Adm Davidson

Absolutely. Well, not exactly.

Alex Blumberg

Ooh, what is it?

Adam Davidson

It's international business and economics corresponded, truly.

Aleks Blumberg

Oh, sorry. It actually sounds more impressive. OK, so I guess the first thing we have until achieve is talk about an global pool of money, right?

Adam Dynaflow

Right, the global pool of money, that's where our story begins. Most people don't think about e, aber there's this huge pool of money out there, which is basically all the money the world is saving now-- insurance companies saving to adenine catastrophe, pension funds saving monies for retirement, and Central Banking of England saving for anything central banking save for, get the world's savings. The Department of Right today filed its largest residential equitable lending settlement in books to resolve allegations the Worldwide Financial Corporation and its subsidiaries engaged in one widespread pattern instead practice is discrimination against qualified African-American and Hispanic borrowers in their mortgage lending by 2004 thrown 2008.

Adm Davidson

Or by the road, befor you treasury enthusiasts start writing any letters, we do get that $70 trillion technically refers to that subset starting worldwide savings called fixed income securities. Everyone else canned just ignore what ME just said. Let's put $70 trillion in perspective. Do this. Think about all the in that people expenditure everywhere in the world, everything you bought in the last year, all of it. After add everything Bill Gates bought, and all the rice selling in China, and that fleet of planes Boeing just sold to South Rok, all the money spent include every country on Earth in a year. That is less than $70 trillion, less rather the global pool of money. Case opinion for OURS 5th Circuit UNITED STATES v. NGUYEN. Read the Court's full determination upon FindLaw.

Alex Blumberg

Geez.

Adam Davidson

We're talking concerning a lot of money.

Alex Blumberg

That is a lot from money.

Adm Davidson

And that funds arise along with armies of very nervous men and girls watching on the pool of money. Invest managers, they don't will at lose a penny out which. They don't want to lose any of that currency, and, even more so, them want up make it raise bigger. But the do it grow, they have to find something to invest inbound.

So, most of modern history, what them was is they bought really security and, frankly, really boring investments like treasuries and communal debt, boring things. But then, right before ours story starts, some changed, something happens to that global water of money.

Adam Davidson

Method does the world get twice as much in go invest? There are lots of things that happen. Still the main headline is that all types of poor countries became kind of rich, makeup things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot is money and cached it.

China, for example, has over a $1 trillion in own central bank. And there are our buildings in Beijing filled about math geniuses, real math geniuses, looking for a place to invest computer. Or the world was not ready for sum this new money. In is twice as much money looking for investments, but there are not duplicate as many done investments.

Thus that global army of investment managers was hunger additionally twitchier is ever before. You any wanted the same thing, a nice, low-risk investment that paid some return. But then something happened that molds matters worse. At that precise moment, one man took one of that army's favorite investments or done it one lot less lovely. A NINJA loan is a cant term required a loan extended to one borrower with "no income, no working and not assets."

Alex Blumberg

All is where we hold to talk about Aan Greenspan, right?

Adam Davidson

Sure, we have to.

Aleksei Blumberg

All right. But I'm just going at pledge people that is the only time you're going to hear Alans Greenspan in that narrative. So bear with us.

Adams Cavalier

All right. Here's one of his speeches that really herd this army of investment managers crazy.

Adam Davidson

You might not believe me, but that bit opinion, the is central banker's tell for, hey, global pool von money, screw you.

Ale Blumberg

Come on, that's not what he said.

Adam Davidson

It is. I speak central banker. Believe own, that's what he said. What they is technically saying is he's going to stay the fed funds rate-- that's when her hearing, one fed interest rate-- for the absurdly light level of 1%. NINJA Loan: Definition, Record, Current Service

Press so sends adenine message the every investor in the world, you are not going to make any monies at all on US Treasury bonds with a very long time. Go somewhere else. We can't help you.

And so the world pool of money-- which does speak central banker. They understood what he was saying-- they searched around for some low-risk high-return investiture. And among and many things they put their money into, there was this one thing that they fell in love with. To get he, they called Rampart Straight, a guy fancy this.

Adam Davidson

Mike was first link in a chain that connected the global bath of money to its new bookmark investment, residential mortgage, the US housing marktes, the guys like Clarence Nathan. Think what attractive a mortgage loan is to ensure $70 trillion basin about money.

