"Election 2012 special event." "Tonight,Part1, "Money," "Tonight,Part1, "Money," "Power and Wall Street."" "Power and Wall Street."" "Thecloudsarestillhanging" "Thecloudsarestillhanging over the global economy, and over the global economy, and they're still filled with risk." "they're still filled with risk." "Insidetheepicstoryofthe" "Insidetheepicstoryofthe global financial crisis." "global financial crisis." "Hereweare,threeyearsplus" "Hereweare,threeyearsplus after, and very little has after, and very little has changed." "changed." "Wherewearenow ..." "Wherewearenow ..." "WallStreetgotbailedout," "WallStreetgotbailedout,  and Main Street didn't." "and Main Street didn't." "Andhowwe gothere." "Andhowwe gothere." "Let'sputtogethera" "Let'sputtogethera portfolio of credit risk." "portfolio of credit risk." "Nowthebankshavetaken" "Nowthebankshavetaken these ideas and applied them in these ideas and applied them in ways that they'd never expected." "ways that they'd never expected." "Oncetheseedwas planted," "Oncetheseedwas planted, there wasn't any stopping it." "$36billionin bonusesthis" "$36billionin bonusesthis year." "year." "Thiskindof cultofmore ," "Thiskindof cultofmore , more, more, grow, grow, grow." "more, more, grow, grow, grow." "Theeconomyis melting,the" "Theeconomyis melting,the" "Bush administration is leaving." "Bush administration is leaving." "Obama gets a real glimpse of the" "Obama gets a real glimpse of the future." "future." "Disaster is coming." "Disaster is coming." "There'srealpanicinthe" "There'srealpanicinthe marketplace." "marketplace." "Youmayhavejustmade the" "Youmayhavejustmade the decision that destroyed the decision that destroyed the world." "Thesebankstransferrisk" "Thesebankstransferrisk across the Atlantic, outside the across the Atlantic, outside the purview of American regulators." "purview of American regulators." "TheyturnintoaFrankenstein" "TheyturnintoaFrankenstein monster." "monster." "Occupyeverything!" "Occupyeverything!" "Inanelectionyear..." "Inanelectionyear..." "WallStreetgotawaywith" "WallStreetgotawaywith  bank robbery." "bank robbery." "Istheglobalfinancial" "Istheglobalfinancial system any safer?" "system any safer?" "Thiscrisisreallynever" "Thiscrisisreallynever ended." "ended." "Tonight,Part1, "Money," "Tonight,Part1, "Money," "Power and Wall Street."" "Frontlineismadepossible" "Frontlineismadepossible by contributions to your PBS by contributions to your PBS station from viewers like you." "station from viewers like you." "Thank you." "Thank you." "And by the Corporation for" "And by the Corporation for" "Public Broadcasting." "Public Broadcasting." "Major funding is provided by" "Major funding is provided by the John D. and Catherine T." "the John D. and Catherine T." "MacArthur Foundation," "MacArthur Foundation, committed to building a more committed to building a more just, verdant, and peaceful just, verdant, and peaceful world." "world." "And by Reva and David Logan," "And by Reva and David Logan, committed to investigative committed to investigative journalism as the guardian of journalism as the guardian of the public interest." "the public interest." "Additional funding is provided" "Additional funding is provided by the Park Foundation, by the Park Foundation, dedicated to heightening public dedicated to heightening public awareness of critil issues." "awareness of critil issues." "And by tFrontline Journalism" "And by tFrontline Journalism" "Fund, supporting investigative" "Fund, supporting investigative reporting and enterprise reporting and enterprise journalism." "NARRATOR:" "Everydaytensof" "NARRATOR:" "Everydaytensof thousands of workers make their thousands of workers make their way to Wall Street." "way to Wall Street." "They work for banks, brokerages," "They work for banks, brokerages, hedge funds, insurance companies hedge funds, insurance companies and mortgage lenders." "and mortgage lenders." "It is the largest single sector" "It is the largest single sector of the American economy-- an of the American economy-- an industry that is almost double industry that is almost double the size of America's the size of America's manufacturing sector; a" "manufacturing sector; a business with enormous power business with enormous power and global reach." "and global reach." "It is the industry that led" "It is the industry that led" "America and the world into its" "America and the world into its worst economic crisis since the worst economic crisis since the" "Great Depression." "The banks say they exist to" "The banks say they exist to create wealth-- holding in trust create wealth-- holding in trust our collective worth, promising our collective worth, promising to invest the trillions of to invest the trillions of dollars that stream in from" "dollars that stream in from businesses, pension funds and businesses, pension funds and savings accounts that belong to savings accounts that belong to all of us." "all of us." "One morning in the fall of 2011," "One morning in the fall of 2011, bankers arriving in Lower bankers arriving in Lower" "Manhattan were caught by" "Manhattan were caught by surprise." "surprise." "Thisiswhatdemocracylooks" "Thisiswhatdemocracylooks like." "like." "Thebanksgotbailedout, we" "Thebanksgotbailedout, we got sold out!" "got sold out!" "Onthesidewalk." "Onthesidewalk." "Must go on the sidewalk." "Must go on the sidewalk." "NARRATOR:" "Therecessionhad" "NARRATOR:" "Therecessionhad  destroyed $11 trillion of destroyed $11 trillion of" "Americans' net worth." "Americans' net worth." "A recovery seemed far off." "A recovery seemed far off." "Occupy Wall Street wanted" "Occupy Wall Street wanted bankers held responsible." "bankers held responsible." "MostAmericansthink,and" "MostAmericansthink,and  with good reason, that Wall with good reason, that Wall" "Street got bailed out and Main" "Street got bailed out and Main" "Street didn't." "Street didn't." "We have very high unemployment." "We have very high unemployment." "We lost 8.5 million jobs in the" "We lost 8.5 million jobs in the recession." "recession." "People's houses aren't worth" "People's houses aren't worth what they paid for them." "what they paid for them." "A lot of 'em don't have jobs." "A lot of 'em don't have jobs." "Their kids are graduating from" "Their kids are graduating from college and are moving back in." "college and are moving back in." "Thisiswhatdemocracylooks" "Thisiswhatdemocracylooks like." "like." "We got sold out!" "We got sold out!" "NARRATOR:" "Someprotestorsare" "NARRATOR:" "Someprotestorsare  calling for bankers to be calling for bankers to be prosecuted." "prosecuted." "Itisprettyclear," "Itisprettyclear, actually, that there was massive actually, that there was massive illegality going on." "illegality going on." "And if somebody with subpoena" "And if somebody with subpoena power was intent on prosecuting power was intent on prosecuting that, I don't think there's that, I don't think there's really much doubt that they really much doubt that they" "would be quite successful in would be quite successful in criminal prosecutions." "criminal prosecutions." "Wearethe99% ." "Wearethe99% ." "We are the 99%." "We are the 99%." "NARRATOR:" "Inamatterof" "NARRATOR:" "Inamatterof weeks, Occupy demonstrations weeks, Occupy demonstrations spread to scores of cities spread to scores of cities across America and the world across America and the world calling for radical changes in calling for radical changes in" "the banking system." "the banking system." "Wearethe99percent." "Wearethe99percent." "NARRATOR:" "Bankersresponded" "NARRATOR:" "Bankersresponded by saying that the answer is to by saying that the answer is to move on and get back to move on and get back to business." "business." "Someofourcompaniesmade a" "Someofourcompaniesmade a series of bad mistakes." "series of bad mistakes." "And-and-and we all paid for 'em" "And-and-and we all paid for 'em including... and-and it lead to including... and-and it lead to the economic crisis." "the economic crisis." "MARTINSMITH:" "Butwhatmakes" "MARTINSMITH:" "Butwhatmakes people upset is that..." "I mean, people upset is that..." "I mean, you know, a lot of the people you know, a lot of the people that are on the streets that are on the streets demonstrating, Occupy Wall demonstrating, Occupy Wall" "Street, is that the economy" "Street, is that the economy hasn't recovered but banks have." "hasn't recovered but banks have." "Ifyouwantastronger" "Ifyouwantastronger economy you have to have economy you have to have financial services companies financial services companies that are safe, and sound, and that are safe, and sound, and able to lend and able to finance" "able to lend and able to finance their customers." "their customers." "Now if you wanna have a" "Now if you wanna have a recession then go ahead and- recession then go ahead and- and-and hammer the banks." "and-and hammer the banks." "And, you know, make sure that" "And, you know, make sure that