Original subtitles

MUSIC

The bursting of the nation's housing bubble adds up to a...

It's a shake up on Wall Street.

...bankruptcy protection.

...the government takeover of mortgage giants

Fannie Mae and Freddie Mac.

Alan Greenspan calls it a once in a century financial crisis.

Approve a 700 billion dollar bailout

or face dire consequences.

I have talked to the heads of almost

every single one of these firms in the last 72 hours

and he has no idea what it's like out there. None.

Yes I found a flaw. I don't know how significant

or permanent it is but I've been very distressed by that fact.

MUSIC

SIRENS

MUSIC

Welcome to New York City!

Financial capital of the world.

Welcome to Wall Street.

This is the heart of American capitalism.

Before I begin, a few things about the tour:

One is uh -

I'm not used to the camera in front of me...

One is uh - let's make this tour interactive.

Feel free to ask me questions.

One of the things I love the most

is you guys getting the "aha" moment.

If you can walk away today

with a better understanding of Wall Street,

better understanding of the financial crisis,

I've done my job.

Committee will please come to order.

I will start with the questioning.

Dr. Greenspan I want to start with you.

And my question for you is simple.

Were you wrong?

It would be sure that the mic is turned on.

Partially, but let's separate this problem into

its component parts.

We're talking about explaining History,

major world historic events.

This is as much a wealth crisis as a debt crisis.

Is a problem of wages as much as investment.

It's a debt crisis but it's also very much a crisis of

economic theory.

I think the income distribution was the initial step

in the dynamic that drove the debt crisis.

It's horrifying.

This is, you know, all the people that we trusted

have turned out to be completely untrustworthy.

This crisis is a total failure of markets.

So it's not simple.

MUSIC

In a short span of time between March 2008 to September 2008

so many things happened.

Fear was in the market place.

And if someone was going to tell you in six months

two of the top investment banking would fail

and they would tell you the top US insurance company would fail.

And they'd tell you Fannie and Freddie,

top mortgage issuers: bankrupt.

Oh Iceland: bankrupt.

Bankers around the world.

If someone would tell you this would happen

in as short as six months, you'd think they were crazy.

But that's essentially what happened.

Doctor Greenspan, you had an ideology.

You had a belief that

that free competitive markets are by far

the unrivalled way to organise economies.

"We've tried regulation. None meaningfully worked."

That was your quote.

Do you feel that your ideology pushed you

to make decisions that you wish you had not made?

Well remember that what an ideology is,

it's a conceptual framework

with a way people deal with reality.

Everyone has one. You have to exist you need an ideology.

The question is whether it is accurate or not.

And what I'm saying to you is yes I found a flaw.

I don't know how significant or permanent it is

but I've been very distressed by that fact.

You found a flaw in the reality -

A flaw in the model that I perceived

is the critical functioning structure

that defines how the world works, so to speak.

MUSIC

It wasn't so long ago in the history of man's voyage

to a better world that ships were carrying eager passengers

towards the shores of a new nation

that was just in the building.

Our forefathers were constructing

the foundation of this nation

by interlocking inseparably the blocks

of our political and economic freedom.

In some sense economics, standard economics,

is a very optimistic view of human nature, right?

Everybody's wonderful. Everybody's great.

Every person is a perfect calculator.

And that's basically what it means is that we have

lots of actors, each of them doing the best thing for them

and that creates some kind of social benefit for everybody.

The way of life our forefathers established

on this foundation of freedom

drew people from the far corners of the earth

and all those who set foot on these shores

had the opportunity to build a better life for themselves.

Even young Jonathan, an unskilled lad

from across the sea hoped to find a job

where he could progress according to his ability

and enterprise.

Well there's many factors that ultimately underlie

the current financial crisis but,

one thing that comes across in my mind

is the intellectual change.

An idea. Mm an idea.

In the 1970s the so-called efficient markets hypothesis

began to be received doctrine in the universities.

The simple version of the efficient market hypothesis

is that you have a value of something in the market

whatever it is.

If it's too low people would recognise it

and then you would bid the price up.

If it's too high people would recognise it

and then they'll bid the price low.

So you might have one opinion. I might have the other opinion.

But the opinion of all of us in average

is going to be kind of the correct opinion.

What's called the wisdom of crowd.

This is a hypothesis that

all financial asset prices are correct at all time.

Well correct in the sense that they accumulate

all of the information, pool the information

and then become wiser than any one individual

so that it would be foolhardy to ever question a market price.

While the main street of today doesn't look much like

the main street of Jonathan's time

the principles about business system remain the same.

But businessmen still compete with one another

for the consumers supply of spendable dollars.

And Mrs Consumer is still mighty critical

of everything she buys.

So under that thesis prices are always at the correct price.

You can't have an asset price bubble

in the efficient market hypothesis.

So let me tell you a bit more about myself.

After MIT I went to Silicon Valley

and so I was there before the bubble, during the bubble

and slightly after the bubble, the internet bubble that is.

And so you know, after the bubble I was like looking around

and I was like wow you know, what I'm doing is really risky,

I've got to find something more stable.

What I became is I became a bond trader

of essentially sub-prime mortgages bonds.

I think we know what a bubble is.

It's a phenomenon that has been repeating many times in history.

If you look at the Oxford English dictionary

I think it says something like: a speculative price increase

that's not justified.

It's filled with air like a bubble and it eventually bursts.

Economists would like to come up with a good explanation.

Why did we have a stock market bubble in the 1990s

and then a real estate bubble in the 2000s?

I like to give explanations that sound right to me

and maybe a little disreputable in our own profession.

And they're cultural explanations.