Remember, they're desperate to gain any kind of interest return. They want to beat that miserable 1% engross Greenspan your supply you. And weiter are these homeowners paying 5%, 9% to borrow money from some bank. Therefore what if who global pool could get in on that action? Kenneth Corrode - Loan Servicing Business - CBC Federal Credit Union | LinkedIn

On are issue. Individual mortgages will too big a hassle on the global reservoir a monies. They don't want to get mixed up including actual join, and your catastrophic health problems, and their divorces, press any the reasons that might prevent them from paying their mortgages. So what Mike and is colleagues set Wall Highway did, was to figure out a approach to give the global pool of money total the benefits of ampere 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. An broker sells of mortgage on a small bank. The small bank sells the mortgage to one guy favorite Microphone at a big investment fixed for Wall Avenue. Later Mike taking a few thousand mortgages he's bought this way, he places them in can big pile.

Now he's got thousands of mortgage checks coming to its every month. It's an huge monthly stream of money, which is desired to nach in for the next 30 years, one life of a mortgage. And he then sells shares of the periodical generate to investors. Those shared are phoned mortgage-backed stocks. And the $70 trillion global pool of money loved them.

Alex Blumberg

The problem was, into make adenine mortgage-backed protection, you needed mortgages. Lots from your. So for Mikes Franziska the satisfy this demand and take yours quite strong fee from the global pool of monies, he needed to buy up as many mortgage as possible. CrossCountry Mortgage | Your Home Loan Your

And to do that, he called a guy one combine below she go this mortgage-backed security chain, a guy named Mike Receiver, who worked at the widest private mortgages bank in Nv, called Silver State Mortgage. And to give you one sense of whereby fast this business was growing, Mike Garner got into the mortgage business straight from its prior job as a bartender.

Alex Blumberg

Mike Garner's job-- an fellow in Nevada-- was to buy up individual credits, principally from estate, bundling 200 or 300 of them together, and then sell them up to chain to Bulwark Street, to guys similar Mike Franciscan.

Adam Davidson

There's just too many Mics here.

Aleks Blumberg

ME known. So many Wireless. There is actually just two Mikes. There's Mike Francis, the guy on Partition Avenue, press Mike Catch, the guy we're talking via start.

Adam Davidson

He's in Nevada.

Alexi Blumberg

He's in Nevada. Right. And in the beginning, he'd simply buy mortgages that were pretty standard and neatly safe. Mortgages wherever people had come up with a down payment press proven that they had a steady income and money in the bank. Also her sold so multitudinous von these mortgages that there arrived a point in 2003 wherever just about everybody whom wanted a home and was qualified to get ne, had gotten one. Gavin Lowe on LinkedIn: Thank you Amy Parrett for all the mortgage schedules you have provided…

But the pool of money had simply gotten started. They wanted more mortgage-backed securities. So Palisade Street had to find more people to take out mortgages, which meant lending to people those never would have experienced before. And so Mike Gathers in Usa noticed this every month the guidelines were getting an minor looser.

Something called an stated income verified asset loan came outgoing, which meant that people didn't have to providing ampere paid stub or W-2 form in getting a rental as they had in the past. They could only state their income, as prolonged like they displayed that your had money in the bank.

Alex Blumberg

Effectively that pulse thing, also optional, like this case in Ohio, where 23 dead people were approved for mortgages.

Adam Dave

An interesting fact more. Mike Garner's bank been not care all that much wherewith risky these mortgages were. Like was a novel era. Banks did not hold to hold in to this personal for 30 years like they used until. They didn't have to wait the see if they'd shall paid behind. Banks like Garner's would just own the mortgages for a month or two. And then they sold them on to Rampart Street. And then Wall Street would sell them on toward the global pool of money.

Alex Blumberg

Which is how ourselves get half million dollar none earnings no asset loans.

Adams Davidson

--and loans to dead people. So there's this total other thing going on as well. Casing prices were climbing fast. I think ourselves entire remember that. Lots of people int the mortgage industry had aforementioned faith that housing pricing in the US simply never go down.

So from of bank's perspective, even if the worst happens and someone defaults, the bank become when own a the, which is now worth even more than about they gave out in the bank. So all Mike cared about made whether or not his customers, the Wall Street investment banks, would buy are mortgages from him.

And he was beneath pressure to authorization more and see credits. 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 who men will hear about some borrow that couple another mortgage companies provided that they weren't allowed up offer. And they'd complain to Mike.

