Sunday Night Fright
Bank workers are no more responsible for financial crashes than autoworkers are for auto crashes, right? I can understand why many Americans were angry when they read about the salaries and bonuses that top bankers awarded themselves right after the bailout. But we’d also seen images of Lehman Brothers employees filing out of the bank carrying cartons of personal belongings. Bankers were recession victims also, and it seemed only fair to interview them too. So I set out to find some.
One Sunday evening around 9:30, I got a call from an unemployed loan officer who had been putting me off. He asked if I could manage lunch the following day.
Russell Wynn is a mellow and amiable-looking man in his late forties. His wife, about a decade younger, still works at the same bank he did. Between her earnings, his severance, and their savings, the couple didn’t feel hard-pressed. So far the only thing Russell and his wife had talked about cutting back on were two private school tuitions. But they weren’t going to move their children, five and eight, precipitously. They’d see how things worked out.
Russell had been a traditional banker; that is, he made loans. He isn’t the man you see for a mortgage, a car loan, or money to upgrade a nail salon. He worked upstairs in middle-market lending. His clients were companies that grossed between $15 million and $750 million a year. Some of his customer relationships spanned almost the entire twenty-six years he’d worked at the bank, he told me.
“Those relationships must have made you very valuable to the bank,” I said.
“Unfortunately, my customers had very little need to borrow … Right, even before the downturn.”
“Businesses didn’t need money?” I asked.
“The importers needed seasonal credit,” he answered. “But most of my customers didn’t need new money. They were awash with cash.”
That word “awash” triggered memories of interviews that I’d done with Chase bankers in the mid-1990s. Middle-market bankers like Russell who lent to seafood importers, dental labs, lamp parts manufacturers, and similar concerns had complained that they just couldn’t get anyone to take their money. People who lent to large corporations said the same thing. Everyone was “awash” with cash then too.
But salesmen always complain about the territory. I found it hard to believe that local businesses didn’t need money. So I’d checked it out by talking to several Chase corporate customers. I told Russell Wynn about an assistant treasurer at ITT whom I spoke to in the mid-1990s.
“This guy said that loan salesmen came around like Fuller Brush men offering interest so low that the loan was the loss leader.”
“In a way that’s still true,” Russell said. His middle-market clients may not have needed loans, he explained, but they paid well for services like currency exchange and pension plan management. “Other areas of the bank delivered those services and booked the fees, but I was the gateway in.”
“But you weren’t making loans?”
“I had the opportunity to get out of lending at just about the time period you mentioned,” Russell recalled, “mid-nineties. Investment banking was open to me, but I felt at the time, well …” He tilted his head regretfully. “I just didn’t make the move.”
To dispel his regrets, it seemed, Russell asked if my food was okay and signaled the waiter for more water. We were in an excellent, unpretentious restaurant that he’d recommended. I always buy meals for my interview subjects; still, Russell had the habits of a gracious host. He also wanted to change the subject.
“So how was your weekend?” I asked.
“Excellent,” he replied. “Very ordinary, but the kind of ordinary I like.”
I asked for details.
On Saturday he’d taken the children shopping with a stop at the park. On Sunday they visited his wife’s mother. “She was embarrassed about having no food in the house, so I went out and bought some hot dogs. Just hot dogs and buns, but cook ’em outside on a grill and everyone is happy. It doesn’t have to be summer.”
Russell felt fine until he’d put the children to bed on Sunday evening. “They’re going to school the next day; my wife is getting ready for work. What do I do Monday? I started to get … I don’t know if my wife saw how bad it was, but I was … not panicked, but frightened, actually frightened, I would have to say.”
Now I understood why he’d called me at 9:30.
“My father was retired eighteen years before he died. He only got fragile toward the end. When I visited, we’d argue. Or let’s say, we’d leave the discussion with an open point. He would say he’d look it up in the library. But one time I said, ‘Wait, I’ll Google it.’
“My wife gave me hell on the way home. Why was I taking away a trip to the library—a day with a purpose? After that I always tried to leave him with a couple of things to research. He’d call back with the information, and I thanked him. When he couldn’t get to the library anymore, I got him a computer, but he couldn’t make the leap.
“My father was a very intelligent man. He handled complicated flow problems they have computer programs for now. But eventually his idea of something to do for the day was to organize his pill case for the week. He was grateful if my mother gave him a job like going through the sock drawer and throwing out singles. Shit, is my wife doing that for me?
