Not everybody, but a lot of people did. We were a little early in '05 by not wanting to do those deals, and people were laughing at us, to be honest, to say, well, you're crazy, you're hurting your business. So, most of modern history, what they did was they bought really safe and, frankly, really boring investments like treasuries and municipal bonds, boring things. Believe me, that's what he said. And to find out how they see things now, here's Alex. The problems were not put behind us. The broker sells the mortgage to a small bank. "[2] They then proceed to the opposite end of the spectrum, with a borrower whose mortgage is in default. And he fought the owners and the sales force, tooth and neck, about these guidelines. I speak central banker. Well, we're saying it. And this Glen is about what I can bring to-- trying not to sound cliche-- to society, what I can bring to my family, what I can do to make sure that we don't keep creating that Glen? Well, two major things happened. So basically Adam, a CDO is sort of a financial alchemy, right? And Alex Blumberg will kick things off. There's certainly a perception that, oh, the guys who created all this mess are now making lots of money. They're now calling it a credit crisis. [MUSIC - "HARD TIMES" THE SEX-O-RAMA SOUNDTRACK]. If this seems too good to be true to you, you're in good company. Kerry gently nudges Richard to be realistic, like when he asks Richard how much he spends on gifts for his family. I'm living in my house right now. People who heard our original story singled him out as someone to blame. There would be massive unemployment. Right, what's really hard about this is then you watch people-- you can watch over these 12 months, people cycle on and off. For example, a guy I met named Clarence Nathan, he worked three part-time, not very steady jobs, and made a total of $45,000 a year, roughly. Are you typical of the guys who created CDOs, or are there guys who found a way to somehow profit from this period? And so Mike Garner in Nevada noticed that every month, the guidelines were getting a little looser. I want to step in here, because this is a very important piece of tape. It's been well over a decade, so why can't Eric, who is in many other respects a measured and reasonable person, select a simple piece of furniture? In other words, the giant pool of money would probably have shrunk by a good amount, except the world's governments and the world's central banks have been pumping out trillions of dollars to keep the world economy from complete collapse. 390: Return To The Giant Pool of Money - This American Life Full episode Transcript 390: Return To The Giant Pool of Money Note: This American Life is produced for the ear and designed to be heard. 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. What he's technically saying is he's going to keep the fed funds rate-- that's when you hear the fed interest rate-- at the absurdly low level of 1%. Oh, that's outrageous, but it's a common thing. But this is where he makes CDOs. Cuba Gooding and that kid from Filthy Rich: Cattle Drive. The offices of NACA, the Neighborhood Assistance Corporation of America in Newark, New Jersey are short on frills. There's so many more mortgages in default right now, it's overwhelming the system. Well, that's not so bad. And they sold so many of these mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified to get one had gotten one. They didn't let people like Clarence near their money, in fact, people with part-time employment and unpaid debts in their past. So the bank and I are partners in this deal. Most people don't think about it, but there's this huge pool of money out there which is basically all the money the world is saving now: insurance companies saving for a catastrophe, pension funds saving money for retirement, the Central Bank of England saving for whatever central banks save for, all the world savings. That's the head of capital market research at the International Monetary Fund, the place to go if you want to figure out how much money is in the world. Davidson and Blumberg have also gone on to work with other NPR reporters on a regular podcast covering economics, global finance, and other business topics using similar storytelling techniques: NPR's Planet Money. They talk to people who were actually working in the housing, banking, finance and . He, like more than 4 million Americans at this point, is fighting to keep his home. These are all put together and divided into different slices. And then you start seeing, wow, the property values have stopped increasing. But the pool of money had just gotten started. Instead of defaulting 1 and 1/2% of the time, it defaults 3 and 1/2% of the time. A mortgage-backed security, remember, is a pool of thousands of different mortgages. Most people don't think about it, but there's this huge pool of money out there, which is basically all the money the world is saving now-- insurance companies saving for a catastrophe, pension funds saving money for retirement, the Central Bank of England saving for whatever central banks save for, all the world's savings. And I wanted to talk to him about, what now? CNN . They performed very well. Then Mike takes a few thousand mortgages he's bought this way, he puts them in one big pile. Then there is AA, A, all the way down to B and below. It takes up three modified apartments on the Upper East Side of Manhattan. Go somewhere else. So in this whole process, what's the first time someone looked at your finances? They call and make sure that you work where you say you work. My wife asked me where to put things, and I said, well, it was