Why Did Everyone Buy This Stupid Toxic Debt? No One Understood It

Marketplace has the answer to one of the most troubling questions of our time. Why did people who are supposed to be smart buy all this stupid toxic risky debt? Apparently, it’s because they weren’t that smart, and they didn’t understand what they were buying or selling.

Hey, we thought it was just us! Turns out the Emperor was naked.

Thankfully, Marketplace has written a short one act play that explains everything. Here’s a taste…

SELLER: [sound of door opening] All right. So glad to hear the Union of Mothers and Nurses Pension Fund is keen to invest with us, Mr. Moron.

BUYER: Actually, That’s Mah-RONE.

SELLER: Oh, do pardon me.

BUYER: Happens all the time. Now, we really took a hit when Lead Paint Toyco went under, so we’d like some big, quick returns here.

SELLER: Then have I got the product for you. It’s called a reverse sub-micro-standard mortgage shadow security and — do you hold a degree in rocket science?

BUYER: Nope.

SELLER: Hmm. Well then, simply put, what we do is take semi-insured debts that’ve been sold to us from inelastic bubble markets, vertically resell, then unbundle the revenues according to Moody’s astro-logarithm.

BUYER: Astro …

SELLER: Astro-logarithm, which gives a monetized valuation that has itself been subdivided into A-3 and G-minus pumpkin patch. You following?

BUYER: Not at all!

SELLER: Great; me neither, really! This thing was invented by some eggheads we keep in a cave.

BUYER: Please, continue.

SELLER: Right. So, I think the Q-grades are dumped and leveraged upwards across 25 underplummeries? Our unicorn gives it a kick, and presto: you’ve got 300 percent annual growth.

BUYER: Now, you just said “unicorn.” There is such a thing?

SELLER: Uhhh. Kind of? Honestly, I don’t know. Don’t care!

BUYER: Well, you also said “300 percent.” So, I’m sold!

Credit Crisis Confusion: the one-act play [Marketplace] (Thanks, John!)

Comments

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  1. Marshfield says:

    That is the funniest thing I’ve read in a long time.

    Somewhat sad, too, but WELL DONE

  2. BeeBoo says:

    Taxpayers own it now.

  3. Hahaha!!

    They did it Vogon Poetry style!

    Makes about as much sense as Vogon Poetry.

  4. Brontide says:

    Um, don’t forget the ratings agencies tripping over themselves to be the first to rate this paper “AAA” investor grade. Their commission could not possibly have posed a conflict of interest.

  5. Hint: We’re Charlie

    • Ein2015 says:

      @TakingItSeriously: candy mountain charlie!

      Oh, when you’re down and looking for some cheering up
      Then just head right on up to the Candy Mountain Cave
      When you get inside you’ll find yourself a cheery land
      Such a happy, and joyful and perky merry land

      We’ve got lollipops, and gummy drops, and candy things
      Oh, so many things that will brighten up your day
      It’s impossible to wear a frown in Candy Town
      It’s the Mecca of lovely candy cave

      We’ve got jelly beans and coconuts with little hats
      Candy rats, chocolate bats, it’s a wonderland of sweets
      Ride the candy train to town hear the candy band, candy bells
      It’s a treat as they march across the land

      Cherry ribbons stream across the sky into the ground
      turn around it astounds it’s a dancing candy treat
      In the candy cave imagination runs so free
      So now Charlie please will you go into the cave!

  6. mike says:

    Even better: [docs.google.com]

    • Benny Gesserit says:

      @mike: Thank you very much.

      I’m slightly embarrassed to admit I didn’t really understand what was going on until you put it simple terms. A number of those actions (validate your own employment and buying without a down-payment for example) are, I believe, illegal in Canada.

  7. Wormfather is Wormfather says:

    [Snarky comment] from American Public Media this is Marketplace

    I love market place. I’d love to say more about how much I love that show but first…lets do the numbers.

    [wha wha horns]

    /npr geek

    • Meg Marco says:

      @Wormfather is Wormfather: I listen to Marketplace while I run, and your comment was so realistic it has made me tired.

    • MsAnthropy says:

      @Wormfather is Wormfather:

      Ugggghhh, “let’s do the numbers” irritates the hell out of me for some reason. Probably because it’s less cute the 10,000th time you hear it. As does the “We’re in the Money” bed. But that’s just me.

      Um… otherwise, I too love Marketplace. Woe betide my poor husband if he expresses a wish to listen to anything else on our evening commute home. :)

  8. Norcross says:

    I remember when I explained what a ‘credit default swap’ was to my wife (she’s very bright). her first response: “is that legal?”

    kinda sums it up

  9. pezhore says:

    I love how Steven Colbert put it on Thursday evening…

    “You see, a terrible credit disease has infected the market. Its like, um, business syphilis.”