“Not knowing what I’m supposed to be doing the next day is the worst part of being unemployed. If I have one significant task that I can check off in the day, like researching before a job interview or writing the thank-you note after—that is much harder than it sounds—then I feel okay.”
Of late Russell has been using library computers for his job search. “At first it was embarrassing to admit to myself that I really wanted the walk and the other people around me. I said I needed to go to the library to keep up with various publications and I can’t afford to buy them all anymore. But now I admit I just like going to the library. It’s more like going to an office. I work in a more concentrated way there.”
Russell had been unemployed for five months at that point, he’d been in a backwater of banking, and he was almost fifty. Statistically, things looked bad. But he was a likable man. That was his strong point.
“Your customers obviously appreciated you,” I said. “And you knew more about their business than any other outsider. Maybe something more interesting than banking might turn up in one of those businesses,” I suggested. “Down the line, I mean, as the economy recovers. Why not put feelers out?”
That got no response.
“Or what about teaching?” I asked. “You seem to be good with children.”
Then I thought about all the teachers being laid off. What a stupid suggestion.
“If this goes on much longer,” Russell said as a joke before we parted, “I’ll need my father’s big pill case for something to do and also to hold enough pills to stay calm.”
“The Spinning Stuff”
When the U.S. government announced its $700 billion financial bailout, or Troubled Asset Relief Program (TARP), one stated purpose was to enable banks to keep lending. Since then, the president has appealed repeatedly to banks to increase their Main Street lending. Russell Wynn’s specialty is Main Street lending. The basic banking function you study in Economics 101 is Main Street lending.
Yet Main Street lending had become a backwater well before the recession and remains so today. How can that be?
After I left Russell, I reread my interviews with 1990s Chase bankers with a feeling of déjà vu. Nobody wanted the bankers’ money back then either. Everyone was “awash” in cash.
One really hot, prestigious lending area at the time was for M&A (mergers and acquisitions). Chase and other big banks competed to lend multinational corporations the money to buy each other. The borrowed money was used to buy existing assets rather than to expand an enterprise or create a new one. The loans financed a transfer of ownership and left the resulting enterprise with new debt.
There can be many motives for mergers. Mergers and acquisitions are sometimes about limiting competition or about getting ahold of resources or talent. The year 2011 saw a spate of mergers to avoid taxes.
A merger can certainly be part of a plan to grow. But in the 1990s, when companies were competing for declining business, the primary goal of most mergers was to downsize. The M&A loans Chase made in the 1990s were paid back out of the savings from staff cuts. The bigger the cuts, the higher the stock price rose. But with each round of mergers the companies got smaller. I wondered back then how long this no-growth lending could go on.
But the bankers who made the big M&A loans and got the big bonuses often looked down at Russell Wynn’s middle-market lending and not only because of the smaller scale. “Loans should be made only to the twenty largest companies in each country,” one big lender told me. “To known quantities. That way the debt can be chopped up into chunks and sold on the Euro markets.” In other words, it could be securitized.
But Russell’s mid-market loan applicants were unknown quantities—a fish importer in Brooklyn or a dental plate maker in Queens. His job was to investigate their business prospects individually and to lend depositors’ money to those he found creditworthy. That’s called “intermediation.” In textbooks it’s the basic function of a bank.
Each of Russell’s mid-market borrowers ran a unique business and got a unique “handcrafted” loan for specific purposes. The bank held those unique loans on its books and collected the interest through the life of the loan. But “no one wants an asset on their books,” a Chase executive had explained to me in the 1990s. “Liquidity is everything to a money-center bank.”
I called Russell back and read those quotations to him. That kind of thinking still applied, he said, and he’d be happy to explain. But first he wanted to thank me. After our lunch he’d called several of his old customers and asked them directly about a job. It hadn’t produced any offers yet, but it was the least humiliating networking he’d done so far. “I forgot how down-to-earth those people are.”
The experience was so positive that he’d decided to follow through systematically—going through his old client book from A to Z. He thought he might even drop by some places in person the way he used to when he was their banker. “It’s a long shot but …”
“But all you need is one,” I said, and he agreed.
Russell sounded a lot better than the day we’d met for lunch. Maybe it was because he had a project with tasks to check off each day, maybe because it was ego boosting to talk to people who admired him from his years as their banker, or maybe he felt better because it wasn’t a Monday after Sunday evening’s existential fright.