there when I was growing up, so let's put it there. That was someone else's problem. "Tranche" is just French for "slice." Nobody saw what was coming. And the email would say, there will be no exceptions. Tonko Gast estimates that most of the AAA rated mortgage-backed CDOs that the industry created since 2006 are now worth less than half their value. They bring it out. So they figured absolute worst-case scenario, the foreclosure rate might go to 8% or 10% or even 12%. At the height, I was making between 75 and 100 grand a month. Look, we all got it wrong. All of us, we just lived it. It's Pazarbasioglu, Ceyla Pazarbasioglu. There were even shows on TV about how to do it. So I guess the first thing we have to do is talk about the global pool of money, right? If you are able, we strongly encourage you to listen to the audio, which includes emotion and emphasis that's not on the page. Tell us what you have in the bank. Jim used the word tranche. What was that kid's name? Tell us what you're trying to do. We are telling you to lie to us, effectively. And then I went and I grabbed her and I picked her up. Banking turned on its head and went out looking for partnerships with people like Clarence, loaning him half a million dollars without even checking to see if he had a job. Honestly, I know this sounds-- I was really happy to see there were no major suicides, people weren't jumping off bridges, there weren't a lot of personal disasters. David Marquet says crews would need to locate the vessel then bring it to the surface to unlatch it. They'd take any risk for a bit of return. How many loans are you running in loan performance, altogether? Now, the CDO, that's what we're talking about. A fifth episode entitled "Return to the Giant Pool of Money"[13] was aired on September 25, 2009. The first was an awards dinner for finance professionals who created the mortgage-based financial instruments that nearly brought down the global economic system. 70 trillion dollars in the global pool. Instead of defaulting 1.5% of the time, it defaults 3.5% of the time, well, that's not so bad. Or if you're more of a Wall Street Journal editorial page type, an innocent mortgage banker who was duped by lying, greedy homeowner. It actually sounds more impressive. You could take a pool of thousands of risky mortgages and create a security that was called, money good, as safe as any investment out there. Remember, even though he didn't trust these NINA loans, the bonds he turned them into, they performed well. Every letter represents a month. And have you been making mortgage payments or not? There was talk of a new, Great Depression. So first off, how do we pronounce your name? And it has all sorts of information like how much the house sold for, what the interest rate is. I always like to say that the people in our world, which is this narrow world within Wall Street, the people that are involved in derivatives, with complex financial engineering, they work in a very narrow, focused area. Note: This American Life is produced for the ear and designed to be heard. Absolutely. And in the beginning, he'd only buy mortgages that were pretty standard and pretty safe, mortgages where people had come up with a down payment and proven that they had a steady income and money in the bank. 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. It's not the first time we've seen a country spend a lot of money to try to build up a domestic sports league, but it does have some key differences to . You basically borrowed $540,000 from the bank, and they didn't check your income? The ceilings were probably 25-, 30-feet ceilings. Which is how we get half million dollar no income no asset loans. And Glen loved his job. With no buyers, prices went even further down. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it. So they had not done any amenities to this place? I'd say we've probably lost 60%, probably 3 billion. Is there any way we can do this, because we're losing deals left and right? All of us, we just lived it. 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. And today on our program, in the first half of the show, we're going to play you a lot of that original report, where we hear from the bankers and the mortgage dealers and the investment managers and the homeowners, who together, without meaning to, created the economic disaster we're in today. He gets a mortgage from a broker. And by the way, before you finance enthusiasts start writing any letters, we do know that $70 trillion technically refers to that subset of global savings called fixed income securities. And the rising prices created even more demand, as people started to look at homes as investments, investments that never went down in value. They don't do that. A year and a half ago, NPR News and This American Life teamed up to produce "The Giant Pool of Money," a program that explored what was thought at the time to be the worst financial crisis. Yeah, and then once I got a hit, then I'd call the other people back and say, listen, Bear Stearns is buying this loan. [1] But Clarence's case is more nuanced, and much more common. There's another term the industry uses. Clarence Nathan was a man with three part-time jobs who earned about $45,000 a year, and yet a bank loaned him $540,000. And let me just turn things over to the two of you, Alex Blumberg and Adam Davidson. Prologue Host Ira Glass talks with NPR correspondent Adam Davidson about a black tie event he attended in the spring of 2008. There are lots of technical differences between this crisis and Jimmy Carter's malaise. And people were laughing at us, to be honest, to say, well, you're