they're... that they fail." "they're... that they fail." "Because then you'll have another" "Because then you'll have another recession." "recession." "Doyouunderstandwhy they're" "Doyouunderstandwhy they're angry?" "angry?" "Do you have any comment?" "Do you have any comment?" "Mr. Blankfein, can we ask you" "Mr. Blankfein, can we ask you a question, sir?" "a question, sir?" "Can you give the American people" "Can you give the American people an accounting of how you spent an accounting of how you spent their money?" "their money?" "Do you understand why it is that" "Do you understand why it is that they are angry at bankers?" "they are angry at bankers?" "Do you have any regrets about" "Do you have any regrets about the way you spent the taxpayers the way you spent the taxpayers money?" "money?" "Absolutelynot." "Absolutelynot." "NARRATOR:" "Sincethemeltdown" "NARRATOR:" "Sincethemeltdown of 2008, there have been dozens of 2008, there have been dozens of hearings." "of hearings." "Andweregretthatpeople" "Andweregretthatpeople have lost money." "have lost money." "And whatever we did, whatever" "And whatever we did, whatever the standards of the time were, the standards of the time were, it didn't work out well." "it didn't work out well." "Iwouldliketoaskyour" "Iwouldliketoaskyour opinion of the role that over- opinion of the role that over- the-counter derivatives the-counter derivatives played... played..." "NARRATOR:" "Manyquestions" "NARRATOR:" "Manyquestions have been asked... have been asked incontributingto the ...incontributingto the financial crisis." "financial crisis." "NARRATOR:...buttherehave" "NARRATOR:...buttherehave been few satisfying answers." "been few satisfying answers." "Whatgoeson at WallStreet" "Whatgoeson at WallStreet and exactly what caused the and exactly what caused the crisis and how did we get where crisis and how did we get where we are, it's difficult to we are, it's difficult to" "understand even for understand even for professionals, professionals," "I'mnotsureIunderstand" "I'mnotsureIunderstand that point." "that point." "Maybe you could elaborate." "Maybe you could elaborate." "Well,I thinkit 's,in many" "Well,I thinkit 's,in many ways it is very simple." "ways it is very simple." "I think our regulators and the" "I think our regulators and the industry have to focus on industry have to focus on complexity." "complexity." "Butattheend oftheday," "Butattheend oftheday, people usually have a pretty people usually have a pretty good ability to tell when good ability to tell when something's wrong." "something's wrong." "Somehowwejustmissedthat" "Somehowwejustmissedthat  home prices don't go up forever." "home prices don't go up forever." "WhatisasyntheticCDO?" "WhatisasyntheticCDO?" "ACDOis apoolofassets..." "ACDOis apoolofassets..." "Ithinkfinancemay have" "Ithinkfinancemay have gotten too complicated for gotten too complicated for anyone to understand, anyone to understand," "Thatarepooledtogetherand" "Thatarepooledtogetherand then can be sliced." "then can be sliced." "In a synthetic you pool" "In a synthetic you pool reference securities that are reference securities that are indexed to specific more... indexed to specific more... pools of mortgages." "pools of mortgages." "Andthatthemanagersof" "Andthatthemanagersof these large financial these large financial institutions in some ways have institutions in some ways have been given an impossible task been given an impossible task that they won't be able to that they won't be able to" "comprehend what it is their comprehend what it is their institutions are doing." "institutions are doing." "And that is really, really" "And that is really, really scary." "scary." "Youcreatedthemesswe're" "Youcreatedthemesswe're in." "in." "And now you're saying, "Sorry." "And now you're saying, "Sorry." "Trust us."" "Trust us."" "You created CDOs, you created" "You created CDOs, you created credit default swaps that never credit default swaps that never existed a few years ago." "existed a few years ago." "Who was the brilliant person who" "Who was the brilliant person who came and said, "Let's do credit came and said, "Let's do credit default swaps"?" "default swaps"?" "Find him." "Find him." "Fire him." "NARRATOR:" "It'shardto" "NARRATOR:" "It'shardto pinpoint the origins of pinpoint the origins of" "America's financial crisis." "America's financial crisis." "But one weekend at this resort" "But one weekend at this resort in Boca Raton, Florida, is a in Boca Raton, Florida, is a good place to start." "good place to start." "Assembled here in June 1994 were" "Assembled here in June 1994 were a group of young bankers from a group of young bankers from" "J.P. Morgan." "J.P. Morgan." "At the time it all seemed" "At the time it all seemed innocent enough." "innocent enough." "BocaRatonwasagatheringof" "BocaRatonwasagatheringof people that were part of the people that were part of the" "Global Derivative Group at J.P." "Global Derivative Group at J.P." "Morgan, in part as a" "Morgan, in part as a celebration, in part as an celebration, in part as an opportunity to relax." "opportunity to relax." "But perhaps much more" "But perhaps much more importantly, as an opportunity importantly, as an opportunity to get creative, innovative to get creative, innovative people together in a room to people together in a room to discuss a whole variety of" "discuss a whole variety of different topics." "different topics." "Andsincetheywereyoung," "Andsincetheywereyoung, mostly in their 20s, and sce mostly in their 20s, and sce there was plenty of money there was plenty of money floating around and they were floating around and they were full of high spirits, they did" "full of high spirits, they did what any young bunch of kids what any young bunch of kids would do and they got drunk, would do and they got drunk, they had parties, they threw they had parties, they threw" "each other in pools-- you know each other in pools-- you know this is the normal stuff that this is the normal stuff that happens at conferences." "happens at conferences." "Yes,I wentintothe pool" "Yes,I wentintothe pool fully clothed, as did my boss." "fully clothed, as did my boss." "Some people drank, some people" "Some people drank, some people didn't." "didn't." "And I'm happy to say that, like," "And I'm happy to say that, like, most people stayed reasonably most people stayed reasonably sober." "sober." "NARRATOR:" "Theyplayedhard" "NARRATOR:" "Theyplayedhard but they also worked hard." "but they also worked hard." "They were striving to address an" "They were striving to address an age-old problem in banking: how age-old problem in banking: how to reduce risk." "to reduce risk." "Thedefiningproblemwas that" "Thedefiningproblemwas that banks were unable to adequately banks were unable to adequately deal with their own credit deal with their own credit risks." "risks." "We'rethinkingabouthow to" "We'rethinkingabouthow to manage risk." "manage risk." "We were thoughtful and" "We were thoughtful and deliberate and careful." "deliberate and careful." "We had a responsibility not" "We had a responsibility not just to make a profit for the just to make a profit for the shareholders, but to look after shareholders, but to look after the financial system as a whole." "the financial system as a whole." "NARRATOR:" "Overtwodaysof" "NARRATOR:" "Overtwodaysof meetings, they looked at whether meetings, they looked at whether they could find a way to make they could find a way to make their loans less risky." "their loans less risky." "The first journalist to tell the" "The first journalist to tell the full story was Gillian Tett." "full story was Gillian Tett." "Theybeganto lookfor ways" "Theybeganto lookfor ways to enable financial institutions to enable financial institutions to pass risk between them." "to pass risk between them." "One way to do that was to sell" "One way to do that was to sell loans." "loans." "Another way, though, was to" "Another way, though, was to separate out the risk of a loan separate out the risk of a loan going bad from the loan itself." "going bad from the loan itself." "And out of that came this drive" "And out of that came this drive to develop credit default swaps." "to develop credit default swaps." "(shouting)" "(shouting)" "NARRATOR:" "Creditdefault" "NARRATOR:" "Creditdefault swaps, a kind of derivative swaps, a kind of derivative that insures a loan against that insures a loan against default." "default." "This was a very new concept." "This was a very new concept." "Traditionally derivatives were a" "Traditionally derivatives were a way to bet on the future value way to bet on the future value of something." "of something." "For hundreds of years, farmers" "For hundreds of years, farmers have traded derivatives to have traded derivatives to protect themselves against protect themselves against fluctuating crop prices." "fluctuating crop prices." "It is this type of derivative" "It is this type of derivative that has been traded on