I brought Russell’s attention back to the criticism of lending to “unknown quantities” like these businesses whose owners he’d been calling. Russell acknowledged that if you lend to big corporations, you then syndicate or even securitize the debt. At the other end of the loan-size spectrum, you can get small standard loans off your books by bundling them together into securities that you sell to investors. “Subprime mortgage loans are a handy example of that,” he pointed out. “They don’t have to be good loans, just standard enough to bundle.
“Of course it’s exciting,” he acknowledged, “to do 100 million in mortgage loans, sell them off the same day, use the money to make more loans that you can also sell immediately, keep spinning the same money around and booking fees each time. That will obviously generate more immediate returns than if you hold the loan till it’s paid back. So, yes, that’s where the action is.
“But that doesn’t mean that the bank doesn’t want mid-market loans also,” Russell insisted. “They wanted me to make every good loan that I could. The limitation is that my customers don’t need new money.”
“Even now?” I asked.
“Especially now. Look, factories flip the ‘on’ switch when orders come in. No one borrows to buy material or equipment, no matter how low the interest rate, unless they know they’ll have orders to fill. It’s a problem of demand. I was just speaking to a guy that sells …” Then he remembered he was talking to a writer. “Your banker is like your doctor or your lawyer. That holds for your exbanker too.
“So, yes,” Russell summarized more generally, “securitization, syndication, derivatives, all the spinning stuff, it’s more profitable, more prestigious than plain-vanilla lending. But the bank still wanted me to make as many vanilla loans as I could. The problem is to find businesses that can put the money to use.”
Russell left me with a lot to think about. For more than a decade I’d been shaking my head over what he called “the spinning stuff.” In February 2011, I heard Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, speak on The Brian Lehrer Show on public radio. After a year of investigation, his commission had issued a report on the causes of the financial crisis. Here’s part of what he said: “I had spent a lot of my life in the private sector, in finance, and I was stunned by what I learned this year. I was shocked. The extent to which our financial system went from being a system to support the real economy—companies, job creation, wealth creation in this country—to a system that was money making money, financial engineering alone, to the great detriment of the country.”
So he too had noticed how much financial activity was about “the spinning stuff.” Chairman Angelides gave the impression that if you could slow down the spin and require banks to lend to real businesses for productive purposes, then the economy would recover. But Russell Wynn claims that he’d been free to make all the good middle-market loans he could find; he just couldn’t locate qualified borrowers.
The catch is that a bank can’t lend unless the borrower can pay back. And that depends on making enough additional profit to cover the principal plus the interest. Normally, that means that a business must be expanding. The borrower must use the bank’s money to make and sell more. That in turn depends on buyers. But Americans’ wages had been stagnant for forty years. Still, economic life had sputtered along and sometimes accelerated for another two decades despite my fears. A lot of that turned out to depend upon consumer credit.
One scheme to keep people borrowing and spending, the one that triggered the Great Recession, involved lending money to house buyers who didn’t earn enough to pay it back. These borrowers were told that they could repay their loans by borrowing yet again against the increasing value of their houses. Their wages might not be going up, but house prices would rise forever.
The trick for the loan originators was to get the mortgages off their own books before the scheme crashed. That involved bundling the mortgages into bonds and selling them off to investors immediately. Some banks hadn’t acted fast enough, it seems. Some were even foolish enough to buy the damn things as an investment themselves. When the housing bubble burst, many financial institutions were stuck holding what came to be called toxic assets. I was fortunate enough to meet an unemployed young man who had been right at the center of the mortgage securitization business creating those poisonous bonds.
Creating Value
August Treslow has the gawky charm of a four-year-old Labrador retriever. That’s twenty-eight in human years. Gus was, in fact, thirty-four, but he’s very youthful. He’d been an unemployed banker for seven months when we met in May 2009.
When I arrived at the restaurant, I found him reading The Kite Runner. “I just started reading books a few months ago,” he said. “This is the third. A friend recommended Liar’s Poker. That took a month, but it’s not really hard writing.”
In addition to reading three books, Gus had worked on a Habitat for Humanity housing project in the Bronx, he’d started to learn the language of his birth country (he was adopted), he was “doing stuff” with his old friends, “not just hanging out with the ones who are unemployed,” and he was studying for a test that would give him a certificate as a CFA (chartered financial analyst). “That would prepare me for a job on the sell side.”
Before the recession, Gus used his mathematical skills to help create the mortgage-backed securities that were central to the financial crisis and ensuing recession. But he did not, himself, sell these or any other products to investors.
“Are you going out on job interviews?” I asked.