crazy. That was our difficult task, was trying to produce enough. I'm going to show you-- here's our deal, Monterey. I was as green as you could be. They did consider canceling this year but its been a really tough year, its been really gloomy for them. But he says we didn't help him any, either. So they basically got to this point of six, and then they fought back the current. The small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street. Which seemed unfair to us, because Glen was certainly not responsible for this crisis. They don't want to get mixed up with actual people and their catastrophic health problems and their divorces and all the reasons that might stop them from paying their mortgages. It's hard to believe. You get there, and that's all everybody's talking about. Cuba Gooding and that kid from Filthy Rich: Cattle Drive. And you, by the way, are part of the Planet Money team of economics reporters who did stories here on our program and on the NPR news shows. But they don't say what you make. This is Glen Pizzolorusso, who was an area sales manager at an outfit called WMC Mortgage in upstate New York. 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 the money was gone. And that's all most investors look at that, that letter grade. Then he went two months behind. Transcript Sarah You can check out all of our shows on the economy here. The Giant Pool of Money Analysis Every individual in the United States wishes to be a homeowner because owning a home is considered as the ultimate achievement by majority of the population and is a symbol of successful and fulfilling life (Grant, Rick). But remember, to all the investment managers in the global pool of money who bought them AAA meant safe as government bonds. All right. This is where we have to talk about Alan Greenspan, right? What's going on? 355: The Giant Pool of Money. They talk to people who were actually working in the housing, banking, finance and mortgage industries, about what they thought during the boom times, and why the bust happened. The broker sells the mortgage to a small bank. 150 times was it 3,000-- let's be conservative? I just did what I saw everyone else doing. Get ready for an all new season of Flip This House. But here's the context. You and Alex Blumberg are going to be explaining step-by-step how this all worked. So you're scrambling to sell them. Dan Naygrow. It's not an out-and-out depression. And Jim and most companies like his weren't buying the top-rated tranches, the safest ones, the triple-As. But when I bought my house it was just your credit score and can I pull a credit report? How are we going to get this one funded? Each week in our show, we choose some theme, some topic, and bring you stories on that topic. They don't want to lose any of that money, and, even more so, they want to make it grow bigger. Not to say the original broker didn't have a process. So we checked back in. The other was a non-profit conference for people facing foreclosure. They don't want to lose any of that money, and even more so, they want to make it grow bigger. I ain't got a job. For example, a guy I met named Clarence Nathan. But it's been a really tough year. He beat me. What's going on? It seems as if it's that casual, even though there are a lot of papers that get filled out and stuff flies all over with the faxes and the emails, and all like that. There are problems. We were a little early in '05 by not wanting to do those deals. And occasionally those guys would hear about some loan that some other mortgage company offered that they weren't allowed to offer. Discovery had the cleverly titled, Flip That House. And I'm not trying to absolve myself of anything. 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. It felt very wrong way back when. I have a history of trying to pay but not being able to because of a ridiculously high interest rate. They would call and say, we're looking for more fixed rate. It's hard. So they figured, absolute worst-case scenario, the foreclosure rate might go to 8 or 10 or even 12%. And finally, you'd find out who's actually buying them and would say, yes. We're able to modify your loan, and these are the terms. That's what we did. People who had never invested in real estate before started buying multiple properties as investments. There's a real fear that just like in the '30s, hundreds of banks would collapse. They didn't let people like Clarence near their money, in fact, people with part time employment and unpaid debts in their past. Hey, Adam. The thing that took this problem and turned it into a crisis was something else that was new, something called a collateralized debt obligation, a CDO. The US expects more than 1.1 million bankruptcies this year, twice the 2006 number. And why is everyone talking so much about the 1930s? But then, right before our story starts, something changed. Back when the housing crisis was still a housing bubble, a guy on the phone told me that a NINA loan stands for no income no asset. He can remember almost to the day. But to make it grow, they have to find something to invest in. Tranche is just French for slice. In 2005. And the guy who made millions making loans like the ones that they got, he's the one who lost his house. It's where they make the things. At this precise moment, one guy took one of that army's favorite investments and made it a lot less attractive. And they've got this loan. What's the problem with this one? I wish. We would roll up to Marquis at midnight with a line 500 people deep out front, walk right up to the door, and, give me my table.
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