One thing that strikes me as having been very formative

for people's thinking was the explosion of capitalism.

Government is not the solution to our problem.

Government is the problem.

It started with the Margaret Thatcher

and Ronald Reagan revolutions

that brought free markets to more prominence.

And then it moved on with the breakup of the Soviet Union.

MUSIC

The advent of capitalism in China.

It seemed like there was an intellectual revolution.

That people believed in markets.

And so people thought that we're in a new world:

private property reigns!

It struck a tone of fear in people

that I better get on this or I will be left behind.

I'd call it a gold rush mentality.

And it led to people changing their self-image.

They thought that I have to change to become part of this,

to be smart and stay afloat in this world.

I'm going to be an investment genius.

Play your hand at hotjobs.com.

Dot com. - Dot com.

It looked like the dot com, all those tech stocks

were a great way to invest your money and so money flooded in.

Today I'm talking to some city pets.

Ooh, ooh, hey poodles

did you know that pets.com delivers food, treats and toys?

And, lo and behold, you can't make money

selling pet food on the internet.

But people thought it was this new opportunity for investment.

Doctor I think you should see this.

Why what it is?

He's got money coming out the wazoo.

What do we have?

Money out the wazoo.

Move this man to a private room.

It's time for e-trade.

Unfortunately we were embarrassed by the fall

in stock prices, so we had to turn to some way

of maintaining the ego we had just developed.

I think we had a smart response called sector rotation.

Rotate out of the - that's a little bit of jargon.

Rotate out of the equity sector into the property sector.

Introducing the world's fastest money making system.

John Alexander's Real Estate Riches in 14 days!

It accelerated largely through media.

Television shows that focused on the bubble

and ad campaigns that reinforced notions

that seemed to support the bubble.

Wouldn't you like to learn how to make a fortune in real estate

without needing any money?

People were so pleased that they had found this smart,

at home, investment that they understood

and knew and that they were very confident about.

There's no reason that you can't be living

the same life I am in no time at all.

MUSIC

It's humiliating.

I am an economics correspondent for the New York Times

and I'm 10 months past due

and in extended discussions with the lender.

I'm kind of amazed actually that I'm still in this house.

That deal that I got is not a good deal

and I cannot keep the house with this deal.

All the bad mortgage you can ever imagine in this planet

that the kind of mortgage I have.

MUSIC

I'm a working stiff. I'm a regular guy. I have a job.

I'm trying to get ahead.

And I thought this was a smart way to do it.

Here's how it started for me.

I got married 6 years ago.

And about a year into our marriage

my wife was saying at home and decided

now I want to do something so she looked around

and thought she'd try to sell real estate

and she took the course, passed the test,

went to work for a pretty large Century 21 office in our area

and the broker there, that was maybe 2 years into the boom,

and he said to her, he said, I would recommend

everybody that owns a house

borrow as much as you can against it.

Take out every nickel that you can

and invest it in real estate. You just can't lose.

You can always tell, can't you?

A town with good real estate people

is a more substantial community

because more people own their own homes.

That's right.

MUSIC

You can look at a house that was 2 years ago 300,000

and now they're 600,000.

They're just astronomical.

And you see it happening all around you.

Everybody's getting in on it

so I'd been in my house 12 years or something like that

and I'd built up equity and I thought:

"wow he's right, I should do that."

So that's what I did.

The efficient market hypothesis is built on a simple idea.

That as the price of a good goes up,

we tend to demand less of it.

So the supply and demand matches.

That's what gives us the stability in the system.

If you imagine for example something like a refrigerator.

If its price rises dramatically

people are going to make do

with the refrigerator they've already got

When they start to treat a good as a financial asset

as people started to do with houses in the boom.

That's when you get into a very unstable market.

MUSIC

Asset markets are dramatically less stable than goods markets.

You don't see the price of Chevrolets

sky-rocket and then plunge.

The key difference between an asset and a good

is when you buy a good you want to use it.

You're not going to resell it.

When you're buying an asset, you're buying it

in the hope of being able to sell it in the future

for a higher price.

So if we see that its price is rising

we then tell ourselves that we're very smart.

and we go out and buy some more of that asset.

So in goods markets when prices rise, demand falls.

In asset markets when prices rise demand often rises as well.

In the asset market the very fact

of its having grown in price fuels demand

for additional purchases of the asset.

It also fuels additional purchasing power

because people can borrow more against the value

of the assets they own that went up in price.

MUSIC

Most of these assets are bought financed with debt.

When we buy a house, we buy it with a mortgage

so it's debt financed.

If one of those assets goes up you're able to borrow more money

against that asset so your spending power

for new assets rises as the prices go up.

I bought several investment properties.

I buy one and I took equity out of my house

or I'd buy one and then go look at another one,

take equity from the one I'd just bought,

in order to buy as much as I could.

I bought at exactly the wrong time.

I went on a buying spree right at the peak.

In fact the most expensive property I bought in Hawaii

is still today the highest price in that development

3 and a half years later.

I was the peak.

And to buy around the peak I was the highest one.

Immediately after that the next one was less.

How does that make you feel?

Great.

AMBIENT SOUND

Doctor Greenspan your view of the world,

your ideology was not right. It was not was working.

Precisely. No that's precisely the reason I was shocked

because I had been going for 40 years or more

with very considerable evidence

that it was working exceptionally well.

Greenspan had been working to the assumption

that the financial system was a self-stabilising system.

It meant that he took a view of asset price bubbles,

which was that it really wasn't in his remit

to do anything about them.

MUSIC

He had this idea that the Central Bank

should never question asset prices.