“A couple, but I’m really just studying for the exam. In July, I’ll try to interview. Right now I’m just testing the waters. I don’t want to be one of those people who makes a full-time job out of finding a job, because the jobs come back when the market comes back and you can’t control the market.”
In the decade since he’d gotten his MBA, Gus has worked at two major financial institutions, where he had securitized both mortgages and some kinds of corporate loans.
When I asked exactly how he securitized things, Gus took my notebook, reached for a pencil, and covered many pages with diagrams featuring circles inside boxes connected by arrows with the labels MBS, CDS, CDO, CLO, and so on.
Leaving aside the TLAs (three-letter acronyms), this is what I gathered from reviewing the notes. The underlying assets for the bonds Gus created might be 200,000 mortgage loans or some kind of corporate debt. These had been gathered together by the deal manager. The manager was going to sell the right to collect the fruits of these loans to investors. But first they had to be turned into bonds divided into different tranches or slices according to their risk.
Institutions like pension funds that were legally required to be cautious might agree to take a low interest, like 4.5 percent, for the right to collect the first 15 percent of the money that comes in every month. More daring or unregulated investors, like hedge funds, might buy the bottom tranche. They would get 7 percent, perhaps, but they’d collect out of the last 15 percent of the payments that came in on those same 200,000 mortgages.
To make things a little more complicated, some investors were going to be paid out of the interest on the mortgages, some out of the principal, and some out of both. Sometimes groups of bonds were themselves chopped up and bundled together into new securities yet one level further removed from the underlying house mortgages.
Gus’s job was to figure out the proper size for each tranche in a way that kept the right balance between the risk and the return. His work was mostly mathematical, but there was some personal interaction too, he told me. Different parties had conflicting interests in having the various tranches smaller or larger, and Gus received many “human inputs” as he worked.
Sometimes the manager of the deal would bring Gus in when he talked to potential investors. “He’d turn to me as the expert to answer specific questions.”
But finding buyers wasn’t what slowed a bank down. The limiting factor during the heyday of such bonds was getting enough “raw material”—that is, enough mortgages to securitize.
“In business,” Gus said as if quoting from one of his MBA courses, “one way of controlling efficiency is to control the pipeline so you can have a steady flow of the raw material. If you’re in the copper business, you can buy copper, or you can buy a copper mine. Well, if you were in the mortgage securitization business, you can get a steady flow of mortgages the way everyone else was doing it. Bank of America bought Countrywide, Merrill bought Franklin.” These were two big subprime mortgage lenders.
Eventually, a lawyer would incorporate Gus’s tranche work and other elements of the deal into a formal contract for investors called an indenture. “It could be a three-hundred-page book,” Gus told me.
“My book could be three hundred pages,” I said.
“But I’ll be paid more,” Gus remarked. He knew my kind of writing could be difficult too, he quickly added. But there was a reason for the pay difference. “One person’s research might generate hundreds of millions in profits, but what could an academic researcher at a college generate—a million-dollar grant that gets spread over several years, maybe?
“It’s not the skills; it’s what value can be generated from the skills,” Gus explained. “It might not be fair, but it’s the capitalist system. My work creates a lot of value.”
When Gus says his work generates “value,” he means profit for shareholders. And since his bank’s shareholders retained the profits made from the sale of his tranches in the good years, the shareholders he worked for did indeed come out ahead. By that definition Gus created value.
There was no sense asking him about social value. You can’t undo a master’s in business administration in one afternoon.
The redeeming thing about Gus is that he didn’t complain about his own job loss or any other personal consequences from a system that, in his words, “might not be fair.” Gus had an almost spiritual acceptance of capitalist business cycles.
I told him about the hedge fund stock picker who was so determined to stay in his high-bonus industry no matter what.
“A lot of people are determined,” Gus responded, “and some will get back. But the truth is a lot of them will leave finance forever. What you have is a pool that gets expanded in good times. In bad times it dries up, gets small. When it expands again, you have a new class of MBAs and undergraduates that can fill in those spaces.”
Did that mean that a recent graduate might occupy Gus’s old niche when the waters rose again?
Gus wasn’t a particularly philosophical fellow, but he seemed, for a moment, to gaze past me into the eons of time in which flowerings and extinctions, recessions and recoveries lay down their layers in the geological record.
“Will the new people eventually be paid as well as you were?” I asked.
“Yeah, I think. In 2000–2001 there was a lot of flak about high-paid analysts doing biased research. Their pay went down for a while, but it went back up because they create value.