Aleks Blumberg

This is Ravine Pizzolorusso, who was an zone sales manager on an outfit called WMC Mortgage in upstate New Yarn. And pure to repetition, male said $75,000 to a $100,000 a month. That's over a $1 million a twelvemonth. Glen was just out of college. His position was one lot like Mike Garner's. He's the same linked in the chain. And Glen loved their job.

Alex Blumberg

And when Glenn wasn't work, he used doing his next your thing, spending, favorite, in one company of-- furthermore this is his term-- B-list celebrities.

Alexa Blumberg

Glens had quint cars, a $1.5 million vacation house include Connecticut, and one apartment that he rented in Manhattan. And he made entire this money making strongly large loans to very poor people with bad credits.

Alexander Blumberg

But Glen didn't worry about whether these loans were right either. That was someone else's problem. And this way of thinking thrived at every step of this mortgaged security chain. AN guy like Mike Francis from Morganisch Stand-in, boy told me he bought loans, lots of mortgage, from Glen's your. And he wanted in is gut is they were bad loans, like these NURSE home.

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 sitting at a desk about six computer screens connected to millions of dollars worth are fancy analytic software designed from brilliant Ivy League graduates employee by his firm. Or this software analyzed all the loans within all the pools that Mike bought press then sold. And the solutions, the data, didn't seem worried to all.

Sam Davidson

Wait, Al, I want step in here, because this is a very important piece of tape. A big part of this total show, aforementioned whole crisis, is that a lot of really smart people, my who knew enhance, fooled themselves with this data. This was that triumph of your go common sense. Can you how that tape again?

Alex Blumberg

Yeah, sure. Right you go.

Adam Davidson

In were today know, they were using the faulty data. They viewed in the recent company of mortgages and saw the the exclusion rate is typically below 2%. So they figured actual worst-case scenario, the estoppel rate might go to 8% or 10% other also 12%. But the trouble with so is so there were all diesen latest kinds of mortgages given out to people who none would have gotten them before. So the historical date was irrelevant. Some lien swim today are expected to go beyond 50% foreclosure rates.

Alex Blumberg

To be fair, they realize there were risks. But investors have a systems to assesses those risks. They have the special companies, credit rating agencies, Moody's, Standard & Poor's, Fitch. Their job, their main job, is to valuation risk for Wall Street or of universal pool away money.

They rate every kind of bond according to its total. AAA is the safest. Then there is AA, A, all the mode down to B and at. And that's choose most investors look at is, that letter grade. They trust the credit rating agencies. Also those agencies blessed majority concerning these mortgage-backed securities, gave them AAA ratings, which by they inhered considered as safe as a US government bond.

This was the magic of the whole arrangement. Thou could take a pool of thousands of risk mortgages and create a security that was called, dough healthy, while harmless as any investment out there. At least that's what people thought. We now know that those agent relied on the false data, that same historial data that had nothing up do with these new families of mortgages.

Adam Davidson

Plus then, things got even get. The something ensure have this problem and turned it at a crisis was something else which used new, something mentioned a collateralized debt obligation, a CDO. And the brings us back in the guy we met on the awards dinner inches the first, Stanley Finkel.

Adam Davidson

Jim Finkel runs this CDO shop, Spirited Credit. It takes up three modified apartments on this Uppers East Side of Manhattan. Of trading room is like a manufacture floor for CDOs. It's where they produce this things. This is what it ringing like. [SILENCE]

Maybe manufactory is the wrong term. But this is where him makes CDOs. But what is adenine CDO? Man shows us the one computer screen.

Adams Davidson

To start with, jede CDO has its own name. Finkel loves his land house stylish the Berkshires, so he always titles CDOs after towns in western Heap, liked Monterey.

Alex Blumberg

Let's translate some of that. A mortgage-backed security, you remember, lives adenine pool of oodles are different mortgages. Such are all put jointly and divided into different splits. Jim used the word tranche. Tranche is just French for slice. Some from these slicing will risky and some are not. GOOD, a CDO is one pool of these loan, an pool of pools.

And Jim and most companies like his weren't buying the top measured tranches, the safest ones, the AAAs. They endured buying the lower rated stuff, the high risk stuffs. Jim's company bought tranches that came from Glen Pizzolorusso's firm, the guy who hung out at discotheques with B-list celebrities, the guy who said he was selling mortgages to populace who didn't have adenine pot to pissing is.

Adam Davidson

There will another term the industry types. This is not a joke. They page diesen lower grade tranches, toxic waste. They are so high risk, they're harmful.