    “Well how did that happen?”

    “Well, it started with a few slutty lenders who jumped into bed with some really sub-prime mortgages. The next thing you knew, you had a credit orgy. People were swapping derivatives. AIG was all up in Fanny Mae. Wachovia took on Golden West, then turned around and got it on with A.G. Edwards, then Citigroup had them all at once. It was a steaming pile of hot swapping assets. No one, no one knew who was bundling who, but it felt good and everybody was doing it. And in the end, lets just say, the market *blew* its liquidity.”

  10. ht9000 says:

    This is the perfect example of the phrase,”the road to hell is paved with good intentions”, not the free market’s fault or the fault of capitalism. Our politicians, especially democrats were so willing to let EVERYONE (even those with bad or no credit) reach the American dream of owning a home. They threatened the banks to abandon their common sense into lending money to risky borrowers with the help of Fannie Mae and other semiprivate agencies that the democrat refused to reform. When you distort the free market with these agencies, and the government allowing the banks to bundle the good debt with the bad debt you get a whole pile of mess that you have now. Mark to market is not helping either. And I just do not understand how can you place every private companies under the Sarbanes-Oxley act and not include Fannie Mae? The resulting melt down from cooking the books are just deserved, too bad the people responsible will never see jail time.They’re still in charge of the committees (democrats) and the executives that ran Fannie Mae to the ground are laughing all the way to the bank.

    • ht9000 says:

      @ht9000: Also, by Fannie Mae’s backing of these bad debt, investors and banks gets the false sense of security from the assumption that the government will bail them out when the shiznit hits the fan.

  11. AdvocatesDevil says:

    Yeah, like 9/11 and everything else that has happened during the 6 years the Republications completely controlled all of the government, it’s all the Democrats fault! They sure are craft, destroying the country even while the Republicans controlled everything!

    • I_Elohel says:

      @AdvocatesDevil: Really? Are we really going to point fingers and lay down on party lines? That’s what’s wrong with America today, people who blindly follow one party or the other. Your comment makes me sad, my friend.

    • BoomerFive says:

      @AdvocatesDevil: Completely controlled all of the government? Yes, of course! All those democrats that have had control of the House and Senate that have been there for 6 years are neo-secret republicans!!!

      Nancy Pelosi is the speaker of the house, she is a democrat, this means that there are more democrats in the house than republicans. Get a clue man.

    • pezhore says:

      @AdvocatesDevil:

      When you take into account that most republicans today aren’t truly classic Republican (small goverment, etc) and tend to follow more traditionally Democratic beliefs, you’re completely off mark Advocates.

    • @AdvocatesDevil: If it’s anyone’s fault it’s the fault of a) homeowners who did not read the fine print of all those forms they signed, b) shady mortgage brokers who were basically handing our mortgages they knew would blow up eventually to anyone and everyone, c) finance companies that bought up these horrible mortgages from the shady mortgage brokers without looking too closely at just what they were buying and d) investment firms who built securities based on debts which were on very shaky ground and in a market known for its volatility. The Federal Government (Democrat and Republican alike) were merely the catalysts, by not making sure there were proper safeguards in place.

    • ExGC says:

      @AdvocatesDevil: Why not just read what the NYT said about the genesis of this problem – in 1999. [query.nytimes.com]

  12. JayDeEm says:

    My next door neighbor bought 2 houses at the same time, in the same community back in 2005/2006. When things went south and he wound up underwater, he let them both go into foreclosure. The house next to me still sits empty, yet he went out and bought ANOTHER HOUSE in a different neighborhood at the current market values. Oh… and he’s also a Realtor.

    How does this sort of thing happen? What’s a person’s incentive not to walk away from a house that’s underwater and go buy another one at the new lower price? (Aside from the hassle of it all)

    • orlo says:

      @JayDeEm: Well, there used to be this strange item called a Down Payment, which is the only logical way to structure a mortgage. Then bank CEOs realized they didn’t give a crap about their banks and started offering no down payment loans. Then banks like Countrywide started paying people 10% of the house’s value to take out a mortgage. And today Congress made sure that they will get away with it.

  13. newgalactic says:

    It’s the unhinging of consequence from failed risk. If you are going to be rewarded for overcoming risk, but not held to the consequences of failed risks, there’s no reason to not act in a risky manner.