“There’s always cycles. In bad economies the employer has more power. When the economy is good and there’s more money around, the employee has more power. When you have people in finance working sixteen, eighteen hours a day plus weekends, if you don’t pay them well, you’re not going to have finance.
“And what people are learning from this recession is that finance makes the world go around. An employer can take advantage in a bad economy. But if they don’t adjust in a good economy, the good people will leave.”
“So it finds its balance,” I said. My hands moved like balance scales gradually coming to rest in the middle.
“I don’t know if there’s ever a balance,” Gus corrected me dialectically. “It’s a continual shift of power from one side to another.” His own imaginary scales kept moving through the full range and back.
Gus seemed to find comfort in viewing his own ups and downs as part of the eternal cycle of booms and busts. He was part of economic evolution even if he himself wound up fossilized in a recessionary stratum. There is a grandeur in that view of life, I suppose.
Two years after he lost his bank job, Gus landed a position at the Federal Reserve Bank applying his mathematical skills to risk models.
“The pay is not as good,” he told me, “but I have twenty-two days of vacation, nine-hour days, no weekends, and every other Friday off.” (I happen to know that the Fed also has a fantastic pension plan, though Gus wasn’t thinking that far ahead yet.)
“Which job do you like better?” I asked.
“I liked being part of the pressure before,” he answered, “but I also like it that now when I come home, I can go work out or see people.”
I couldn’t tell whether Gus considered himself back in the pool or fossilized. But I told him that he was the first person I interviewed who had found a permanent, full-time job.
“If you give it more time,” he said, “they’ll all land somewhere.”
The Mystery of the Missing Unemployed Man*
Sizing the tranches of mortgage-backed securities put Gus at the dead center of the financial crisis. But the center of a storm is sometimes calm and quiet. I wanted to talk to one of those high-bonus guys who’d worked a few paces off center, at the turbulent trading desks where Gus’s bonds were bought and sold. Traders have a reputation for arrogance, but I suspected I’d find them as innocently enthusiastic as Gus. Alas, the banality of evil makes it difficult to find any villains to interview. Or if they were there, they were too busy to talk to me. Everyone really is just doing his job.
Since mortgage-backed securities had been the downfall of Lehman Brothers, Bear Stearns, Merrill Lynch, the world’s largest insurance company, AIG, and many other Wall Street institutions, there had to be plenty of unemployed toxic-asset traders roaming feral on the streets of downtown Manhattan. The “do-you-happen-to-know-anyone-who-worked-at” research method usually works surprisingly well. But I couldn’t find a single mortgage-backed securities trader.
Eventually, I phoned Outtent & Golden LLP, a law firm representing Lehman Brothers’ former employees in a suit for severance pay. The lawyer’s job was to make sure they got their fair share of what was left when the bankrupt company’s assets were sold off.
I asked partner Jack Raisner if he could possibly inquire among his unemployed plaintiffs for someone who had traded mortgage-backed securities and might be willing to talk to me about how he was managing now. “I don’t use real names,” I assured him. I knew it was a touchy request.
“Most of them were snapped up immediately by Barclays,” Mr. Raisner answered.
“What for?”
He represented many other financial clients too, and he thought that the kind of person I was looking for just hadn’t remained unemployed very long. Mr. Raisner sounded like an honest and helpful man, but I still thought he might be brushing me off to protect his unemployed clients. How could those toxic-asset traders still be working?
Then I met a banker who confirmed that traders at his company were still busy with asset-backed securities. In fact, he thought he noticed a couple of new chairs at their trading desk. He speculated that “those damn things” had become so complex that the people who put them together were needed to “unwind the bank’s positions”—that is, to get them out of the deals. That made sense to me.
Then I saw a column in the Financial Times headlined “Strange but True—the Credit Specs [Speculators] Are Back.”† The knowledgeable John Dizard reported:
Even after they’ve been reviled by talking heads and politicians from here to Ulan Bator, credit default swaps are still a very low-cost way of putting on speculative positions, as long as they still trade. And so, thanks to the Geithner Treasury’s policy of reform, rather than dissolution, CDS trading has regained a vampiric strength the real economy still lacks. (Emphasis mine)
I’m afraid I’m going to have to define a couple of financial terms in order to explain what Dizard found so surprising.
People who buy bonds normally insure them against default. The credit-default swap, CDS, or simply “swap,” that Dizard is surprised to see trading again is a special form of insurance.
An insurance company like AIG says to an investor, perhaps a pension fund, “You pay us $7,000 a month, and if you fail to receive the full interest on that mortgage-backed bond for, say two months, then we’ll buy the whole bond from you for the $200 million you paid for it.”