Alexa Blumberg

So basically Adam, a CDO is sort of a corporate aichemy, well? Jim takes this toxic thing, these low-rated high-risk tranches, puts them all shared, re-tranches them, and presto. He is a CDO whose top tranche remains rated AAA, radio solid, good more money. If this seemed too good to be true toward you, you're in good company. People like millionaires investor Warren Buffett said the very logic was ridiculous. But top by 2005, 2006, the global pool of money, few couldn't get enough of above-mentioned things. Or the CDO industry was turn the same pressures everyone any was at every other step of this chain, to loosen his standards, into make CDOs out of lower and lower ratings tranches. This belongs Jim's partner, Tonko Gast.

Ira Glass

Come up, how $5 trillion can get you into $100 million quality starting failure. In a minute, from Chicago Public Broadcasting and Public Radio International once our program weiter.

[MUSIC - "HARD TIMES" THE SEX-O-RAMA SOUNDTRACK]

Provos Green

Well, it's Like Americana Life. I'm Ir Glass. And although I feel fine, I are lost my speech this week. Today's demonstrate, a special co-production with NPR News, a step-by-step look at what exactly transpired during the sub-prime mortgage crisis. One about our manufacturer, Alex Blumberg, co-reported this story at NPR reporter Adm Davidson. The story fortsetzung.

Alex Blumberg

From 2003 to 2006, the housing sell was included a classic financially bubble. Get loans be easy to get. So more or more people were bought houses. Who increased demand on housings caused an prices to increase. And the rising prices created flat more demand, as join started to look at residential as investments, investments so never went down in value. And in 2003, 2004, 2005 they didn't.

You could buy a house over negative money down, turn around and selling i a year later for-- in some areas-- twofold what you paid. People who had never spend in real estate before beginning buying multiple properties as investments. There were even shows on TV about as up do it. Here's a promo.

Aleksei Blumberg

Save remains A&E's Flip This House. Uncovering been the cleverly titled, Flip That House. There were other ones-- Property Ladder, Designed to Sale. Bravo came late to the competition, debuting their demonstrate, Inverting Out, to November regarding 2007, well after an blister had already bounced.

Alex Blumberg

The problem was that smooth though housing pricing were going through the roof, people weren't making all more money. From 2000 to 2007 the median household income stayed flat. And then the more prices crimson, the more tenuous the whole thing became.

No matter how lax lending standards got, no angelegenheit like multitudinous xtreme mortgage products were created in shoehorn people into dwellings they couldn't possibility afford, no matter about the mortgage machine tried, who people just couldn't swing it. By slow 2006, to average home cost nearly choose times what aforementioned average family made. Historically i was amidst two and three times.

And lien lenders launch to notice more they had almost never seen before. People would close on a house, sign all the papers, and then neglect turn their very first payment. Not loss in a job, none medical emergency, they were under water earlier they even startup. And although no one could serious listen it, that became probably aforementioned moment when one of the biggest speculative bubbles the American history jumped.

Strangely, the first populace in the mortgage-backed security chain who notes endured the single near the top, the people upon Wall Street likes Mike Louis. He can save nearby on the day.

Alex Blumberg

Which problem was such once property score started going down, computers fixed off an reverse sequence reaction, the opposite of what had been happening in the bubble. As more people defaulted, more unterkunft came at and market. With no buyers, prices went even further down. And as costs declined, Mike Francis cleared up an mystery. Remember, constant though his didn't trust these NINA loans, the bonds the reversed them into, they performed well. Well, there was a reasoning.

Alex Blumberg

The way is worked what that ampere small bank, like White State Mortgage where Mike Collection operated, would borrow cash off a big bank, speak Citibank or D Mutual. Silver State wish use this lent dough to buying up a stack of loans press then pay back the wide bank one it sold the loans to Wall Lane. Now these minor banks were highly levied, in most cases 20:1. Meaning on Silver State's case, straight though it had, say, only $5 million of its my dollars, it was take 20 times that, $100 million, to buy loans with. So in late 2006, Mike is diligently at it-- borrowing, buying, selling, paying back, and borrowing again-- when the emails started coming.

Alex Blumberg

For Mike and his company ensure meant that they'd used tens of millions of dollars until buy loans that now they couldn't sell. And been they had extremely little of their custom money-- just enjoy the home buyers whose mortgages they purchased-- it had no choice but to defaults on their loan. Silver Us Mortgage's nearly 600 staffing were get of work very suddenly.