It should only take action when asset prices started to fall.

So whenever there was the tiniest slowdown

he'd be leaping in with monetary stimulus

cutting interest rates and trying to boost activity again.

And of course boosting economic activity

is just a euphemism for trying to

encourage the economy to borrow even more.

Creating a credit boom or a credit bubble.

So we're in this crisis in large part

because our Central Banks have,

for the last two or three decades, encouraged us to

borrow more and more and more and eventually

got us into this unsustainable state.

Now if the Central Banks operating

its interest rate policy in a way to encourage

asset prices to keep inflating

obviously that's going to benefit that portion of society

that owns assets, which is typically

the wealthy end of the spectrum already.

In 1900 many men had to work 10 hours a day,

6 days a week, to earn enough money to provide

their families with the bare essentials.

And labour was the rule in the home as well as the factory.

A half century later

we had invested enough in our business system

to provide the average worker with efficient

and expensive buildings

and machinery to enable him to produce enough

in a 40 hour week to earn twice as much

as the 1900 worker earned in a 60 hour week.

This shorter work week gives us all more leisure time

to enjoy a standard of living beyond the wildest dreams

of anyone who lived a half century ago.

The more we earn the more our families have,

to spend for the things they need and want.

You ask an American when was America

most prosperous in the 20th century?

Most Americans outside of financiers on Wall Street

will tell you the 1950s.

It's thought of as this time of perfection.

This golden age of capitalism with big fin cars

and houses and anybody, any guy, could get a job

and support his wife and kids.

And this kind of lifestyle isn't possible

for most people today.

And fortunately we have been able to

raise our standard of living

without sacrificing the spiritual side of life

which means so much to the American family.

Now this is also the moment in America

that has the least income inequality in our history.

And I don't think that's a coincidence.

MUSIC

Before the sort of World War II period,

income inequality was very high.

The share of total American income

going to just the top 1 percent

peaked in 1929 at about 22 percent.

Which is an extraordinary figure.

And then as you go into World War II, income inequality

falls from 1945 to 1970.

In the 1970s the top 1 percent were getting only 9 percent.

That was a huge fall.

And then in the 1970s you start to see it rise again.

Accelerating in the 1980s.

MUSIC

There's been a big shift in the way income growth has occurred

in the United States certainly but also in other countries

as well, but not to the same degree.

What we've seen is that unlike the three decades

right after World War II when incomes grew

at about the same rate for everyone

starting in the early 70s roughly, income growth

started accumulating only at the top.

MUSIC

The share of the top 1 percent went shooting up

like a July the 4th sky-rocket

back up to about the same as in 1929.

And partly that can be explained by the credit boom

or the credit bubble.

You were okay up to that credit business,

couldn't you make that a bit clearer?

To really understand it you have to go back to the 1920s.

There was increasingly inequality

but there was also increasing debt.

The US was developing great productive capacity

in consumer goods industry such as refrigerators,

such as radios, such as auto mobiles.

And these were very expensive

for the average worker at the time.

And so over the mid 20s to late 20s

there's an incredible explosion of instalment credit in America.

People could borrow to pay for all the new modern

electric appliances.

And you had a rapid rise in credit in the economy

to the point at which we got too much credit,

too much indebtedness and then eventually the system collapsed.

So the 1920s can actually be seen as a kind of precursor

of what happened in the 2000s.

MUSIC

So you have a very pronounced U shape curve

just as we have seen happening with income distribution.

And that's because economic activity, profit growth

and credit creation are all intimately linked.

Ah yes dear lady. High, high quality at a low, low price.

If the banks are more willing to lend

it becomes easier for companies or for households to spend

because they can borrow money and they can then spend it.

Sales dollars from satisfied customers once again.

So as credit rises corporate profits rise.

The remainder of the profit is paid out as dividends.

But who tends to own the shares in the corporate

and the shares in the bank?

Generally it's the wealthier people that own

the capital stock of an economy.

So if profitability is being boosted then there's

a natural tendency to polarise wealth distribution

within the economy as well.

That's a symptom of a credit cycle.

Say, that sure was a neat job.

MUSIC

That building across is the most important building

of Wall Street.

That building is the House of Morgan Building.

That's where JP Morgan's original bank was.

The institutions that are going to make the most profit

from that credit creation process are of course the banks.

Every time a loan is made they take a margin on it.

Every time a bond is traded they take

a margin on that as well.

So the credit bubble creates a system where you boost

financial profitability

more than profitability in the rest of the economy.

MUSIC

So if there's a boost of profitability

for the banking sector it tends to drop quite quickly

through to pay for bankers, through to the bonuses.

Ha! Here we go.

I think the compensation strategy that we've had

for many years

is in line with best practices to encourage

long term incentives.

The closer you are to the money the more of it you make.

If I took anybody and I paid them

10 million dollars for their job,

I took you and I started paying you

10 million dollars for your job,

in 2 weeks you will think you will deserve it.

I'm looking forward to my next million.

We want to hire and retain the smartest people in the world.

And so we have to offer them incentives

which can compete with those that are trying to attract

the best and the smartest people in the world too.

You know we just want one thing from Wall Street;

we'd like them to be able to do the maths.

That's all we want.

We just want them to be able to do arithmetic.

And they got it completely wrong.

If they were that good we wouldn't have been in this mess.

Alright so our next stop's going to be Deutsche Bank

where I used to work. Alright. Let's go.

MUSIC

So it's been an enormous pyramiding of income

and wealth in the last 30 years.

If you look at the people in the top deciles,

the lion's share of the growth that occurred

there was in the top 1 percent.