They couch it in those terms instead of writing a straight insurance policy because insurance is regulated. When AIG sells insurance, it’s required to put aside a small amount in reserve in case any of the hazards it insured against occur. But this is a private, custom-written agreement to “swap” a worthless bond for money in case of default.
The first thing bugging the columnist John Dizard is that the U.S. Treasury, under Timothy Geithner, decided to make good on these unregulated non-insurance policies even though AIG had been flouting insurance regulation. The costs of covering these swap obligations were potentially enormous because they involved most of the mortgages in the United States.
But here’s something even more shocking. You don’t have to own the mortgage bonds to buy the swap/insurance on them.
Any “investor” can go to AIG and say, “You know that Merrill asset-backed bond number 123456? I too will pay you $7,000 a month, and if the bond defaults, you’ll owe me $200 million also.”
It’s as if any number of people could buy life insurance on the same individual.
If our government was merely going to cover the policies on the original mortgage-backed securities, the maximum payout, though large, was at least calculable. If 80 percent of the mortgages in the United States have been securitized and if a quarter of them eventually default, that’s a vast but finite loss.
But any number of people could have bought swaps on the same bonds, related distantly to the same mortgages. So the swap payouts could be many times the value of the real houses. How many times reality will it eventually come to? Two times, ten times, a hundred times? We don’t know, because swap trading was (and still is) unregulated. There’s no derivatives exchange that, like a stock exchange, keeps track of transactions. (Regulation of this trade is still “pending.”)
Not only are swap losses potentially humongous, but the “investment” has nothing to do with anything in the real world. Neither party to these “me too” swaps owns, builds, or finances housing or anything else. Both parties are simply betting on whether a certain group of people will pay their mortgage bills. And, of course, a life insurance policy beneficiary with no relation to the individual insured has an interest in finding the sickest individuals and shortening the life span of those who linger too long. Some of these people were also in a position to create the most unhealthy mortgages and mortgage bonds.
It’s the ultimate example of Phil Angelides’s “money making money” or Russell Wynn’s “spinning stuff.” That’s why Dizard called it “vampiric.” It’s something dead feeding on the blood of the living economy.
And according to Dizard, speculators are actively trading these and other debt derivatives again. So my missing unemployed man isn’t just cleaning up old messes. He’s busy making new ones!
But why are rich people reviving this market and fighting any attempt to regulate it? Aren’t they scared of it too? Let me quote Dizard’s column once more:
The credit specs are back. After all, if the dictates of style and tax auditors say you have to go easy on conspicuous consumption, and if there’s no demand for the products of real capital spending, then you might as well take your cash to the track, or the corner credit default swap dealer. (Emphasis mine again)
“No demand for the products of real capital spending.” That means you can’t invest your money in a productive business because there aren’t enough buyers for the additional products or services they’d make. That doesn’t mean there isn’t enough need or desire. In economics “demand” means desire backed with money. There’s insufficient demand when people aren’t earning enough to buy back what they produce.
But in the absence of action in the real world, folks with money have to put it somewhere. The last time a big bookie, AIG, went broke, the U.S. Treasury decided to make good on all its uninsured, unregulated markers. So of course everyone is returning to the track on the assumption that it will do so again. By strengthening the assumption that there’s no real risk, the government is fostering what is called moral hazard.
The lawyer representing those Lehman Brothers traders wasn’t lying to me. The guys who lost jobs at one off-track betting parlor were immediately snapped up by another. My mysteriously missing unemployed man has been sitting at a trading desk all this time.
Way up on a high floor he’s still spinning old asset-backed securities, new securities made of bundles of the defaulted old bonds, swaps to insure them, bets on the swaps, and ever higher, more “derived” financial products.
Meanwhile, many levels of abstraction below, we can make out tiny houses with ant-sized people at the windows and barely visible “For Sale” signs on the lawns. Those are the “assets” these asset-backed securities are ultimately backed by. As we get closer, we can see that the ants are agitated. For though the highest-level lenders were relieved of their risks, the ground-level borrowers still owe as much as ever. In many cases it’s more than they can pay.
When I contacted people who faced recession-related home loss, I found that I could understand the mortgage crisis best by arranging their stories in order of their escalating difficulties. So we’ll start with someone who merely fell behind and work our way up (or down) to foreclosure and eviction.
* Most of the material in this section appeared first on Tom Engelhardt’s elegantly edited Web site TomDispatch.com.
† Financial Times, May 27, 2009.