"The Giant Global Pool of (subprime) Money"

[Nords]

I found this transcript on a local discussion board. It's an episode of NPR's "This American Life" with the hosts trying to trace the flow of subprime money. It's a 20-page PDF and it lacks PowerPoint graphics or profanity, but it's a fast read.

http://www.thisamericanlife.org/extras/radio/355_transcript.pdf

"It is a lot of money. And that money comes with an army of very
nervous men and women watching over the pool of money: investment managers. This army is nervous because they don't want to lose any of that money and they also want to make it grow bigger. But to make it grow, they have to find something to invest in. So, for most of modern history, they bought really, really safe, really boring investments: things called treasuries and municipal bonds. Boring things. But then, right before our story starts, something changed, something happened to that global pool of money."

"Think how attractive a mortgage loan is to that 70 trillion dollar pool of money. Remember, they're desperate to get any kind of interest return. They want to beat that miserable 1 percent interest Greenspan is offering them. And here are these homeowners, they're paying 5, 7, 9 percent to borrow money from some bank. So what if the global pool could get in on that action?
There are problems. Individual mortgages are too big a hassle for the global pool of money. They don't wanna get mixed up with actual people and their catastrophic health problems or debilitating divorces, and all the reasons which might stop them from paying their mortgages.
So what Mike and his peers on Wall Street did, was to figure out how to give the global pool of money all the benefits of a mortgage – basically higher yield - without the hassle or the risk.
So picture the whole chain. You have Clarence. He gets a mortgage from a broker. The broker sells the mortgage to a small bank, the small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street. Then Mike takes a few thousand mortgages he’s bought this way, he puts them in one big pile. Now he’s got thousands of mortgage checks coming to him every month. It’s a huge monthly stream of money, which is expected to come in for the next thirty years, the life of a mortgage. And he then sells shares of that monthly income to investors. Those shares are called mortgage backed securities. And the 70 trillion dollar global pool of money
loved them."

In one part, two guys are sitting around an office filled with expensive computers. However they're using a handheld calculator to figure out if they can help a homeowner renegotiate a mortgage, but they don't know how much of it they own or even who else owns the mortgage now. So they give up and ask the IT guy who created the tracking spreadsheet, only to find out that it's actually tracking 16 MILLION mortgages bundled into a CDO which might have nearly 200 separate tranches.

One of the mortgage middlemen was making $75K-$100K PER MONTH at the height of the frenzy. Today he's out of work and he's stopped paying his own mortgage...

 

[FinanceDude]

I found this transcript on a local discussion board. It's an episode of NPR's "This American Life" with the hosts trying to trace the flow of subprime money. It's a 20-page PDF and it lacks PowerPoint graphics or profanity, but it's a fast read.

http://www.thisamericanlife.org/extras/radio/355_transcript.pdf





In one part, two guys are sitting around an office filled with expensive computers. However they're using a handheld calculator to figure out if they can help a homeowner renegotiate a mortgage, but they don't know how much of it they own or even who else owns the mortgage now. So they give up and ask the IT guy who created the tracking spreadsheet, only to find out that it's actually tracking 16 MILLION mortgages bundled into a CDO which might have nearly 200 separate tranches.

One of the mortgage middlemen was making $75K-$100K PER MONTH at the height of the frenzy. Today he's out of work and he's stopped paying his own mortgage...

That's no doubt the BEST easy to understand explanation of the mess I have looked at...thanks.........

 

[JB]

Great show. You can listen to it online here . The soundtrack is great -- 'Hard Times' from the Sex-o-rama soundtrack.

 

[soupcxan]

I doubt you can have a single CDO with 16MM mortgages in it - if the average mortgage is $150,000 then we're talking about a $2.4 trillion CDO, which I don't think exists. And I would be very surprised to see any kind of ABS with 200 tranches, I think 5 tranches is more likely.

 

[Gardnr]

One of the mortgage middlemen was making $75K-$100K PER MONTH at the height of the frenzy. Today he's out of work and he's stopped paying his own mortgage...

I heard that show on podcast a couple months or so ago. It's a good one, although disgusting too.

Yeah, apparently everybody and their brother (or sister) was becoming mortgage brokers with very little, if any, experience in anything resembling real estate, finance, banking, etc. I know a couple of guys who had been in the business as a side thing that couldn't compete anymore because they weren't willing to deal in the sleazy business that developed (liar loans, etc.)

The gold rush was on and it's obscene how much some were making on this giant sloshing flow of money. They were living it up too, taking out their own neg-am, interest-only, ARM (etc.) mortgages on huge houses, and buying big cars, etc. I don't have any numbers on it but I'd bet that a huge majority are now broke and/or bankrupt. There are certainly a huge number of anecdotes to suggest just that.

Obscene.

 

[RonBoyd]

For a short, concise explanation of what's happening here (don't have to be a weatherman) see this op-ed piece referring to Long-Term Capital Management... anyone remember them?

 

[donheff]

Wow, sobering show.

 

[jazz4cash]

Great, Great post. I highly recommend the audio link provided by JB. This pretty much confirmed what I suspected all along. It skipped over lots of shenanigans such as bogus appraisals though. I think they pinpointed late Oct '06 as the day the bubble popped. This corresponds exactly with the peak of home prices in my neighborhood.

 

[chinaco]

Good post. Thanks.

This may also help to explain the recent tech bubble and the oil/commodity bubble.

As this pool of money chases investment returns with certain desired risk exposures (low or high) for a desired (attractive) return... the bubbles will continue to occur.

If $36T turned int $70T in a few years.... that means only one thing... Twice as much $ were printed (or are owed).


This piece also puts the blame on Wall Street and the Mortgage lenders. It also enticed idiot individual Americans that have no financial sense to try to game the system (not enough income to support the loan or poor credit history).

 

[Texas Proud]

I doubt you can have a single CDO with 16MM mortgages in it - if the average mortgage is $150,000 then we're talking about a $2.4 trillion CDO, which I don't think exists. And I would be very surprised to see any kind of ABS with 200 tranches, I think 5 tranches is more likely.

Actually they can have 200 or more... the 'super senior' can have that many based on who gets paid first etc... some get a higher percent of principal so their maturity is short and some have much longer maturities...


Funny thing is that some CDOs had only one investor... they bought the whole thing for some reason... at least back when I was trustee on them and they were actually done right

 

[chinaco]

The piece also point to lack of regulation on a massive scale and greed of the people earning commissions and bonuses (which led those to not follow conventional wisdom and rules).

It appears that the rating agencies sold everyone out for fees... Ratings abuses at root of credit crisis | www.azstarnet.com ®


It also point to something that all of us have always know. Offer free money to irresponsible borrowers and 90% of them will take it everytime. Some tried to hang on by taking more money out of the home value (HELOC) to pay the mortgage... but that was doomed to failure no matter what... it was just a matter of time or an event.