the that has been traded on the commodities exchange in Chicago, commodities exchange in Chicago, along with the futures of fuels, along with the futures of fuels," "currencies and precious metals." "currencies and precious metals." "In Boca Raton, the J.P. Morgan" "In Boca Raton, the J.P. Morgan team realized that they could team realized that they could use credit derivatives to trade use credit derivatives to trade their loan risks." "their loan risks." "Bankersborrowedoneset of" "Bankersborrowedoneset of ideas that had been developed in ideas that had been developed in the commodities market and the commodities market and applied it to loans for the applied it to loans for the first time." "first time." "This idea was essentially" "This idea was essentially created under the banner of created under the banner of making the financial system making the financial system safer." "safer." "NARRATOR:" "Thefirstbig" "NARRATOR:" "Thefirstbig  credit default swap was credit default swap was engineered by Blythe Masters and engineered by Blythe Masters and involved Exxon." "involved Exxon." "Exxonwastheclientatthe" "Exxonwastheclientatthe bank and we had credit exposure bank and we had credit exposure associated with that associated with that relationship." "relationship." "TheExxonValdspewed" "TheExxonValdspewed almost 11 million gallons of oil almost 11 million gallons of oil into Prince William Sound." "into Prince William Sound." "NARRATOR:" "Inthewakeofthe" "NARRATOR:" "Inthewakeofthe" "Exxon Valdez oil spill and a" "Exxon Valdez oil spill and a rash of lawsuits, rash of lawsuits," "Aciviltrial..." "Aciviltrial..." "Returneda five-count" "Returneda five-count indictment... indictment..." "NARRATOR:" "Exxontookout a" "NARRATOR:" "Exxontookout a multi-billion dollar letter of multi-billion dollar letter of credit with J.P. Morgan." "credit with J.P. Morgan." "Aletterof creditcreates" "Aletterof creditcreates credit risk." "credit risk." "If Exxon were to fail on their" "If Exxon were to fail on their obligations, then J. P. Morgan obligations, then J. P. Morgan would have to step in and make would have to step in and make good on those obligations on good on those obligations on" "their behalf." "their behalf." "It was a large amount of" "It was a large amount of exposure, and there was a exposure, and there was a significant amount of risk significant amount of risk associated with that." "associated with that." "NARRATOR:" "Andthatriskisa" "NARRATOR:" "Andthatriskisa big drain on a bank." "big drain on a bank." "Everytimeabankmakesa" "Everytimeabankmakesa loan, under banking regulations, loan, under banking regulations, they're required to set aside they're required to set aside certain reserves of capital for certain reserves of capital for the loan." "the loan." "So J.P. Morgan, when they made" "So J.P. Morgan, when they made the loan to Exxon, would have the loan to Exxon, would have had to set aside some capital." "had to set aside some capital." "J.P.Morganhastohold" "J.P.Morganhastohold  certain capital relative to the certain capital relative to the size of that loan in the event size of that loan in the event the loan is not paid off at the loan is not paid off at" "100% as you expect." "100% as you expect." "Well, of course if you don't" "Well, of course if you don't have to do that and you're a have to do that and you're a bank, you'd prefer not to bank, you'd prefer not to do that." "do that." "SMITH:" "Becausethenyou can" "SMITH:" "Becausethenyou can  finance more freely, you can finance more freely, you can take on more debt?" "take on more debt?" "Right." "Right." "NARRATOR:" "SoMastersstarted" "NARRATOR:" "SoMastersstarted looking at who could take on looking at who could take on their loan risk and free up J.P." "their loan risk and free up J.P." "Morgan's capital." "Morgan's capital." "She found a taker in London" "She found a taker in London-- the European Bank for the European Bank for" "Reconstruction and Development." "Reconstruction and Development." "The EBRD." "The EBRD." "EBRDwouldreceive" "EBRDwouldreceive compensation from J.P. Morgan compensation from J.P. Morgan for taking on or assuming credit for taking on or assuming credit risk and felt that that was a risk and felt that that was a good risk/reward proposition." "good risk/reward proposition." "And so risk was essentially" "And so risk was essentially dispersed." "dispersed." "And why did J.P. Morgan do that?" "And why did J.P. Morgan do that?" "Because we wanted to free up our" "Because we wanted to free up our capacity to do more business." "capacity to do more business." "NARRATOR:" "Thiswasamajor" "NARRATOR:" "Thiswasamajor financial innovation." "financial innovation." "Credit derivatives made it" "Credit derivatives made it possible for a bank to skirt possible for a bank to skirt capital requirements." "capital requirements." "Andthat'swhatactually" "Andthat'swhatactually happened." "happened." "Is the amount of capital that" "Is the amount of capital that banks had to hold got less." "banks had to hold got less." "And so banks became able to" "And so banks became able to create more and more credit." "create more and more credit." "They could make more loans." "They could make more loans." "Theinnovativeelementof" "Theinnovativeelementof swaps is that they allow swaps is that they allow companies, financial companies, financial institutions, governments, to institutions, governments, to shed the risks that they don't shed the risks that they don't" "want to take and take on other want to take and take on other risks that they would prefer to risks that they would prefer to be exposed to." "be exposed to." "NARRATOR:" "TheExxondealwas" "NARRATOR:" "TheExxondealwas just the beginning." "just the beginning." "Demonstrating that risk could be" "Demonstrating that risk could be offloaded and capital freed up." "offloaded and capital freed up." "J.P. Morgan had struck gold." "J.P. Morgan had struck gold." "In 1998, they decided to ramp up" "In 1998, they decided to ramp up their credit derivatives their credit derivatives operation." "operation." "That year, another young banker" "That year, another young banker joined the team, Terri Duhon." "joined the team, Terri Duhon." "Partofmy jobwas tocome in" "Partofmy jobwas tocome in as a trader and to build a as a trader and to build a credit derivative trading book, credit derivative trading book, including all the risk including all the risk management around the more" "management around the more exotic products." "exotic products." "That was what I was brought in" "That was what I was brought in to do." "to do." "NARRATOR:" "PreviouslyJ.P." "NARRATOR:" "PreviouslyJ.P." "Morgan had written credit swaps" "Morgan had written credit swaps on single companies like Exxon." "on single companies like Exxon." "Duhon was asked to write swaps" "Duhon was asked to write swaps on bundles of debt." "on bundles of debt." "Theideawaslet 'sput" "Theideawaslet 'sput  together a portfolio of credit together a portfolio of credit risk." "risk." "A portfolio of names." "A portfolio of names." "NARRATOR:" "Herfirsttradewas" "NARRATOR:" "Herfirsttradewas a credit default swap on 306 a credit default swap on 306 corporate names on J.P." "corporate names on J.P." "Morgan's books." "Morgan's books." "Andthatlistof306" "Andthatlistof306 entities, they were very highly entities, they were very highly rated." "rated." "They had very low credit risk." "They had very low credit risk." "SMITH:" "Andthecreditdefault" "SMITH:" "Andthecreditdefault swap was ensuring J.P. Morgan swap was ensuring J.P. Morgan against default by those 306 against default by those 306 entities." "entities." "That'scorrect." "That'scorrect." "SMITH:" "Manyof themFortune" "SMITH:" "Manyof themFortune 500 companies or other... 