Slice that up and you'll see the lion's share of the growth

in the top 1 percent occurring in the top 1/10th of 1 percent

and so on as far as we've managed

to go up and find data to check

MUSIC

For everybody else this new inequality

meant a bunch of things.

Only a business operating at a steady profit

can give its workers security...

From World War II until about 1970 wages grew very steadily.

There was a widespread well- paid manufacturing economy.

Good steelwork, good car work.

Higher wages and steady employment.

All this changed after 1970.

With double whammies of the rise of globalisation

and the industrialisation beginning to hit

the American workforce.

Through the 1950s, 60s, 70s,

the bottom 90 percent of the American population

was getting roughly 65 percent of national income.

That share fell to above 50 percent

in the last few years.

Adjusted for inflation the medium wages stagnated

from the early 1970s

except for a small blip in the early 90s, until today.

MUSIC

Well there are certainly primary residences

here in Westhampton Beach.

But for the most part they're secondary.

Some of these homes are third and fourth homes

for some of the people here.

You can certainly get a small cottage here

somewhere in 500,000 to 1 million dollars

but the lower end properties are rare

and you generally need to really put some money into them

to make them liveable.

With that said you can certainly afford a house here

around 900,000 dollars or way up to 10, 12, 20 million dollars.

So depending on how much money you have in your back pocket.

So we're about 2 weeks away from being complete.

Home-owners taking possession in about 2 weeks time.

It's stunning.

Thank you. Right now we're just doing a final punch list

and walk-through and final touch ups as you can see.

Great raised panel detail. Custom kitchens.

It's really coming along amazingly.

Thank you.

The gentleman who bought the house

is a chief operating officer of a hedge fund in Manhattan.

And this is their summer home here in the Hamptons.

They have another home up in West Chester, Upper New York.

Here's your home audio control for system.

Again he's able to control the house anywhere in the country

or anywhere in the world as a matter of fact.

It used to be that more was better.

More was more impressive. More was everything.

I think what we have in Westhampton Beach

is what most people are looking for, which is simpler.

It used to be the 10,000, 15,000 square foot house

had to be.

Today that smart money is saying

I want to simplify my life.

People are keen to want to scale down.

That's what Westhampton Beach offers to people.

It offers them a simpler life.

Do I need the 17,000 square foot home

or really can I survive with the 8,000 square foot home?

There's plenty here.

And you still get the Hampton address.

MUSIC

As you go up the income distribution scale

what people spend their money on changes.

So that consumer goods relatively decrease.

Housing increases a lot.

But then when you finally get to the top of the economy

they're spending most of their money on assets

rather than manufactured goods.

And so this upwards income redistribution in itself.

tends to ignite asset bubbles

That process of income distribution

created a bidding for houses indirectly.

The people at the top of the income ladder buy mansions.

People in the middle don't seem offended by that in America.

They want to see pictures of the mansions

But what does happen is that when the people

people at the top build bigger their bigger houses shift

the frame of reference for people who are near them

in the income distribution.

People have a lot of money but not quite at the top.

MUSIC

So you get a cascade one stage at a time

that drifts down through the income distribution.

The medium family now if it wants to buy

the medium priced new house for its area

it's got to buy one that's now 2400 square feet in size.

In 1970 it was about 1600 square feet.

So 50 per cent larger house you have to buy if you want to match

the spending of people at your income level

if you're in the middle.

Well maybe you shouldn't

because you don't have any more money,

you can't afford that house

but then you say well if I don't match the spending

of people in my area

it'll be my kids who go to the inferior schools because there's

a very tight link between how good the schools are in the area

and how much the houses cost.

So it's really a dilemma for the family in the middle.

Oh I don't know what to do Jenny.

I want that house so bad I can taste it.

Maybe we ought to wait.

My colleague Carl Case and I we wanted to find out

what were the dynamics of home prices and there was

surprisingly little academic or scholarly literature on it.

Someone would publish a paper in you know, 1953 or something

and then it would just be forgotten.

I'd find them in dusty volumes.

And I thought well I'll link them together.

So I created for the United States a home price index

from 1890 to the present.

And when I corrected these for inflation,

consumer price index inflation,

to my surprise there was no increase in home prices .

from 1890 to 1990.

It was just the same.

And then there was this huge bubble in the US

starting in 2000.

And that was the only one.

Savers and home-owners are capitalists.

They've worked and saved to make the biggest

single purchase in their lifetimes.

They have a share of America's wealth.

They've seen capitalism work and they've made it work

at home and at their own communities.

On the one hand you have home-buyers

struggling to make ends meet,

looking for the only way they know how to

make money in our economy

They can't make money through their labour

so but maybe they can make it through

buying a house and seeing the value of that house increase.

So people look to mortgages, these easy to get mortgages

as a way to finally get their share of the American dream.

And on the other hand the income inequality produced

a ready supply of capital at the top to be invested as well

in these kinds of mortgages

so while the top was not willing to pay

the bottom wages, they were willing to lend them money.

In a typical city or town, on a typical residential street,

we find a typical home occupied by a typical America family.

Like millions of his fellow Americans,

John Q Public earns enough money

to keep up the payments on a new car.

He takes great pride in owning a fine, new,

long-term mortgaged home, that was built to last a lifetime.

that was built to last a lifetime.

The way in which mortgages have been sold

has changed tremendously over the 20th century.

Sign right here.

Mmm, mind if I read it first.

In the 1920s, there were a variety of ways to borrow

for a mortgage.

Things that seem as though they were just invented

a few years ago were actually commonplace,

like balloon mortgages,

or interest-only mortgages for houses.

