leading to this tragic moment in America. Main Street had emulated Wall Street; both had collaborated on a giant mortgage Ponzi scheme by exploiting the “American Dream.”
The dream was just about money in their minds, not family homes, livelihoods, or individual futures. I began to think if we as a society could develop a greater understanding that money represents human effort and energy and is not simply some inanimate thing disconnected from us, we might very well shift the system. What is a mortgage anyway? Very simply, it is thirty years of our labor. It represents somebody’s life’s work, a family home, the fruit of three decades of effort. What do we do in our homes? Eat, sleep, laugh, cry, raise children and create a life for ourselves and our loved ones. It is so much more than a paper document that is traded dozens of times. It represents each of us at the deepest level of our society. In the midst of this massive and tragic con game were ordinary folks and decent industry pros, all of whom were broadsided by the excesses of others. Housing prices plummeted and the credit markets froze, thereby affecting every consumer and every small, medium, and large business in America. And then it rippled out across the globe. No longer was this relegated to the upper levels of Wall Street and the ordinary real estate industry; now it became a cross for all of us to bear. In the fast-paced cyber-economy of the 21st century, everything we do is tied to each other directly. It was something we had failed to recognize as a society in the century before. The first time I understood this fully was on September 11, 2001. On September 15, 2008, I understood it again.
Financial reform has passed in Congress. It remains to be seen how effective this will be in averting another meltdown like the subprime mortgage crisis. Yet the financial industry is full of clever people paid to think of ways to get around laws. No matter how many reforms we enact, the thing that will save us comes more from within than without. In a society, people need laws, but they also need a moral code that determines its values. What stops most of us from murdering someone is not a law—it is a deep conviction that murder is wrong. We do not need a law to teach us that simple truth. In the global Wall Street, stretching across fifty states, small town U.S.A, the streets of London, Frankfurt, Paris, and Brussels, the cities of Europe, Asia, Australia, Africa, and Latin America, the financial markets affect modern life for billions of inhabitants. We have a duty to honor that responsibility. The moral code of the financial industry has gone off course. It has been distorted by the false belief that money is only paper to be traded or numbers on a screen to be manipulated—and not representative of human lives. We forgot ourselves in the quest for more. We forgot each other. We have been at this place before in America. We were here in the early 1800s, and again in the later part of that century. We arrived here in the Panic of 1907 and with the Crash of 1929. We repeated history once more with the Financial Crisis of 2008. With each crash, we learn something, but perhaps only to forget it when times are good. With the world connected in a way it never has been before, perhaps we can glean some lasting wisdom from our own past and present.
Profits without Purpose
“Guys were getting richer than they had ever dreamed. It was surreal. I knew at some point it had to end, but I never thought it would end like this.”
- Lehman Subprime Mortgage Trader
“So how did we get here?” I asked Jeff, the Lehman Brothers mortgage trader. “How did we go from giving people a second chance at home ownership to destroying the global economy?” As Jeff had explained in Chapter One, when the subprime mortgage product was first created, it had a genuine purpose. It provided a service to people who experienced unexpected hardship, yet had the ability to rise above their circumstances. Jeff continued: “Everyone got carried away with the amount of money there was to be made. The Street was printing money because the demand for these securities was so high. In order to meet that demand, we had to lower some of the standards for who qualified for these loans. It was not just the Street: banks were printing money; brokers were printing money; investors were printing money; and borrowers were using their homes as cash machines. Guys were getting richer than they ever dreamed. It was surreal. I knew at some point it had to end, but I never thought it would end like this. I guess no one really understood how big this had gotten. No one ever thought it would end like this.”
In the months to come, I would hear that statement from industry pros repeatedly. No one thought it would end the way it did. Another managing director who worked at Lehman for fifteen years told me: “I saw it coming due to the competitiveness. The returns were off the charts. It was money chasing money chasing money. No one knew or cared about the deals because there were investors behind investors behind investors.” Everyone involved was chasing money and going after the big bucks, yet forgot how they were making it. From Wall Street to Main Street, profits were made so fast that no one stopped to think about where they came from. Few understood the consequences of their actions would lead to a global meltdown and a threat to the American way of life. Many on Wall Street did not think the industry did anything wrong; after all, it was just making money the way it always had. Wasn’t that what it was supposed to do? Did the system function on “evil and greed,” as many ordinary Americans believed, or was there a basis of value that supported finance—a system of credit and debt that creates prosperity for hundreds of millions of people, or so Wall Street believed?
A senior executive at Bear Stearns said: “Making loans to creditworthy borrowers was one of the easiest ways to make money on Wall Street. The securitization machine became like an assembly line that produced massive amounts of bonds, which in turn produced massive profits for the industry. As long as there were borrowers who wanted loans, there was money to be made. As the market for prime mortgage loans became saturated, guys in the industry started looking for new ways to make money. The subprime markets presented that opportunity. Even though subprime loans were riskier than prime loans, the banks and Wall Street firms would not have to keep them on their books for long. This meant that they would not have to worry about the risk. Lending money to anyone who would take it regardless of their ability to service the debt became the norm.”
Risk is something that Americans understand well. It is part of our DNA. We have a love-hate relationship with it more than any other developed nation. You cannot be more of a risk taker than our founders were when they decided to overthrow the greatest military and economic power in the world. They took a risk that not only could they win a war against imperial England, but also that they could survive without the hand that fed them. (Great Britain was the main source of credit for the emerging nation before and after the Revolution.) Many of the comments in the aftermath of the financial crisis revolved around the “reckless risk taking of Wall Street.” Pundits, politicians, bloggers, journalists, and ordinary citizens fumed about the casino-like state of the mortgage markets. The battle of risk and reward dates back two centuries to Hamilton and Jefferson. The first credit crisis in America occurred in 1792 in the wake of a government bond scandal. Jefferson remarked, “The credit and fate of the nation seem to hang on the desperate throws and plunges of gambling scoundrels.”1 Some two hundred and eighteen-years later, in the spring of 2010, one senator echoed Jefferson’s words when discussing the CDO markets: “It’s gambling, pure and simple, raw gambling.”2
Nearly one hundred years ago in 1908, the Economist wrote: “The financial crisis in America is really a moral crisis, caused by the series of proofs which the American public has received that the leading financiers who control banks, trust companies and industrial corporations are often imprudent, and not seldom dishonest. They have mismanaged trust funds and used them freely for speculative purposes. Hence, the alarm of depositors, and a general collapse of credit.”3; A century later we found ourselves in the middle of yet another collapse of credit and moral dilemma. This financial crisis was no different than those before it. Profits had become more important than people once again. The industry forgot their foundation of service in the quest for profit. Who benefited from their product beyond a small group of financiers? What value did these financial instruments provide to society? Ordinary folks got wrapped up in the Street’s euphoria and took advantage of the easy money. They were the first ones to take the fall. Americans are risk takers by nature. Pioneers drove wagon trains through unknown lands facing enormous danger as they settled the West; speculators risked it all to cross the Rockies to pan for gold; immigrants,