500 companies or other..." "Itwouldhavebeenyour ..." "Itwouldhavebeenyour ... some of your most well-known some of your most well-known household names." "household names." "And so we were giving investors" "And so we were giving investors an opportunity to, in effect, an opportunity to, in effect, invest in our loan portfolio." "invest in our loan portfolio." "J.P.Morgandidalotof" "J.P.Morgandidalotof work, did a lot of due work, did a lot of due diligence to assemble this diligence to assemble this portfolio of loans." "portfolio of loans." "And you can get it in one easy," "And you can get it in one easy, bite-size piece." "bite-size piece." "NARRATOR:" "Andthebank" "NARRATOR:" "Andthebank facilitated this by slicing up facilitated this by slicing up the portfolio into different the portfolio into different risk levels, or tranches." "risk levels, or tranches." "Investors could choose how much" "Investors could choose how much risk they were willing to take." "risk they were willing to take." "Differentinvestorswanted" "Differentinvestorswanted different levels of risk." "different levels of risk." "There were some investors that" "There were some investors that wanted to earn a big return on wanted to earn a big return on really risky stuff." "really risky stuff." "And there were some investors" "And there were some investors that wanted to earn a little that wanted to earn a little return on stuff that wasn't return on stuff that wasn't risky at all." "risky at all." "NARRATOR:" "Fromthere,the" "NARRATOR:" "Fromthere,the  bank looked to expand their bank looked to expand their business even further." "business even further." "Soalongcomesthisidea" "Soalongcomesthisidea-- what if we could create a market what if we could create a market where people were able to buy where people were able to buy and sell freely, independently and sell freely, independently" "of the companies themselves, the of the companies themselves, the risk associated with lending to risk associated with lending to those companies." "those companies." "NARRATOR:" "Andso theybegan" "NARRATOR:" "Andso theybegan selling derivatives that were selling derivatives that were simply bets on any and all simply bets on any and all portfolios, whether the bank portfolios, whether the bank owned them or not." "owned them or not." "These products came to be known" "These products came to be known as synthetic collateralized debt as synthetic collateralized debt obligations-- synthetic CDOs." "obligations-- synthetic CDOs." "Therewereinvestorswho were" "Therewereinvestorswho were able to invest in some entities able to invest in some entities that they had not had access to that they had not had access to before." "before." "SMITH:" "Bybuyingacredit" "SMITH:" "Bybuyingacredit default swap." "default swap." "Byinvestingin acredit" "Byinvestingin acredit default swap because it was a default swap because it was a name that they hadn't previously name that they hadn't previously had access to." "had access to." "So there was a lot of... a lot" "So there was a lot of... a lot of very positive reinforcement of very positive reinforcement of the market." "of the market." "And it just grew." "And it just grew." "It grew very naturally." "It grew very naturally." "Once the seed was planted there" "Once the seed was planted there wasn't any stopping it." "wasn't any stopping it." "NARRATOR:" "Itwasthe" "NARRATOR:" "Itwasthe  beginning of an unfettered brave beginning of an unfettered brave new world of banking." "new world of banking." "SMITH:" "Thiswasprettynew" "SMITH:" "Thiswasprettynew stuff." "stuff." "Thiswas..." "Thiswas... (laughs)" "(laughs)" "This was incredibly new stuff." "This was incredibly new stuff." "It was amazing." "It was amazing." "It was clearly a product that" "It was clearly a product that was in need." "was in need." "We had identified a need." "We had identified a need." "NARRATOR:" "Mostof themembers" "NARRATOR:" "Mostof themembers of the Global Derivatives Group of the Global Derivatives Group at J.P. Morgan were in their at J.P. Morgan were in their" "20s, including Masters and 20s, including Masters and" "Duhon, but with the creation of" "Duhon, but with the creation of the credit default swap market, the credit default swap market, they had made banking history." "they had made banking history." "Whatinthelongrunthisall" "Whatinthelongrunthisall meant was that credit, which is meant was that credit, which is a vital part of the lifeblood of a vital part of the lifeblood of any economy, the global economy," "any economy, the global economy, became a more readily available became a more readily available asset." "asset." "And the thinking was that that" "And the thinking was that that would be an unambiguously would be an unambiguously positive thing." "positive thing." "Credit helps drive growth, helps" "Credit helps drive growth, helps companies deploy capital, helps companies deploy capital, helps employment, et cetera." "employment, et cetera." "It wasn't any longer just an" "It wasn't any longer just an idea in a room in Florida, it idea in a room in Florida, it was the creation of an entire was the creation of an entire marketplace." "NARRATOR:" "Riskcouldnow be" "NARRATOR:" "Riskcouldnow be easily traded." "easily traded." "It fueled a worldwide credit" "It fueled a worldwide credit boom." "boom." "Soon other banks got excited" "Soon other banks got excited about the money to be made about the money to be made writing credit derivatives." "writing credit derivatives." "Paul LeBlanc was a derivative" "Paul LeBlanc was a derivative salesman at Morgan Stanley who salesman at Morgan Stanley who remembers the pressure to geton." "remembers the pressure to geton." "Thevolumeof transactions" "Thevolumeof transactions was just exploding." "was just exploding." "I mean, I used to know all the" "I mean, I used to know all the statistics, because they used to statistics, because they used to talk about it every meeting, how talk about it every meeting, how this is a growing market." "this is a growing market." "You have to get your customers" "You have to get your customers involved." "involved." "They can make money." "They can make money." "We can make money." "We can make money." "It was a massively important" "It was a massively important sector for us to focus on, sector for us to focus on, derivatives." "derivatives." "NARRATOR:" "Andimportantlyit" "NARRATOR:" "Andimportantlyit was a private market-- was a private market-- unregulated and out of view." "unregulated and out of view." "See,unlikean" "See,unlikean  exchange-traded market where all exchange-traded market where all the banks can see all the the banks can see all the positions there's no public positions there's no public market for these derivatives." "market for these derivatives." "You can't look in the newspapers" "You can't look in the newspapers and get a price for them." "and get a price for them." "These are all private," "These are all private, off-exchange markets." "off-exchange markets." "And nobody else in the market" "And nobody else in the market knows what's going on." "knows what's going on." "NARRATOR:" "Andbecausethis" "NARRATOR:" "Andbecausethis market was opaque, the market was opaque, the spreads-- the difference spreads-- the difference between what banks could charge between what banks could charge for derivatives and what it cost for derivatives and what it cost" "to provide them-- could be huge." "to provide them-- could be huge." "SMITH:" "Howmuchwerethese" "SMITH:" "Howmuchwerethese things making for the bankers things making for the bankers that were selling them?" "that were selling them?" "Thespreadson derivatives" "Thespreadson derivatives are several times larger than on are several times larger than on comparable cash securities, just comparable cash securities, just as a general rule." "as a general rule." "And that's why the banks trade" "And that's why the banks trade them." "them." "SMITH:" "Cashsecuritiesbeing" "SMITH:" "Cashsecuritiesbeing those that are... those that are..." "Equities,bonds." "Equities,bonds." "SMITH:" "Wellpaintsome" "SMITH:" "Wellpaintsome picture of that and the kind of picture of that and the kind of money that people were making." "money that people were making." "Thebestreferencethatyou" "Thebestreferencethatyou could give is that if you look could give is that if you look at, say, the spread that a bank at, say, the spread that a bank might earn doing an IPO for" "might earn doing an IPO for" "Facebook, they're gonna maybe" "Facebook, they're gonna maybe make one percent to bring out make one percent to bring out that IPO, very hot IPO." "that IPO, very hot IPO." "If you were doing the same-sized" "If you were doing the same-sized deal in a derivative security, deal in a derivative security, you might make ten times the you might make ten times the fee." "fee." "Andthebasicbusinessthat" "Andthebasicbusinessthat  they created was immensely they created was immensely profitable." "profitable." "But there's a problem with all" "But there's a problem with all of this." "of this." "Most people in finance assume" "Most people in finance assume risk can be eliminated; but all risk can be eliminated; but all you can do is to move it around you can do is to move it around from one party to another party." "NARRATOR:" "Therewasgrowing" "NARRATOR:" "Therewasgrowing concern in Washington." "concern in Washington." "Wearemovingtowardsgreater" "Wearemovingtowardsgreater risk." "risk." "We must do something to address" "We must do something to address the regulation of hedge funds the regulation of hedge funds and especially derivatives in and especially derivatives in this country-- $33 trillion, a this country-- $33 trillion, a substantial amount of it held" "substantial amount of it held by the 25 largest banks in this by the 25 largest banks in this country, a substantial amount country, a substantial amount being traded in proprietary being traded in proprietary accounts of those banks." "accounts of those banks." "That kind of risk overhanging" "That kind of risk overhanging the financial institutions of the financial institutions of this country one day, with a