Thousands of people get a big thrill

out of looking at model houses,

and a much bigger thrill when they buy one.

They can be amortised, or unamortised.

They can be three years. They can be ten years.

...going to a model house now. Suppose we follow them.

The husband apparently isn't very keen about it all,

but you know how wives are.

So they would borrow some large fraction of the house

and then refinance it in three to five years.

It's a part of what causes the mortgage crisis

of the Great Depression

is that suddenly not just that everyone lost their job,

because a lot of people obviously lost their job,

but that investors fled the mortgage investment market.

So in response to this,

the Federal Government developed the FHA...

...the Federal Housing Administration.

Do you know how far your pay will go in buying a house?

It may surprise you to learn that you can become

a home-owner even on a small salary

with a National Housing Act insured mortgage.

The FHA standardised the criteria for a good mortgage,

by banking its standard it made it into a commodity

that could be resold anywhere in America.

It enabled investors in New York to be able to invest

in Texas or California.

Home ownership is the basis of a happy, contented family life.

And now, through the use of

a National Housing Act insured mortgage,

is brought within the reach of all citizens

on a monthly payment...

The FHA underwriters' manual had very explicit criteria

for what made for a good investment.

So 20 percent, for instance,

of whether a mortgage should be approved or not

depended on whether or not there was class

and race mixing in a neighbourhood.

And so if there were restrictive deeds

to keep out Jews, Asians and, most importantly,

African-Americans, it was considered a good investment.

Under these roofs Americans can live as Americans should.

These pleasant, helpful surroundings provide

the background that young Americans need and deserve.

Through this policy there was the co-creation

of both the ghetto and the suburb,

and the consequence was that mortgage capital flooded

from basically New York City into suburbs around the country.

It made it very difficult for people who lived in the city,

particularly areas that were multiracial or multi-ethnic,

to get mortgage loans.

And over time, over 30 / 40 years,

those kinds of markets and the housing deteriorated...

and it helped bring about what we see as the urban crisis.

MUSIC

This is Bedford-Stuyvesant in Brooklyn in New York City.

There are something like 2.3 / 2.4 million people

living just in Brooklyn alone.

This is a very vibrant community.

There is a lot of immigrants who live here

and a lot of old time New Yorkers, Brooklynites,

families that have lived here through the generations.

The work that I do, I started doing it in the early 1990s

and the work was about getting access

to loans in neighbourhoods

that had been historically redlined, which means

they were cut off from access to banking services.

Bank branches either weren't there

or long abandoned the community.

So we were working with community groups to try

to get banks to make loans in neighbourhoods

that had been cut off from financial services.

By the mid 1990s, the picture

was just changing right in front of us,

because these same neighbourhoods were suddenly

flooded with credit.

Consumer finance companies and other lenders had realised

that there was a lot of money to be made

by making mortgages in neighbourhoods that had been

cut off from mainstream banking.

So much money was being made during the eighties and nineties

that investors had to put it somewhere.

And not just money being made in the United States,

but all over the world.

I mean, with oil you know, with the rise of China,

there's a lot of money that's sloshing around the world.

Capitalism works. And it's because capitalism works

that there's more money to invest than ever before,

so people began to invest a lot in mortgages.

MUSIC

Dynamic Credit's a specialist investment manager.

We manage portfolios of financial products

called mortgage securities.

It really began in the late 1980s.

Banks, who made mortgage loans, didn't wanna sit and hold

those mortgage loans for their full term.

But they were ten year, 15 year or 30-year loans,

they were clogging up the capacity of the bank.

You'd lend out the money and it would take

all that time to get it back in.

You're far better off originating the mortgage

and selling it off.

The origins of secularisation were to take those mortgages

on a pooled basis and form CDOs out of them,

Collatorised Debt Obligations.

CDO is that kind of conglomeration of

mortgage backed securities that can be sold

into the capital markets.

Have you guys heard about toxic asset, yeah?

I'm gonna show you guys what a toxic asset looks like.

I'm gonna let you guys touch and feel this toxic asset.

Be careful when you handle this because it's toxic, right?

So this is a first page of a legal document

of a CDO - Collaterised Debt Obligation.

And the actual document itself is an inch thick.

What it does it tells you how the CDO works.

You basically take a pool of any regular

cash-producing instruments, like a mortgage, credit card,

corporate loans, you pull it together, you tronch it up,

layer it and risk, different risk layers,

and then you sell that to investors around the world. OK?

That's essentially what a CDO is. It's sort of like

a Frankenstein sort of security, that's what it is.

There are a lot of attractions to doing CDOs

on the money management side,

you get paid anywhere from one tenth of one percent per annum

on multiple billions of dollars, which could mean

a couple of million dollars a year fees,

to a half a percent per annum on a couple of hundred million

perhaps corporate credit portfolio,

which again could mean a couple of million dollars a year fees.

And the best part of that was, most of the work

went into selecting a portfolio on day one,

then you were paid over years of time for

I'd say doing a little bit more than babysitting.

Ow!

I would start with a nice clean portfolio of triple A, double A

and perhaps some single A mortgage backed securities,

but I'd have to add something else, what we all juice.

It's an extra element of risk which would pay a higher yield.

At the time, there was a lot of talk about Liars Loans.

The kind of loan that Patty and I got

was one step further down on the credibility ladder

which was called a no-ratio loan,

in which I literally didn't disclose my income.

The house cost 460,000 dollars which, even to me,

was at that time an astounding amount of money.

The problem that I had was huge child support payments

to my ex-wife, as well as alimony,

so I was paying out about 4,000 dollars a month,

which is well over half of my take-home pay,

well over half of my take-home pay.