    Socialism, Communism, whatever it’s called. If there’s a problem in the markets that isn’t being addressed, then government needs to step in and fix it. We’ll call it “functionalism”.

  14. parrotuya says:

    That’s a real humdinger!

  15. sam-i-am says:

    I wasn’t stupid. I had about 5 friends buy houses about 10 seconds before the bubble burst. I told each and every one of them that they were going to lose money. I told them that everything was overvalued. To me, it seemed obvious. Look at what you could buy a house for 5 years ago and then look now, I said. I told them the market needed to revaluate itself and it wouldn’t be a good idea to buy a house for at least a couple years.

    Did they listen? No they did not. Now those 5 friends are in huge debt. Some of them with loans costing $60k more than the values of their homes. A whole new batch of friends are telling me they’re ready to buy a house. Well it’s true, there’s never been a better time to buy then now. Unless you count tomorrow, or the day after, or any day after that for at least another year. Again, I’m telling them not to buy, but they don’t listen.

    My sister tried to get me to go in with her on a screaming deal on a condo in downtown Denver about a year ago. I told her there was no way I was going to buy right now – at the top of the bubble. I showed her charts and graphs. She was very disappointed that I wouldn’t partner with her. Even my dad and brother were really disappointed. But guess who is really relieved now?

    Yea, I don’t mind saying “I told you so.”

  16. mad_oak says:

    Does anyone really want to know why this happened?

    Really?

    I could tell you if you like. If you really want to know, without all the “banks were stupid, brokers lied, borrowers were dumb”.

    Read… it won’t take long.

    It began with the repeal of the Glass-Steagall act. Don’t go all glassy eyed, you will get the meat quick.

    Glass-Steagall prevented banks and stock brokerages from being the same company. Someone had decided that allowing banks, with billions and billions on deposit, free access to the stock markets would be a bad thing, that it might lead to financial missteps.

    Back in 1999, Bill Clinton and Congressional Republicans (please don’t forget Congress was under Republican control from 1995-2000) repealed Glass-Steagall.

    Now we have banks…. with their hundreds of millions, perhaps billions of dollars worth of mortgages outstanding, slowly being repaid one month at a time, returning an acceptable though low return in the form of interest.

    Boring.

    But now banks can market securities… don’t tune out now, you haven’t heard it all. Banks can market securities, so instead of settling for the long term 8% interest and return of capital, banks can sell the whole enchilada, get a lower but immediate return and

    GET ALL THE MONEY THEY LEND BACK AS SOON AS THEY LEND IT!

    Did you read that last line, it was all capitals for a reason.

    Banks, who previously had to husband their funds, find truly worthy borrowers and lend what money they had available suddenly had all the money they had lent back in their coffers.

    And they had a willing (greedy?) market willing to buy more of these super safe, perform better than T-Bills, investments just waiting to invest more money. Even other banks were buying.

    Now, instead of waiting 30 years to get the funds back to lend again… maybe 30-90 days pass and the money is there again.

    Can’t let the money sit idle, you’ve already lent to the qualifed borrowers. The investors are hungry for more.

    So loosen up the qualifying requirements…. loosen a little more… still lending, still selling the mortgages… loosen some more… Investors don’t care, still buying… once this batch is sold we’ve got a whole pile of new money to lend.

    Limited documentation, SIVA (stated income, verified assets), SISA (stated income, stated assets), NIVA (No Income, Verified Assets), NINA (you have a pulse and a FICO score).

    Investors are still buying. Investors don’t care about the quality of the loan, they are buying. Loans that would have received 4 hours of scrutiny now get a 10 minute underwrite, and the banks are paying a bonus for each one!

    Bonus for the broker, bonus for the underwriter, the money is there!

    Just close, just sell, just get more money to make more mortgages.

    Everybody wants to place blame… I say follow the money. And no, the broker commission isn’t the money. The amount borrowed by the borrower isn’t the money. The return the bank made on selling isn’t the money (though you are getting warm). The money is the piles of cash the investors dumped on these securities. They set the rules, they set the requirements, they didn’t care because values always go up and there is no risk.

    And guess who we are bailing out, the very investors who bought and perpetrated and encouraged the very mess they are in.

    Happiness.

    • econobiker says:

      @mad_oak:

      “The money is the piles of cash the investors dumped on these securities. They set the rules, they set the requirements, they didn’t care because values always go up and there is no risk.”

      There was no risk in the banks old ways of doing things-methodical, credit worthy, and on 15 and 30 year time horizons, it is when the banks loosened up like you said above that all hell broke loose…

  17. radiochief says:

    I dunno.