this country one day, with a thud, will wake everyone up." "thud, will wake everyone up." "NARRATOR:" "Proposals" "NARRATOR:" "Proposals circulated to rein in the banks circulated to rein in the banks and to regulate derivatives." "and to regulate derivatives." "Whatareyoutryingto" "Whatareyoutryingto protect?" "protect?" "We'retryingto protectthe" "We'retryingto protectthe  money of the American public, money of the American public, which is at risk in these which is at risk in these markets." "markets." "NARRATOR:" "Theheadofthe" "NARRATOR:" "Theheadofthe" "Commodity Futures Trading" "Commodity Futures Trading" "Commission, Brooksley Born, led" "Commission, Brooksley Born, led the charge." "the charge." "Wearetheregulatorwhich" "Wearetheregulatorwhich has been given the authority to has been given the authority to oversee the major derivatives oversee the major derivatives markets." "markets." "BrooksleyBornwasabsolutely" "BrooksleyBornwasabsolutely right because what she said is, right because what she said is," ""If you don't have transparency" ""If you don't have transparency and regulation of derivatives, and regulation of derivatives, the risk is gonna build up and the risk is gonna build up and they're gonna lead to a they're gonna lead to a" "financial crisis that's gonna financial crisis that's gonna cause massive taxpayer cause massive taxpayer bailouts."" "bailouts."" "NARRATOR:" "Thebankslobbied" "NARRATOR:" "Thebankslobbied hard for no derivative hard for no derivative regulation." "regulation." "Thebanksdidn'twantanyone" "Thebanksdidn'twantanyone to know how much risk they were to know how much risk they were taking on." "taking on." "They didn't want to have to" "They didn't want to have to quantify it on their balance quantify it on their balance sheet." "sheet." "They wanted to be able to push" "They wanted to be able to push it off and hide it, and that was it off and hide it, and that was why they lobbied so hard to make why they lobbied so hard to make sure that swaps and derivatives" "sure that swaps and derivatives would be treated differently would be treated differently from other kinds of financial from other kinds of financial products." "products." "NARRATOR:" "Otherswantedthem" "NARRATOR:" "Otherswantedthem to be regulated like insurance." "to be regulated like insurance." "Oneofthemostheavily" "Oneofthemostheavily regulated products in the regulated products in the country are insurance products, country are insurance products, for all the obvious reasons." "for all the obvious reasons." "If you're gonna... if you're" "If you're gonna... if you're gonna write insurance, you have gonna write insurance, you have to have enough money to pay off to have enough money to pay off that insurance." "that insurance." "SMITH:" "Butif youwritea" "SMITH:" "Butif youwritea credit default swap, you don't credit default swap, you don't have to have that same amount of have to have that same amount of money on hand?" "money on hand?" "Oranythingelse,including," "Oranythingelse,including, importantly, no disclosure." "importantly, no disclosure." "SMITH:" "Soyou'resayingit's" "SMITH:" "Soyou'resayingit's  a kind of under-the-table a kind of under-the-table insurance agreement that avoids insurance agreement that avoids regulation?" "regulation?" "It'saninsuranceproduct" "It'saninsuranceproduct designed not to be regulated as designed not to be regulated as an insurance product and an insurance product and designed to avoid regulation at designed to avoid regulation at all." "all." "And one thing we do know is that" "And one thing we do know is that when a product of any type is when a product of any type is designed with minimal designed with minimal regulation, capital and activity regulation, capital and activity moves into that area." "moves into that area." "And it expands dramatically." "And it expands dramatically." "Regulationofderivatives" "Regulationofderivatives transactions that are privately transactions that are privately negotiated by professionals is negotiated by professionals is unnecessary." "unnecessary." "NARRATOR:" "Thechairmanofthe" "NARRATOR:" "Thechairmanofthe" "Fed, Alan Greenspan, sided with" "Fed, Alan Greenspan, sided with the banks." "the banks." "AlanGreenspanwascoming" "AlanGreenspanwascoming from a very libertarian from a very libertarian tradition." "tradition." "Keep your hands off everything." "Keep your hands off everything." "The markets will sort themselves" "The markets will sort themselves out." "out." "And if there's a problem, then" "And if there's a problem, then we'll clean up afterwards." "we'll clean up afterwards." "And now that really was the way" "And now that really was the way the Federal Reserve operated the Federal Reserve operated under his leadership for almost under his leadership for almost" "20 years." "20 years." "NARRATOR:" "OnCapitolHill," "NARRATOR:" "OnCapitolHill, supporters of bank deregulation supporters of bank deregulation made urgent, stark pleas." "made urgent, stark pleas." "Thefutureof America's" "Thefutureof America's dominance as the financial dominance as the financial center of the world is at stake." "center of the world is at stake." "NARRATOR:" "Beforethemwas" "NARRATOR:" "Beforethemwas  legislation to lift limits on legislation to lift limits on how banks could do business." "how banks could do business." "..ifwedidn'tpassthis" "..ifwedidn'tpassthis  bill, we could find London or bill, we could find London or" "Frankfurt or Shanghai becoming" "Frankfurt or Shanghai becoming the financial capital of the the financial capital of the world." "world." "Thisbillis goingtomake" "Thisbillis goingtomake" "America more competitive on the" "America more competitive on the world market and that's world market and that's important... important..." "NARRATOR:" "Andlegislationto" "NARRATOR:" "Andlegislationto prevent oversight of credit prevent oversight of credit derivatives." "derivatives." "...onhigh-payingjobs,not  ...onhigh-payingjobs,not  just on Wall Street in New York just on Wall Street in New York" "City, but it affects every" "City, but it affects every business in America and it business in America and it benefits every consumer in benefits every consumer in" "America." "America." "And we do it by repealing" "And we do it by repealing" "Glass-Steagall." "Glass-Steagall." "NARRATOR:" "Thecampaignto" "NARRATOR:" "Thecampaignto roll back Glass-Steagall, a roll back Glass-Steagall, a" "Depression-era set of reforms" "Depression-era set of reforms was led by the country's biggest was led by the country's biggest bank, Citicorp." "bank, Citicorp." "Theyfeltit wasintheir" "Theyfeltit wasintheir way and persuaded lawmakers, way and persuaded lawmakers, both Democratic and publican, both Democratic and publican, that Glass-Steagall should be that Glass-Steagall should be repealed." "repealed." "It also symbolized when" "It also symbolized when everything really started to go everything really started to go wrong." "wrong." "It'sthemostimportant" "It'sthemostimportant example of our efforts here in example of our efforts here in" "Washington to maximize the" "Washington to maximize the possibilities of the new possibilities of the new information age global economy." "NARRATOR:" "Intheend ,banks" "NARRATOR:" "Intheend ,banks would get larger and derivatives would get larger and derivatives would remain in the shadows." "would remain in the shadows." "Thederivativesmarketwent" "Thederivativesmarketwent into darkness, almost no into darkness, almost no transparency and no regulation." "transparency and no regulation." "And what you see is this" "And what you see is this explosion in the growth of explosion in the growth of derivatives in the United derivatives in the United" "States and throughout the world." "States and throughout the world." "We'reonlysittingona" "We'reonlysittingona  couple of mill... couple of mill..." "NARRATOR:" "Thebankshad won" "NARRATOR:" "Thebankshad won  the day." "the day." "Credit default swaps would now" "Credit default swaps would now be introduced to new markets." "be introduced to new markets." "Thenextapplicationofthis" "Thenextapplicationofthis  same technology was to same technology was to portfolios of consumer credit portfolios of consumer credit risk, and in particular risk, and in particular mortgage-related credit risk." "mortgage-related credit risk." "NARRATOR:" "Andthehigherthe" "NARRATOR:" "Andthehigherthe risk, the better." "risk, the better." "Whateveryoneis tryingto" "Whateveryoneis tryingto create is something that has a create is something that has a high rating, and a high yield." "high rating, and a high yield." "That's the holy grail." "That's the holy grail." "That's the goal, is to mix" "That's the goal, is to mix together assets in some way so together assets in some way so that you come out with a triple that you come out with a triple" "A, and a big return." "A, and a big return." "NARRATOR:" "Andso WallStreet" "NARRATOR:" "Andso WallStreet