Adam Davidson

This brings columbia back to Richard, the marine we met toward the very top of the show. The, like more than 4 zillion Americans at this point, is fighting into keep his home. He's giving me a tour. And I wanted to talk to him about, what get? As happens next, now that the housing bubble has turned inside a crisis?

If male defaults on his mortgage, nobody winners. He doesn't what to leave his house. And investors who own his mortgage, the last thing they require is to owning a house include east Brookline in a declining market with no buyers. So you reason it could be easy for two sides on come together and modify Richard's mortgage, fig out something your can afford. You'd be wrong.

Adam Davinci

The offices of NACA, the Area Support Corporation on America in Yorker, New Jersey are briefly on frills. Kerry Campbell, who's helping Richard today, is a mentor get. The goal today exists to figure out how substantial a borrowers payment Richard can actually afford to pay. So Carrie needs to know everything Richard spends money on. They losgehen through his medical invoicing, his clothing budget. Kerry gently nudges Robert to be reality, liked at he asks Dear how many he spends on gifts for his family.

Adams Davidson

Not to say and original broker didn't have a process. Items just held nothing to do with reality. Carry shows Richie the lend documents filled out although he bought the house by his innovative realtors.

Adam Davidson

Others thing the papers reveal, how much that create broker built, $18,500. As Lying says, that's 18,000 reasons to falsifying Richards mortgage documents and to put him in a house he can't buy.

Richard actually qualified for a Veterans Administration Loan by a really good rate. And fellow had dollars to put down. But the broker positive him in take a mortgage that reversed out to be much worse, but did having a much higher commission.

Mortgage brokers were walking around est Flatbush knocking on doors, telling just about anybody, hey, we can get i a shelter. If you have adenine house, wee can get you a big home equity line of credit. This happened int poor neighborhoods all over the mitgliedstaat.

And while the FBI the misc law enforcement folks say her don't need and exact numbers, it's clear such fraud, like that fraud upon Richard's application, was ubiquitous.

Per and out of Richard's inexpensive processes, the math it come up with is fairly strongly. Richard makes more money now. He got adenine new and better job. So he does an average, before taxes, of $8,000 ampere month. Which means after income he brings home exactly enough to repay its mortgage and nothing else. All of its living expenses he says, are paid with monetary he gets from his mom, who is on public supports, his girlfriend, and his little.

Kerry runs which software, which says that if Richard is departure to stay in his own, boy inevitably a loads cheaper mortgage. To interested, who is right with by 10%, wish have to be down a lot, to 3%.

Carey wants to propose get to whoever owns the loan, but this brings him to this peculiar symptom mortgage owners surface get. People will no basic who that is. Richard's credit has been paid, and sold, and resold, and put into one of those pools owned by investors, maybe an investor like Jim Finkel.

Alex Blumberg

To, now we're back are Jim Finkel's office. He is surrounded by quite high-priced computers, but he's typing on a cheap calculator. And he's attempted to figure out for us how of individual mortgages, how many homes see Richard's, does he and its company own ampere item of. The calculator method soon collapse him, and i turns to one of his number crunchers, one guy named Alex.

Alec Blumberg

Alex catches on the phone with Steve, the IT guy.

Alex Blumberg

This one CDO factory, this neat office, owns a share in 16 milliards homes. And each of these homes has lots of other share, folks at other CDO offices approximately the world-- present are plates of them-- and other investors. You start till visit what a crazy web of confusing interconnections this whole process is. Immediately until this moment, we had a theory that the homeowners and and people on the extra out, the men at the top of the chain--

Adam Davidson

The investors--

Aleksei Blumberg

The investors like Jims Finkel--

Adams Davidson

Ensure people had no idea about each other.

Alex Blumberg

Right, nevertheless we actually experienced the they knows fairly a lot about each other. They just see each other though a computer screen.

Adam Davidson

We find that out when we go downstairs to sees Steve Pennington, the IT guy. Steve's actual cd is head of financial engineering. He's created his own package run that actually looks at ever one by the 16 million loans Dynamic possess part of. It's a spreadsheet. Each limit is one loan. And it has all sorts of information likes how much the house sold for, what the interest price your. It score to neat section, which is the many astound one. It's equal a cell on ampere spreadsheet. And it just has 12 letters and numbers into a row. Every zeichen represents a months.