Mmm, that's disappointing.

Oh, not necessarily, let that be our problem

Borrowing the money, even under my circumstances,

was the easiest thing in the world.

The only thing the lender knew,

the only thing that they wanted to know,

was that I had a credit rating of over 700m,

that the house had been appraised and, you know,

was worth what the purchase pirce was, and that I had a job.

They did confirm I had a job,

but they didn't try to confirm what the income would be.

Well, what are we waiting for?

For me it wasn't a tall a financial investment.

I had no expectation that I was gonna make

make a bundle of money on the rising value of the house.

It's a hormonal thing.

It's a cornerstone to keeping your family together.

It's a ticket to, you know, continued membership

in the middle class.

You know here I had been through this pseudo

kind of traumatic, dramatic, you know,

divorce and remarriage, this was normalcy again.

I could still be a normal guy.

MUSIC

I used to have my own optical store.

I needed financial help, so I went to the bank.

And I found that each time I was talking

to some financial people, they was asking me

if I have a house.

And they did explain to me that if I have a house,

it would be like a collateral.

So after I close my business, I told me my new adventure

would be to get myself a house.

And then from a house I can get myself another business.

So we came here and I liked the house.

He told me the house was 679,000 dollars.

679,000 dollars!

I tried to get some older real estate,

but in this neighbourhood the price is about the same.

But he told me, you know what, it's a two family house too.

You can render all the part and you can do the basement.

They tell me you're going to pay about 4,000 dollars a month.

I said, "Listen, 4,000 is very expensive."

They told me don't worry about it,

after a year you can refinance.

When you refinance you can get the mortgage go lower.

So don't worry, going for me just for one year.

So we're gonna just do some quick announcements

and then turn it over to Herman.

We've gotten quite a number of folks calling us

for foreclosure assistance.

I don't know if you wanna highlight what's been going on?

We got four last week.

I mean there just a bunch of home-owners who are in loans

that were much too expensive for them.

The majority of the loans that were generated

and then sold to Wall Street to be securitised

were refinanced loans.

They weren't adding to home ownership,

they were taking away and they were

deteriorating home-ownership.

Right, I was just gonna say, according to

the Federal Reserve it's something like 77 percent

of the sub-prime loans made

were refinancing loans, so they were loans

made to people who also, to add to what Josh was saying

had built up a lot of equity in their home, so they have

a lot of wealth that they'd build up.

And there were lenders and brokers and contractors

who were all working together to try and get people in the loans

without any regard to whether they were affordable,

because they knew that they could turn around and sell them

the next day to Wall Street investment banks at a premium

and make a profit.

And they knew that they could charge high fees upfront.

Every time the loan is refinanced, the borrower,

and this is what the incentive is for the broker and the lender

to keep flipping the loans, is that

they're charging more upfront points and fees.

And what that does is it strips out the equity

each time more and more.

If you look at the deed records for neighbourhoods,

particularly neighbourhoods of colour in New York City

where there's a high rate of home ownership,

you'll see so many homes where people were refinanced

over and over and over several times in one year

sometimes until their equity is gone and they lose the house.

MUSIC

The banks were interested in maximising transaction cost.

One could understand, that's capitalism,

that maximise their profits, but...

they were doing it at the expense of the poorest Americans

There were attempts to try to stop this.

It was clear that it was predatorial lending,

but they fought back.

They stopped the legislation that was moving forward

to stop the predatory lending.

I've seen this. I've seen the kind of lending patterns.

I've seen what they've done to some of these poor people.

And let me tell you, it is outrageous.

AMBIENT SOUND

If you are asking me who do I blame for my own mortgage wows,

I will tell you absolutely certainly I blame myself.

and I don't put the blame on anybody else

I knew exactly what I was getting into,

and I knew better actually than most other borrowers.

We began to struggle very quickly.

We ran through what little extra cash cushion

I had left in my savings,

then we were borrowing

I hate this.

And we were borrowing more than we realised

through our credit cards to keep ourselves afloat.

But, you know, sometimes these things work.

We were borrowing on average an extra 2,000 dollars a month.

But where would this go then?

The staggering amount of money and the interest rates

on that money were just through the roof.

And I was trying to figure out what in God's name to do

and that's when I called my friendly mortgage broker

and started wailing about my problems.

(phone ringing) Oh, excuse me. Chandler speaking.

He said, look, I'll figure a way out of this,

and indeed he did.

Oh, oh, put him on.

The value of the house had gone up about 10 percent

over those two years.

Yes, sir.

And we ended up boosting the amount we had borrowed,

another 50,000 dollars.

I thought you would.

The theory of the whole manoeuvre was if I...

borrow more against the house, and pay off my credit cards,

my credit scores automatically go up.

Even though the total volume of debt is exactly as high,

maybe a little higher, than it was before.

And because I've got those higher credit scores,

now I can get a slightly cheaper loan.

Go figure! It makes no sense at all.

You have to be pulling the wool over your eyes aggressively

to believe this kind of stuff.

Now we are beginning to see something of

what a mortgage banker really does.

A full and active life he leads, much of it behind the scenes,

or the betterment of the community.

The reason why the money, this capital,

gets allocated into consumer debt

and gets allocated into mortgage debt, is because

it has a better return than investing it in businesses,

than investing it in factories or things that make things.

And it's the simple banal calculation

that's behind all of this,

it's not some greedy Wall Street banker.

and all capitalists, are always greedy,

that's the basis of our entire system.

It's that the opportunities for investment

are different than they used to be.

And that a dollar put into credit card debt, or into

mortgage debt, makes you more than a dollar

put into a factory.