discovered the rewards of discovered the rewards of funding the American Dream." "funding the American Dream." "Just as they had bundled" "Just as they had bundled corporate loans, bankers now corporate loans, bankers now bundled mortgages." "bundled mortgages." "Youwouldbuythesebigpools" "Youwouldbuythesebigpools  of mortgages, and these credit of mortgages, and these credit default swaps enabled you to default swaps enabled you to bundle all this stuff together, bundle all this stuff together, bring it in house, in order to" "bring it in house, in order to get it ready to put through the get it ready to put through the sausage-making machine sausage-making machine and create these securities." "and create these securities." "NARRATOR:" "Bankersspread" "NARRATOR:" "Bankersspread their investing dollars across their investing dollars across the country, but especially in the country, but especially in states seeing historic levels of states seeing historic levels of population growth." "population growth." "Places like Florida, Nevada," "Places like Florida, Nevada," "California... and here, in" "California... and here, in" "Georgia." "Georgia." "Well,Atlantawasone ofthe" "Well,Atlantawasone ofthe hottest markets in the country, hottest markets in the country, the Atlanta region." "the Atlanta region." "NARRATOR:" "RoyBarnesisthe" "NARRATOR:" "RoyBarnesisthe former governor of Georgia." "former governor of Georgia." "Georgiawasthefourth" "Georgiawasthefourth- fastest-growing state at the fastest-growing state at the turn of is last century and turn of is last century and the fastest growing state the fastest growing state east of the Mississippi." "east of the Mississippi." "So it was a hot market to start" "So it was a hot market to start with." "with." "Iputmy houseonthemarket" "Iputmy houseonthemarket on Tuesday." "on Tuesday." "And it was gone Thursday." "And it was gone Thursday." "NARRATOR:" "Electedin 1998," "NARRATOR:" "Electedin 1998," "Barnes is renowned for having" "Barnes is renowned for having taken on Wall Street over taken on Wall Street over subprime lending-- a market the subprime lending-- a market the" "Street had traditionally" "Street had traditionally avoided." "avoided." "Subprimelendinghasbeen" "Subprimelendinghasbeen around for a long time and is around for a long time and is supposed to be lending done to supposed to be lending done to people whose credit is inferior." "people whose credit is inferior." "Andinthe'80stherewasno" "Andinthe'80stherewasno  place for subprime." "place for subprime." "Nobody wanted it." "Nobody wanted it." "The banks wouldn't buy it" "The banks wouldn't buy it because there was a higher risk." "because there was a higher risk." "CityMortgage,mayIhelp" "CityMortgage,mayIhelp  you?" "you?" "I'vebeenhavingtrouble" "I'vebeenhavingtrouble with my credit." "with my credit." "That'snoproblem." "That'snoproblem." "We'll give you the best rate" "We'll give you the best rate possible." "possible." "Thesubprimemarketwas" "Thesubprimemarketwas  originally a niche market." "originally a niche market." "Originally it was not the major" "Originally it was not the major banks." "banks." "It was the mortgage brokers who" "It was the mortgage brokers who were specialists in this market." "were specialists in this market." "Subprimeloansin Atlanta" "Subprimeloansin Atlanta jumped by more than 500% during jumped by more than 500% during a five-year period, a five-year period," "Whatreallychangedthe" "Whatreallychangedthe  appetite for subprime mortgages appetite for subprime mortgages was you could securitize and was you could securitize and you could sell it on Wall you could sell it on Wall" "Street." "Street." "They do it in tranches, and then" "They do it in tranches, and then they wrap it up so they could be they wrap it up so they could be packaged together and have an packaged together and have an overall higher yield." "overall higher yield." "Nearlyhalfof allnew single" "Nearlyhalfof allnew single family home construction is in family home construction is in the South, now more than the South, now more than" "50,000 a month." "50,000 a month." "And,ofcourse,Moody'ssays" "And,ofcourse,Moody'ssays  triple A." "So it was just a feeding" "So it was just a feeding frenzy." "frenzy." "I mean, it was just an absolute" "I mean, it was just an absolute feeding frenzy for subprime feeding frenzy for subprime mortgages." "mortgages." "Withtheeconomystrong," "Withtheeconomystrong, homebuyers are willing and able homebuyers are willing and able to spend double what they did to spend double what they did just two decades ago." "just two decades ago." "Andyoucouldjustabout" "Andyoucouldjustabout drive by a bank and they'd throw drive by a bank and they'd throw a loan paper in your car as you a loan paper in your car as you passed by." "passed by." "Became very loose." "Became very loose." "Became very loose." "Became very loose." "NARRATOR:" "Butwhatbig banks" "NARRATOR:" "Butwhatbig banks on Wall Street did not or on Wall Street did not or would not see was what was would not see was what was happening on the ground around happening on the ground around the U.S.-- a wave of lending" "the U.S.-- a wave of lending abuses." "abuses." "It'sa phraseyou'relikely" "It'sa phraseyou'relikely to hear in the future:" "to hear in the future:" "predatory lending." "predatory lending." "Wetrustedmortgage" "Wetrustedmortgage companies... companies..." "Wesaythatwewere" "Wesaythatwewere  swindled... swindled thesituationhavecaused ...thesituationhavecaused me to go into the state of me to go into the state of bankruptcy." "bankruptcy." "Thisiswhatyou call" "Thisiswhatyou call robbing somebody without a gun." "robbing somebody without a gun." "TheWildWestexperiencein" "TheWildWestexperiencein home mortgages was well home mortgages was well underway." "underway." "41-year-oldHessiemay 41-year-oldHessiemay" "Hector, mother of three, agreed" "Hector, mother of three, agreed to a second mortgage at 27.5%." "to a second mortgage at 27.5%." "Wewerecreatingmortgages" "Wewerecreatingmortgages that we had never seen before." "that we had never seen before." "And they were being created" "And they were being created faster and faster." "faster and faster." "Theinterestrateonthese" "Theinterestrateonthese loans was as high as 42%." "loans was as high as 42%." "Wesawborrowersgivenloans" "Wesawborrowersgivenloans that were greater than the that were greater than the value of their home." "value of their home." "Home buyers were getting loans" "Home buyers were getting loans that had no income." "that had no income." "The borrower-- particularly the" "The borrower-- particularly the elderly or the low income-- had elderly or the low income-- had no clue as to what they signed." "no clue as to what they signed." "There was a tremendous growth of" "There was a tremendous growth of mortgages that we knew made no mortgages that we knew made no sense financially." "sense financially." "Whenyouhaveahigh interest" "Whenyouhaveahigh interest rate, then you have high points, rate, then you have high points, then you have pre-payment then you have pre-payment penalties." "penalties." "When you have balloon payments," "When you have balloon payments, when you have adjustable-rate when you have adjustable-rate mortgages and when you layer mortgages and when you layer those bad practices on top of a those bad practices on top of a high interest rate, it becomes" "high interest rate, it becomes predatory." "predatory." "Blackhomeownersin Atlanta" "Blackhomeownersin Atlanta have become such frequent have become such frequent targets of unscrupulous lenders targets of unscrupulous lenders that counselors regularly hold that counselors regularly hold community meetings to issue community meetings to issue warnings." "warnings." "Youendup withmonthly" "Youendup withmonthly payments that you can't afford." "payments that you can't afford." "Andwhydidtheysell them to" "Andwhydidtheysell them to people that they were not good people that they were not good for?" "for?" "They did it because th could." "They did it because th could." "We'vegotto fight,fight," "We'vegotto fight,fight, fight, fight!" "fight, fight!" "NARRATOR:" "Housingadvocates" "NARRATOR:" "Housingadvocates around the country took on around the country took on predatory lenders." "predatory lenders." "But one of the fiercest fights" "But one of the fiercest fights was here in Georgia, over what was here in Georgia, over what was called the Georgia Fair was called the Georgia Fair" "Lending Act." "Lending Act." "Butwedon'tneedrhetoric..." "Butwedon'tneedrhetoric..." "NARRATOR:" "Thebillwas" "NARRATOR:" "Thebillwas  sponsored by state senator sponsored by state senator" "Vincent Fort..." "Vincent Fort..." "Weneedaction,now ." "Weneedaction,now ." "Peoplearetrickedintoowing" "Peoplearetrickedintoowing more money that they could ever more money that they could ever dream.... dream...." "NARRATOR:...andbackedby" "NARRATOR:...andbackedby" "Governor