    I was listening to WBZ-AM this morning. One of the 3 MA reps changed his vote from ‘No’ to ‘Yes’ yesterday. Yes, you John McTierney.

    His reason was, ‘I’ve talked to everyone in my district from CEOs to Bank Vice-Presidents and everyone on down the past few days and the panic is real…’ (This is approximately vebatim)

    Now I think, something had to be done. But I am not sure what the bill will do. But that quote just goes to show who really rules the roost. His constituents did not ask for it, CEOs and VPs did… Ugh.

    Good God, I am so tired of the mulligan these financial types are getting. How many quotes in the paper, radio, internet and TV say, “Ooooh, these things are very complicated. No one knows why it happened…” So, a CEO or some bank risk analysis person could not figure out that if you float loans to people who can not afford them, they’ll fold. Or the idiots on Wall Street who bought, packaged and sold those notes as investments.

    Why is there no $700 billion bailout for the people who took the mortgages? Frankly, in a lot ways, I’d rather see the people who took out those mortgages keep their houses by the US gov’t buying them off. Rather than huge hand outs to rich bastards and selfish speculators who fostered this disaster. Let the banks fail.

    A Democratic President and a Republican Congress get deregulation of financial services in 1998 by rolling back protections FDR put in 1938? Well, f*ck a duck!

    Wow! The Republicrats and Democrans want deregulation to ensure better services, lower prices, more access and the market will regulate themselves. Woohoo! Yah. No.

    Markets are only it in for themselves, and the way capitalism regulates itself, is by non-competing (failing) markets. No, we can’t bail out our fellow taxpayers who overstretched themselves and are destitute now. No we gotta bailout the retards who foisted this on the American Publc and made much personal wealth off of this debacle.

  18. metaslugx says:

    This is what happens when you sign something you don’t understand.

  19. Sarcastikate says:

    Sorry, but anyone who can’t put 20% down on a house has no business owning one. This is the way it was for a long time. Owning the home of your dreams is not a God-given right. Ooh, ooh…I just thought of an amazing concept called “LIVE WITHIN YOUR MEANS”. I know a lawyer who did some of these sub-prime closings. He tried to explain to these folks just what they were getting themselves into, but most didn’t want to hear it. They wanted what they wanted, that’s all. Any kid who doesn’t have the latest Wii, cell phone & iPod is humiliated. Instant gratification. Worry about paying for it later on. Maybe the hard times coming will force some folks to go back to basics. Can’t get all that credit anymore? Gee, maybe save up for something you want. Radical concept, but maybe your spoiled rotten kids would appreciate it a little more. A comeback for valuable life lessons.

  20. yankeesbaby says:

    This is what really happened. My best friend against my advice was one of those people that bought 2 houses. I saw it all go down. It’s called straw buying which she found out after the fact. They told her that someone had trouble paying their mortgage and that the house would go in her name for a few months for a $10,000 payment for her “help”. They faxed her BLANK mortgage application forms and told her to just sign all of them. Later on when she was approved for the mortgage she saw that they had filled in her income and inflated it by $5,000 and they put a $25,000 bank account on her forms which she didn’t have, to get her approved by the bank. Based on what was put on the forms by the brokers, of course she was approved. Went to a closing. Now she owns a house that she doesn’t plan to live in. The appraisal was way over the actual value of the house. When the house was sold to her, a very large check came back (I’m not very knowledgable about real estate so I don’t know where that check came from) that paid all the people that were involved. This is the root of the whole scam, this check that comes back because the house was over appraised. The appraisers, the sellers, the mortgage brokers, the lawyers, the notary, etc… all got paid from this check. So yes, predatory lending is involved but the bank probably wouldnt have approved the application if they contained the correct information, which was filled in by the mortgage and real estate brokers. They paid the mortgage for 2 months and now a year later she’s stuck with a over appraised house in a bad market. Oh yeah, her credit was in the 700’s which was why they chose her. Now it’s in the 500’s. The moral of the story kids is that there were a lot more people involved than just the bank and the buyer. And all of those people (appraisers, brokers, lawyers, etc…) got away scott free with really fat bank accounts thanks to these straw buyer deals. I personally believe these “deals” are the whole reason for the breakdown.

    • econobiker says:

      @yankeesbaby: Your friend could go to jail.

      Back in the late ’80s early ’90s, I remember this type of scam evolving out of a now -(formerly )depressed area of NJ (Asbury Park). Taking crap houses, overvaluing them for mortgages, straw buyers and then busting the difference between the value and mortgages out as illegal profit. Only difference was that those folks went to jail and the current crop probably will not…