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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.

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