Roy Barnes." "Governor Roy Barnes." "...talkedintobelieving ...talkedintobelieving there's a way out." "there's a way out." "GovernorBarnesandothers" "GovernorBarnesandothers are making a last ditch are making a last ditch effort... effort..." "NARRATOR:" "Thebilltargeted" "NARRATOR:" "Thebilltargeted high-cost loans and predatory high-cost loans and predatory lenders with a series of rules lenders with a series of rules and prohibitions." "and prohibitions." "It'suprightnow onthe" "It'suprightnow onthe" "House floor, a governor's bill" "House floor, a governor's bill to crack down on so-called... to crack down on so-called..." "NARRATOR:" "Themortgage" "NARRATOR:" "Themortgage lenders and the banks struck lenders and the banks struck back." "back." "Noneofthesepeoplehave a" "Noneofthesepeoplehave a clue of what's going on." "clue of what's going on." "Nobody here understands the" "Nobody here understands the business and they didn't let us business and they didn't let us speak." "speak." "YouwouldhavethoughtI" "YouwouldhavethoughtI had recommended that we repeal had recommended that we repeal the plan of salvation." "the plan of salvation." "And why were they so opposed to" "And why were they so opposed to it?" "it?" "Money." "Money." "Money." "Money." "Thisbillwillcripplethe" "Thisbillwillcripplethe mortgage business, it's gonna mortgage business, it's gonna cripple real estate sales, it's cripple real estate sales, it's gonna absolutely devastate the gonna absolutely devastate the home market in Georgia." "home market in Georgia." "I can guarantee you." "I can guarantee you." "Therewerethreatsthatthe" "Therewerethreatsthatthe residents in Georgia wouldn't residents in Georgia wouldn't be able to get mortgages be able to get mortgages any more, because investors any more, because investors would not buy the mortgages in" "would not buy the mortgages in" "Georgia." "Georgia." "And if that were true, no bank" "And if that were true, no bank would create a mortgage in would create a mortgage in" "Georgia." "Georgia." "NARRATOR:" "Despitetheefforts" "NARRATOR:" "Despitetheefforts of the mortgage lobby, Barnes of the mortgage lobby, Barnes and Fort got the bill passed in and Fort got the bill passed in" "April 2002." "April 2002." "Georgianowhasthe toughest" "Georgianowhasthe toughest predatory lending law in the predatory lending law in the nation." "nation." "NARRATOR:" "Themortgagelobby" "NARRATOR:" "Themortgagelobby feared that similar legislation feared that similar legislation could pass in other markets could pass in other markets like California." "like California." "They opposed Barnes'" "They opposed Barnes' re-election." "re-election." "They funded his challenger and" "They funded his challenger and lobbied to rescind the law." "lobbied to rescind the law." "RightafterGovernorBarnes'" "RightafterGovernorBarnes' defeat in November, one of the defeat in November, one of the top legislative priorities for top legislative priorities for the new governor and the new the new governor and the new legislature was to gut the" "legislature was to gut the" "Georgia Fair Lending Act." "Georgia Fair Lending Act." "I think it was about two weeks" "I think it was about two weeks into the new legislative session into the new legislative session and it was gutted." "and it was gutted." "NARRATOR:" "Butforaseven" "NARRATOR:" "Butforaseven- month period, predatory lending month period, predatory lending in Georgia declined." "in Georgia declined." "It may have been the last chance" "It may have been the last chance to slow the housing boom." "to slow the housing boom." "Iwouldliketosituphere" "Iwouldliketosituphere and tell you that I was like and tell you that I was like" "Nostradamus, that I saw that the" "Nostradamus, that I saw that the world was going to come to an world was going to come to an end because of all this." "end because of all this." "But I could never have foreseen" "But I could never have foreseen the difficulty that existed." "the difficulty that existed." "Never have... could I have" "Never have... could I have foreseen that." "foreseen that." "Ithinkwe stillwouldhave" "Ithinkwe stillwouldhave  seen an unrealistic bubble." "seen an unrealistic bubble." "But it wouldn't have gone up as" "But it wouldn't have gone up as fast and it wouldn't have fast and it wouldn't have collapsed as fast." "collapsed as fast." "We would not have been in as" "We would not have been in as deep a hole today as we are if deep a hole today as we are if we hadn't had these funny we hadn't had these funny mortgage products." "mortgage products." "Noletup in thehousing" "Noletup in thehousing boom, which is good for the boom, which is good for the economy." "economy." "Homes were selling last month" "Homes were selling last month at a record clip, the main at a record clip, the main reason low mortgage rates... reason low mortgage rates..." "NARRATOR:" "Thebig" "NARRATOR:" "Thebig banks continued to package and banks continued to package and sell more mortgage portfolios." "sell more mortgage portfolios." "And more and more of these CDOs" "And more and more of these CDOs contained high-risk subprime contained high-risk subprime debt." "debt." "To keep the rating agencies on" "To keep the rating agencies on board, more credit default swaps board, more credit default swaps were sold." "were sold." "Let'ssayIhaveapoolof" "Let'ssayIhaveapoolof mortgages" " I have a thousand mortgages" " I have a thousand mortgages from California and I mortgages from California and I want to package these up." "want to package these up." "But I decide, "Well, some of" "But I decide, "Well, some of these mortgages may be subprime these mortgages may be subprime and I want to buy a little bit and I want to buy a little bit of credit default insurance."" "of credit default insurance."" "SMITH:" "Andby doingthat,you" "SMITH:" "Andby doingthat,you improve the profile... improve the profile..." "Intheory,yes." "Intheory,yes." "SMITH:...ofyourCDO ..." "SMITH:...ofyourCDO ..." "That'sright." "That'sright." "SMITH:...sothatyou can" "SMITH:...sothatyou can  sell it better." "sell it better." "Icouldgo getaratingfor" "Icouldgo getaratingfor it, too." "it, too." "I could go to Moody's and say," "I could go to Moody's and say," ""Look, I have laid off two" ""Look, I have laid off two percent of the risk on this percent of the risk on this portfolio." "portfolio." "Shouldn't I get a better rating" "Shouldn't I get a better rating than if I just sold the pool as than if I just sold the pool as it was?"" "it was?"" "SMITH:" "Soyoutakealot of" "SMITH:" "Soyoutakealot of crap... crap..." "That'sright." "That'sright." "SMITH:...alotofmortgages" "SMITH:...alotofmortgages that are... that are..." "Hideouscrap." "Hideouscrap." "SMITH:" "Butyouinsureitand" "SMITH:" "Butyouinsureitand the credit agency says, "Hey, the credit agency says, "Hey, that's a good idea."" "that's a good idea."" "Yes." "Yes." "Yes." "Yes." "Anditseemsthatinthe" "Anditseemsthatinthe housing market many investors housing market many investors actually began to take more actually began to take more risks precisely because they risks precisely because they thought th they had bought thought th they had bought" "protection with credit default protection with credit default swaps." "swaps." "Newhomesalesjumped13%" "Newhomesalesjumped13% over a year ago, while existing over a year ago, while existing home sales rose 4.5%... home sales rose 4.5%..." "NARRATOR:" "TheteamatJ.P." "NARRATOR:" "TheteamatJ.P." "Morgan was also dabbling in" "Morgan was also dabbling in mortgage debt but they weren't mortgage debt but they weren't sure it made good sense." "sure it made good sense." "Wetradedmortgages." "Wetradedmortgages." "We had some mortgages on our" "We had some mortgages on our books." "books." "We certainly understood the" "We certainly understood the mortgage-backed security market." "mortgage-backed security market." "But we had a lot of trouble" "But we had a lot of trouble getting comfortable with that getting comfortable with that risk." "risk." "The big hang-up for us was data." "The big hang-up for us was data." "We had years and years of" "We had years and years of historical data about how historical data about how corporates performed during corporates performed during business cycles." "business cycles." "But we didn't have that much" "But we didn't have that much data about how retail mortgages data about how retail mortgages performed during different performed during different business cycles." "business cycles." "Weknewhowmuchmoneypeople" "Weknewhowmuchmoneypeople said they were making." "said they were making." "We saw that UBS and Merrill" "We saw that UBS and Merrill" "Lynch had securitized products" "Lynch had securitized products earnings that were growing earnings that were growing faster than ours." "faster than ours." "And we asked ourselves the" "And we asked ourselves the question, "What are we doing question, "What are we doing wrong?" "wrong?" "What