MUSIC

Most of the buildings around here had sprung up

within the last five years.

I think this building over here, they're still building,

even though there's close to 20,000 units that are either

available or are gonna be available

in a very short period of time.

And this one just sprung up not too long ago as well.

I think there is 400 units

and there's 50 people in it right now,

so it makes for a lonely existence.

In some buildings they're empty.

But what happens is that these banks, you know,

they get the financing to build these buildings and,

you know, they have to keep building.

Started the mortgage business in 2001

and started in Miami, and started working

for this company Ameriquest Mortgage.

Last year as a branch manager I made

little under1 million dollars,

nine hundred and 30 something thousand.

And most of the work that I did was refinance.

Sixty percent of it was for debt consolidation

and the other 30-40 percent was cash out.

We felt like we were helping people, you know.

We'd walk into our office and there was baskets

of flowers and fruit from people that we refinanced

that weren't able to refinance and, you know, we got 'em a loan

and now they were saving 400 or 500 dollars a month,

or you know we pulled their house out of foreclosure.

There was a lot of that we did,

so how could that not make you feel good?

At the time it seemed like win, win for everybody.

It's wonderful, it turns out, that while incomes are falling

...house prices were rising.

As the housing assets grew, and their wages remained stagnant,

people would borrow money from their houses

to make up the gap in their wages.

This fall in the share of the bottom 90 per cent

represents a transfer upwards

of roughly one and a half trillion dollars each year

to the top 1 per cent.

This enormous upward redistribution

of American income

took place in a stable democracy

with governments that were promoting this

upwards redistribution being re-elected time and time again.

It's a very interesting question of how

how was the American elite able to get away with it.

When we were doing refinancing, it was very common

to see people with 20,000 and 30,000 dollars

worth of credit card debt.

Holy smokes!

We've masked a lack of income growth

by the fact that people have been supporting

their living standards with more debt.

So what they were doing is they now had

all this equity in the properties,

so a lot of people refinanced to get rid of that debt,

to consolidate the debt.

We had, in one year alone, over 900 billion dollars

in what are called mortgage equity withdrawal,

much of that money going into consumption.

So you have roughly one and a half trillion a year going up

and roughly one trillion a year coming down

in the form of house equity refinancing.

If the American population had been receiving something

like the same income share as in the 1950s and 60s,

then they would have been able to increase

their consumption in a sustainable way

out of rising income, but that's not what happened.

The fatal flaw was the assumption

that real estate values would always go up,

and I think even a fourth grader would be able to tell you

that's impossible.

It can't happen. That's contrary to the laws of physics.

It's contrary to history,

and yet somehow everyone literally bought into that.

The problem started after a year.

"No, you cannot refinance

because the value of the house went down."

Then I hear some bell, panic.

And she told me, "You know what?

You can do a loan modification, OK?"

I say, "OK, fine. If I can do a loan modification,

what is a loan modification?"

"That where we going to go over your loan and lower

your end choice, and give you something that you can afford."

I said, "OK perfect."

When they answered me back they told me

that my loan modification was denied.

I say, "Why?" They say, "because you've been paying your mortgage

on time.

You have never been late, so it means that you have no hardship.

Don't pay your mortgage. Don't pay for two or three month

and then you apply for other colleague to do

loan modification and then we will be able to give you

the loan modification.

I said, "OK, fine."

So I take three month I didn't pay, and

I filled out the paperwork again. And guess what?

They deny.

MUSIC

Tampa, St Peterbsurg, New Orleans, Kenner, Mansfield,

Ohio, Phoenix, Messer, Scottsdale, San José, Sunnyvale,

Fresno, Columbus, Ohio, Poughkeepsie, New York,

Michigan city, Port, Indiana, New York, New Jersey,

San Francisco, Tampa, St Petersburg, Portland, Vancouver,

Dallas, Fort Worth, Arlington, Tampa, Los Angeles,

Long Beach, Riverside, New York, Cleveland, Boise City,

San Diego, Carlsbad.

Each one of these is a mortgage that is part of

a particular pool for which we have an exposure to,

or in this particular case, we've done an analysis for.

We're looking history of a borrower. And so what you see

see is this delinquency history for 12 periods.

And so there's C for current. There's three for 30 days.

There's six for 60 days and then nine is for 90 days

or more delinquent.

Then you've got FC which means the process

of foreclosure has been started.

And then you have REO which means

the process of foreclosure was completed

So C's good, you wanna see long lists of C.

You wanna see everybody that looks like that.

Where it gets bad is when you look at situations like this

where you went foreclosure, REO

and then the bank finally discharged to the home,

but they took a 193,000 dollars loss on this home

And so interesting things are you looked at

present status nine, but they started out current

and then they went through five periods of current,

and then they got 30 days delinquent,

then they basically fought back to current.

It appears that they've survived some event and then

they just went down the slippery slope and this time

they've turned the corner.

Once you're 90 days delinquent it's really tough to get back.

It's kind of a dark world because you see it happen

and it's somebody's life.

As Americans you've been taught this is one of your major stores

of value and a situation where,

you know, wages are not rising in America,

this has been one of the major methods for people to

ultimately increase their income in the middle class,

is through this house appreciation factor.

But now that that's gone, it's a devastating reality,

and so you're seeing this ripple through the economy.

MUSIC

It's a myth that people didn't see this crisis coming.

There was a lot of chatter in the industry.

Well things started to go wrong in the fall of 2006.

The so-called 'smart money' people...

You know, the definition of being a 'smart money'

kind of person or player is that you know when to get out,

and so they all thought they knew when to get out.

