A Sucker Born Every Minute

I still get the calls all the time: “Hello, this is John with a great new 5.1 percent mortgage interest rate,” the recording says. ” Press 1 if you want to lock it in now.”

And thus, the insanity continues.

One day they were pizza delivery guys, now they’re selling mortgages. Or at least they were, before the robots took over.

I heard an interesting radio bit recently on This American Life,  a repeat from last year, that breaks down the sub-prime mortgage crisis in plain language and human stories that sound almost too insane to be true. You hear about guys like Mike, a bartender out of Carson City Nev., who knew nothing about the industry before he began bundling mortgages for the biggest players on Wall Street. Or Glenn, who was making $75,000  - $100,000 a month bundling mortgages straight out of college. Of course, now Mike’s bank has closed and Glenn can’t pay the mortgage on his own house.

The way the show break it down, it all began in the early 2000s when this giant global pool of savings nearly doubled from $36 trillion to about $70 trillion, thanks in large part to third world countries becoming more productive. All this money needed a place to go. For years, managers had invested the savings in safe places like treasury bonds, but this changed when Alan Greenspan, one of our favorites here, declared that he planned to keep the Federal Funds Interest Rate at a paltry 1 percent. Essentially saying, as the show puts it, “Screw you, global pool of money.”

So the financial managers of all this money went out looking for other investments and found mortgage-backed securities, which looked great at the time. What’s not to like about getting a piece of the action from banks charging 9 percent interest from homeowners? As a result, this massive appetite grew for these mortgage-backed securities, putting pressure on the little guys like Mike and Glenn to go out and find new homebuyers, whether or not they had a pot to piss in. It got to the point that a lot of these guys were hocking “NINAs,” no income, no asset loans. In other words, you didn’t need anything more than a credit score and a pulse.

You’d think this would raise red flags for the more seasoned players on Wall Street, who were further packaging the mortgage-backed securities into larger instruments called Collateralized Debt Obligations, or CDOs, but the bankers, it seems, were either blinded by greed, victims of groupthink, or probably both.  One of the reasons they felt so safe was that they were looking at data that showed foreclosure rates of less than 2 percent, but the problem was that the data was historical, collected before the invention of these crazy no-interest or even negative amortization mortgages. Little did they know the foreclosure rates would reach levels of 50 percent in some regions.  Plus housing prices just kept rising, which looked good on paper, but didn’t take into account that household incomes were remaining flat. By 2006, the average house cost four times the average household income, almost twice as high as in decades past.

We all know the rest of the story. How these CDOs were rated AAA when they should have been rated B-. How when the housing prices finally flattened, and then dropped, the system almost instantly went into a freefall from which it has yet to recover. As many as half of those AAA CDOs have dropped 50 percent of their value, many worth virtually nothing.

While those Ivy League brains managing that huge pool of $70 trillion in savings thought they had found the magic bank account, they were actually throwing the funds into a furnace that burned massive amounts of money into thin air.

Now the 1 percent offered in Treasury Bills is looking pretty good. And banks won’t lend to anybody.

Yet I continue to get these calls. Must be more than a few suckers still left out there.