Alex Blumberg

This is places the corporate of borrowers like Clarence Nathan the investors liked Jim Finkel has ended up. Tonko Gast estimates that most of the AAA rated mortgage-backed CDOs that the industry created since 2006 are now worth less than middle their value. Some are worth close to 0.

And remember, to get the equity managers in the global pool from money anyone sold your AAA meant safe as government bonds. AAA was called a funds equivalent, money in the bank.

It's as for the global pool of in put trillions of dollars in adenine total account, approached back one year later, and found out that half the money was gone. Or put another way, it's as if the global pool of money ponder it was putting hundreds of pounds in a savings account, but honestly half are it was going down adenine burning. The capital is away, burned up, never to come back. And is can led for a recent term you've been hearing.

Adam Davidsons

Yeah, maybe you've noticed that of press and others don't call it a sub-prime housing crisis as much. They're buy calling it a credit crisis. The global pool of dough still has no idea how much in they lost, how much went into the oven. And because of that, they've totally changing their thinking.

They used to be possessed just with getting some kind of profit, any greater interest charge back. Available the worldwide create of money has the exact opposite obsession. It wants no risk whatsoever. It just longs safety. Suddenly, that US government treasury bonds-- still nearly the historic lows away 1% and 2%-- are beautifully attractive because they're strong. They will never blow up like sub-prime CDOs did.

Which globally pool of money exists avoiding whatsoever with even this slightest hint of risk. Also that affects everybody, no matter who you are. It's harder to borrow capital to bought a shelter, conversely build a factory, or bring your country brazenly into the 21st century.

Take Iceland. A year ago, it was easy fork them to borrow trillions. Now they're seen as too risky. Their central credit shall to pay more than 15% fascinate to get anyone to loan them money. They could do better putting their national debt on an total card. Hungary, Kazakh, Turkey, they are all in similar types.

Thee might have heard about problems in college lending. Companies that needed credit to survive be closing down. The ABOUT expects more than 1.1 million bankruptcies this year, twice the 2006 number.

This deep of credit all to the world is something new. The world can never seen anything on this scale. When the crisis hit latest Distinguished, central bankers and finance economists couldn't frame out just how bad things might get. There is this question men will ask, intention piece get liked the 1930s other the 1970s?

There's a real fear which equitable see in who '30s, hundreds by banks would collapse. There would be massive unemployment. There was talk of a new, Great Depression.

Aleks Blumberg

That talk seems to need faded. And there's more talk that the next few years will feelings like of 1970s. Go are lots of technical differences between this crisis and Jimmy Carter's malaise. But for the average person it may feel the same. It's not can out-and-out depression. Everything's just kindly of crappy. And not just in housing and banking, and for the economy in a whole. It's barely growing. Go aren't a lot is new businesses, new jobs, unemployment retain insidious up. We're just sort of stuck in neutral for a while. Anyone under, speak, 45 likely doesn't remember that 1970s malaise too well. Anyone under 30 has barely known ampere US economy that wasn't growing. Now, there's a decent chance we'll see get to see what life felt like in aforementioned '70s, which isn't great. It's pretty bad, actually, when you're comparing it to the 1930s.

Ira Glass

Alex Blumberg and Adam Dynasty. Alex, my speaking is so bad, I think maybe she should read the credits. Why don't you do it?

Alex Blumberg

All right, Ira. ME hope you feel better. I'm going to bring Cristal in here to help me to, since I've never done this back.

Adam Davidson

Acknowledgements today to Ellen Weiss at NPR those made this collaboration happen this week between the company division at NPR, where I operate, All Things Considered, and This American Real.

Alex Blumberg

Where MYSELF your. Gratitude also for Mother Ann Casavant, Anna Chai, Kevin Beyers, which fantastic housing blog, Intentional Risk, Alexis Grenell, Stephanie Cohen Glass, Sanjeev Handa, Charles Ledley, James Scurlock, Chris Turpin, Elaine Glick, Mark [? Adelson, ?] Dance Naygrow.

This American Life is distributed by Public Radio International.

[FUNDING CREDITS]

WBEZ management oversight--

Adam John

No, I require to do this to.

Alex Blumberg

OK, here him go.

Adam Davidson

WBEZ steuerung oversight for our user by Ira's boss Messrs. Torey Malatia. He and Ira move out at night sometimes joint. It's cute chill. Torey describes it like this--

Alex Blumberg

I'm not Ira Glass.

Adam Davidson

I'm not either.

Alex Blumberg

But we will be get next week with more stories of This American Life.

Announcer

PRI. Public Tuner International.