Daring to Say Loans Made No Sense By DAVID CARR

September 29, 2008
The Media Equation
Daring to Say Loans Made No Sense By DAVID CARR

Sometimes, if you want the real answer, you have to ask a dumb question.

Alex Blumberg, a producer at “This American Life,” a public radio show that specializes in old-fashioned storytelling about local slices of Americana, has never owned a house or had a mortgage, let alone covered the financial industry. Nonetheless, he was fascinated as he watched the subprime mess unfold.

His dumb question? “Why are they lending money to people who can’t afford to pay it back?”

In 2006, Mr. Blumberg began bothering his friend Adam Davidson, an experienced business reporter at National Public Radio, about subprime loans. Mr. Davidson, who had a broad knowledge of global capital markets, patiently walked him through collateralized debt obligations, yield and risk curves, and the growing amount of international capital in need of a home. But Mr. Blumberg still didn’t get it. How could securities based on lending money to bad risks be good business?

“I was embarrassed for him,” Mr. Davidson said. “I understood how money flowed around the world and I was talking to big-picture thinkers.”

Soon, Mr. Blumberg was madly surfing the Web and torturing his wife and friends with arcane talk about loan syndication and credit-default swaps. “It was a very unhealthy obsession,” he says now. “I just couldn’t understand how they could expect to be paid off when everyone I knew was maxed out on their credit cards. And these were very big loans.”

He decided to do the story for “This American Life,” a show that has a reputation for discussing things like summer camp and inner demons.

“I told him, I don’t know how you’re going to do a story about mortgage securitization for ‘This American Life,’ but good luck,” Mr. Davidson said. But by December of last year, both Mr. Davidson and the broader markets were beginning to have their doubts about whether the fallout from subprime lending had actually been contained.

The more they talked, the more Mr. Davidson realized the education was going both ways. They eventually came up with a one-hour collaboration between NPR News and “This American Life” called “The Giant Pool of Money” that was broadcast last May and became a much downloaded primer on all the mayhem that followed. (You can find it at thislife.org/Radio_Episode.aspx?sched=1242)

Mr. Blumberg and Mr. Davidson were hardly the only ones asking questions. Nearly 19 months ago, under the headline “Mortgages May Be Messier Than You Think,” my colleague Gretchen Morgenson wrote, “as is often the case, only after fiery markets burn out do we see the risks that buyers ignore and sellers play down.”

As the assumptions that had blown air into the bubble began to dissipate, many mainstream reports became increasingly skeptical in their reporting and blogs like Calculated Risk offered increasingly alarming insights.

After large-scale financial disasters, the press is usually criticized — often justly — for ignoring the problem, but it’s hard to make that case with the subprime mess. If no one saw this coming, they were not looking.

“This has been a very slow-moving train wreck,” said Andrew Leckey, director of the center for business journalism at Arizona State University. “But it came wrapped in the warm feelings of home ownership while the executives behind it used obfuscation and a lack of transparency to lie about how deeply they were in the subprime business.”

As Mr. Davidson and Mr. Blumberg showed, there’s more than one way to get behind the lies. Using an ad they placed on Craigslist — “Were you employed in the subprime mortgage industry?” — the pair proceeded to assemble a remarkably likable rogues gallery of participants up and down the subprime food chain. One was Clarence Nathan, who sounded like a nice guy, but his house was in foreclosure, and he did not have full-time employment. He had no assets to speak of, and yet he received a loan for $450,000.

And then Mr. Blumberg asked Mr. Nathan the stupid question: “Would you have loaned you the money?”

Mr. Nathan answered: “I wouldn’t have loaned me the money. And nobody I know would have loaned me the money. I know guys who are criminals who wouldn’t loan me that, and they break kneecaps.”

The pair suggested that an excess of global capital — a doubling in available capital in just six years to $72 trillion — left a “giant pool of money” in need of returns. Enter mortgage-backed securities. A lot of them.

One of the remarkable things about the report is the absence of evildoers, even though the cumulative effect of their behavior is now threatening to upend our nation. Early in the broadcast, we hear from Mike Francis, an executive director at the residential mortgage trading desk of Morgan Stanley. “From our standpoint it’s like, there’s a guy out there with a lot of money. We’ve got to find a way to be his sole provider of bonds to fill his appetite. And his appetite’s massive.”

The story then turns to another Mike, Mike Garner, a bartender in Nevada turned mortgage bundler. Mr. Garner said that market appetites for anything that resembled a mortgage pushed loan standards down: “No income, no asset. You don’t have to state anything. Just have a credit score and a pulse.” (Mr. Blumberg pointed out that the pulse thing was optional: 23 dead people in Ohio were also approved.)

Mr. Garner’s boss had been in the business for 25 years and knew something was wrong. “It makes me sick to my stomach the kind of loans we do.”

It was not a very common response. Glen Pizzolorusso was an area sales manager at WMC Mortgage in New York and a young ninja in this new world. Just out of college, he had five cars, a penthouse and a vacation house in Connecticut. And a taste for good living.

“We ordered three, four bottles of Cristal at $1,000 per bottle,” he said on the broadcast, recalling a night when he had a table at Marquee, a nightclub in Manhattan. “They bring it out, you know they’re walking through the crowd, they’re holding the bottles over their heads. There’re firecrackers, sparklers. You know, the little cocktail waitresses,” he said. “You know so you order three or four bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’re the cool guys? We were the cool guys.”

Mr. Pizzolorusso himself soon fell behind on his own mortgage. “We could take joy in his deep-frying in his own greed, except for the fact that we all will end up getting billed for the Cristal.” Mr. Blumberg said: “I admire him very much for talking to us. “He was completely honest about how he behaved.”

Kevin Kelly, a writer and thinker who helped invent Wired and The Whole Earth Catalog, is a huge fan of “The Giant Pool of Money.”

“It was not an abstract,” he said. “These were ordinary people doing ordinary things that accumulated in the wrong sequence and creating a system that failed. Normally, the scale prohibits people from understanding, but it was broken down into parts and sets of behavior that regular people could understand.”

It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing.

Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story.

“It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back.”

That was five months ago, and now that same furnace is about to burn public money. Mr. Davidson and Mr. Blumberg are working on a follow-up report to be broadcast next week on “This American Life,” that looks into the wreckage of a calamity their reporting all but predicted.

Mr. Blumberg said that back when they first started, “there were all these respected economists saying that no, it’s not a bubble, and yes, there would be a correction, but it would be a soft-landing and I think people were too intimidated to question that,” Mr. Blumberg said.

“That’s the story of my life, asking the stupid question,” he said.

Email: carr@nytimes.com