Sophisticated investors would negotiate for better protection.

They'd said, well I need more protection against potential

potential defaults in the portfolios,

so they get an extra 1 percent protection.

But 1 per cent extra protection was like saying to somebody,

you know, I'm gonna give you an extra life vest

to wear on the Titanic.

My safety valve in my mind when I did this,

again no one put a gun to my head, but I always thought

if the market starts to turn, I'll sell.

You started having borrowers not paying in the first month,

the second month or the third month, and there's wave

of mortgages coming back to the originators.

What triggered it was an abrupt lowering of ratings on hundreds

of sub-prime mortgage back securities.

And that struck a huge panic into the whole structural

products market.

Investors suddenly knew that the game was up.

It wasn't that they were surprised that the downgrades

had happened, but they now knew that

all of the other securities couldn't hold up either,

and knowing that they bailed out very, very quickly.

Oh yeah we were surprised at how fast

the devastation took place.

There was no time to sell. Once there's blood in the water,

everybody's running and there was just no way out.

The crisis came on us rather fast and it took fast action.

I think that the government had to prevent

a collapse in confidence.

The whole system was predicated on there being a complete gap

between the people on the ground making the loans

and the people packaging them to sell them off,

you know, through the secularisation process

on Wall Street.

So that you can have people sitting in their high rise

building on Wall Street, or wherever they were,

in their fancy offices, having no connection whatsoever,

and no regard, and not even in their imagination,

thinking about what this commodity was

that they were bundling and selling off.

They were completely severed,

and that was why this was able to go for so long.

Cause one would hope there would be some people

within that machinery that had some conscience,

and that if they understood what they were packaging

was actually translating very concretely into loans that were,

let's just be blunt, ruining people's lives.

I mean wiping out people's life savings, stealing their equity,

making people homeless, wrecking families.

I mean the devastation can't really be overstated

what it means to sort of be kind of induced

into a loan that then spins out of control

and leaves you without your home.

Do I feel any responsibility?

I think responsibility is a difficult feeling for people

in the sense that most people's participation,

other than a select few which had very, very important jobs

probably head of the rating agencies, some chief regulators,

couple of chief bankers, etc,

most of the other participants in the system I think

kind of felt like hogs in the wheel of a much larger

piece of machinery.

Mr Chairman, I agree with you in the fact that

there are a lot of people who raised issues

about problems emerging, but there are always

a lot people raising issues and half the time they're wrong.

And the question is what do you do.

I mean you point out, quite correctly, that

the Federal Reserve had as good and economic an organisation

as exists in, I would say, in the world.

If all those extraordinarily capable people were unable

to foresee the development of this critical problem,

I think we have to ask ourselves why is that.

And the answer is that we're not smart enough.

AMBIENT SOUND

My aunt had a riding stables in the Midwest

and every summer I'd go out there and work for herself.

Go on, girl.

She died 12 / 14 years ago, and there were 50 horses

to dispose of, so I thought, "Well, I have the land now,

maybe I should get horses." So that's what happened

Good girl.

I owe a lot more on this place than it's worth,

so hopefully it'll all work out and I can hang on to it,

but that's still to be determined.

My situation right now is I'm waiting for a loan modification.

I need a loan modification.

My only way out is a loan modification.

I don't want to be live free, I know I have to pay my mortgage,

I'm going to pay my mortgage.

It would be ashamed if I cannot hang on to my house.

It would be a shame.

I don't want to think about that, because

I don't think it's right because I can pay for it,

all I'm asking is the loan modification. OK.

The value of the house was too high.

The kind of mortgage I got was a bad mortgage,

so why they cannot redo my mortgage for me?

Why they are going to want me to lose my house,

or what they going to do with it?

To have, you know, achieved a measure of respect in your life,

worked hard to become a, you know, correspondent

in Washington and a famous newspaper,

and you know kind of been, in a way, a part of the establishment

And to now, you know, see yourself plunged down to being,

you know, a debtor the likes of which are being

made fun of all over the place. It's just an awful experience.

You find out you're not as strong as you thought,

you're a whole lot more foolish than you thought,

and furthermore you've lost, maybe, almost everything

that you had,

in terms of your financial assets and maybe even

in terms of your marriage.

It doesn't get much worse than that.

MUSIC

So thank you all for joining me today.

On this tour I gave you guys a lot of information.

I wanna give you guys a few takeaways, key takeaways.

People when they talk about the financial crisis,

they talk about the regulation of financial institutions,

they talk about evil people lending money

when they shouldn't, taking advantage of people,

predatory lending, but I think all those things

pale before the real crisis, which is the way in which

capital moves in the economy, and the way in which

wage and equality has caused this capital

to move so inefficiently in our economy.

What we are doing in effect is transferring money from people

who would spend it to people who don't need all that money

and don't spend it.

Record bonuses, you know, hundreds of people

getting more than 1 million dollars a year,

even when the company makes a loss.

So the problem is that when you have

growing in equality, typically your level of consumption

goes down.

In the United States, we said to those whose income

was not going anywhere, we said, "Don't worry, continue

to spend as if you're income was going up.

But the only way you do that is through debt.

But that particular model has been broken.

We need to have capitalism work for us, not work us over.

This is the real difference, right?

We need to figure out a way to make profits create jobs,

for everybody, not profits create just some wealth

for the very few.

If that's the case, then capitalism will no longer work,

because people will not stand for it.

And, what's made capitalism great for the last 500 years,

is that it's actually created better

standards of living for everyone.

The capitalism the last 30 years, has decreased

the standard of living for everyone

except those at the very top.

MUSIC