are we missing?" "What are we missing?" "Have we not figured out how to" "Have we not figured out how to lay off some of this risk?" "lay off some of this risk?" "And honestly, we couldn't" "And honestly, we couldn't figure it out." "figure it out." "What we never imagined was that" "What we never imagined was that those firms weren't doing those firms weren't doing anything at all." "anything at all." "They were just taking the riskt." "They were just taking the riskt." "ThefirstwaveofJ.P. Morgan" "ThefirstwaveofJ.P. Morgan bankers who had developed these bankers who had developed these original ideas in the 1990s, original ideas in the 1990s, when they saw what was starting when they saw what was starting to happen-- essentially other" "to happen-- essentially other banks were taking these ideas banks were taking these ideas and applying them in ways that and applying them in ways that they had never expected-- some they had never expected-- some of them began to get very" "of them began to get very worried." "worried." "Wewerejustabouttosay" "Wewerejustabouttosay" ""Done" on a transaction." ""Done" on a transaction." "We had a global phone call and" "We had a global phone call and we were discussing the risk we were discussing the risk that we were about to do and we that we were about to do and we had discussed it over and over had discussed it over and over" "and over." "and over." "And finally someone on that" "And finally someone on that phone call said, "I'm nervous."" "phone call said, "I'm nervous."" "Twiceasmanyhomebuyersare" "Twiceasmanyhomebuyersare getting adjustable mortgages." "getting adjustable mortgages." "Wealmosthadstopped" "Wealmosthadstopped thinking and stopped reassessing thinking and stopped reassessing the risk as we went along." "the risk as we went along." "And suddenly we found ourselves" "And suddenly we found ourselves with a product that was vastly with a product that was vastly different from where we started." "different from where we started." "And every little tweak along the" "And every little tweak along the way we had all said, "Oh, that's way we had all said, "Oh, that's okay." "okay." "That's okay." "That's okay." "That's okay."" "Until suddenly we all looked up" "Until suddenly we all looked up and said, "Hang on, it's not and said, "Hang on, it's not okay."" "okay."" "Theworldis stillliving" "Theworldis stillliving with a lot of big, unresolved with a lot of big, unresolved problems." "problems." "NARRATOR:" "Otherbankswere" "NARRATOR:" "Otherbankswere not so cautious." "not so cautious." "They aggressively sold subprime" "They aggressively sold subprime" "CDOs to customers all over the" "CDOs to customers all over the world." "world." "London became a second beachhead" "London became a second beachhead for their trading and sales for their trading and sales operations." "operations." "Thestockmarket'sonthe" "Thestockmarket'sonthe rise and economic statistics... rise and economic statistics..." "Thecityof Londonactually" "Thecityof Londonactually did yeomen's service in creating did yeomen's service in creating some of the nastier structures." "some of the nastier structures." "They did this offshore." "They did this offshore." "These were not SEC-registered" "These were not SEC-registered deals." "deals." "These were all private" "These were all private placements." "placements." "So they were going through the" "So they were going through the legal loopholes." "legal loopholes." "(bells chiming)" "(bells chiming)" "NARRATOR:" "A groupof" "NARRATOR:" "A groupof  state-run banks in Germany known state-run banks in Germany known as Landesbanks were among the as Landesbanks were among the biggest customers." "biggest customers." "Desiree Fixler, who worked at" "Desiree Fixler, who worked at" "J.P. Morgan, says she was amazed" "J.P. Morgan, says she was amazed by these banks' appetite for by these banks' appetite for subprime mortgages." "subprime mortgages." "Youknewthatacore groupof" "Youknewthatacore groupof banks in Germany would buy banks in Germany would buy anything." "anything." "We strongly believed they were" "We strongly believed they were very naïve." "very naïve." "We were amazed that they would" "We were amazed that they would buy this." "buy this." "It was..." "I mean, every single" "It was..." "I mean, every single person, every salesperson, was person, every salesperson, was envious of that particular envious of that particular salesperson that was able salesperson that was able to cover the Landesbanks and IKB to cover the Landesbanks and IKB" "because you were in one of the because you were in one of the hottest seats, globally." "hottest seats, globally." "You were gonna generate" "You were gonna generate tremendous profit margin." "tremendous profit margin." "They were big buyers." "They were big buyers." "IKBwasveryconvincedthat" "IKBwasveryconvincedthat  they were one of the strongest they were one of the strongest bank in that area." "bank in that area." "They were running around telling" "They were running around telling people how good they are in people how good they are in investing." "investing." "NARRATOR:" "Germanbanking" "NARRATOR:" "Germanbanking giant Deutsche Bank did several giant Deutsche Bank did several deals with IKB." "deals with IKB." "SMITH:" "Didyouthink,atthe" "SMITH:" "Didyouthink,atthe time, that your products were time, that your products were helping IKB, that these were helping IKB, that these were good things for them to buy?" "good things for them to buy?" "Yeah,absolutely." "Yeah,absolutely." "Otherwise we wouldn't have" "Otherwise we wouldn't have manufactured these products and manufactured these products and sold it to them." "sold it to them." "SMITH:" "Soyouwerebullishon" "SMITH:" "Soyouwerebullishon subprime mortgages in the U.S." "subprime mortgages in the U.S." "Wewerebullishonthe" "Wewerebullishonthe mortgage market in general, mortgage market in general, and subprime, which was a and subprime, which was a element of it." "element of it." "We were not overly aggressive" "We were not overly aggressive but we were a part of that but we were a part of that market, absolutely." "market, absolutely." "Americansarebuyingreal" "Americansarebuyingreal estate in record numbers." "estate in record numbers." "That demand..." "That demand..." "NARRATOR:" "Bytheend 2005the" "NARRATOR:" "Bytheend 2005the total outstanding value of total outstanding value of credit default swaps around the credit default swaps around the world was measured in trillions world was measured in trillions of dollars and was doubling of dollars and was doubling" "every year." "SMITH:" "Didtopmanagementat" "SMITH:" "Didtopmanagementat" "J.P. Morgan understand credit" "J.P. Morgan understand credit derivatives?" "derivatives?" "Yes,theydid." "Yes,theydid." "Absolutely they did." "Absolutely they did." "SMITH:" "Didtheyatother" "SMITH:" "Didtheyatother banks?" "banks?" "No." "No." "Not all other banks." "Not all other banks." "Certainly not." "Certainly not." "SMITH:" "Didtheregulators" "SMITH:" "Didtheregulators understand them?" "understand them?" "Idon'tthinkthe regulators" "Idon'tthinkthe regulators understood." "understood." "I don't think the credit ratings" "I don't think the credit ratings agencies, the bankers or the agencies, the bankers or the regulators fully understood all regulators fully understood all of the kinds of credit of the kinds of credit instruments that we're talking" "instruments that we're talking about." "about." "SMITH:" "Inotherwords,some" "SMITH:" "Inotherwords,some  big banks simply didn't know big banks simply didn't know what they had in terms of risk." "what they had in terms of risk." "Certainly,theydidn't..." "Certainly,theydidn't... they didn't know some of the they didn't know some of the forms of risk that they had." "forms of risk that they had." "That's exactly right." "That's exactly right." "Saleswerehigherthanmost" "Saleswerehigherthanmost  regions, up more than 40% regions, up more than 40% in the west and northeast... in the west and northeast..." "NARRATOR:" "Housingprices" "NARRATOR:" "Housingprices continued to soar." "continued to soar." "Banks packaged more and more" "Banks packaged more and more" "CDOs." "CDOs." "Theoretically, there was no" "Theoretically, there was no limit." "limit." "An investor didn't need to own" "An investor didn't need to own any actual mortgages." "any actual mortgages." "So-called synthetic CDOs allowed" "So-called synthetic CDOs allowed investors to bet many times over investors to bet many times over on someone else's portfolio of on someone else's portfolio of debt." "debt." "Itallowedparticipants" "Itallowedparticipants-- either buying or selling, so either buying or selling, so on either side of the market-- on either side of the market-- to take their positions without to take their positions without being constrained by the size" "being constrained by the size of the underlying market." "of the underlying market." "InsyntheticCDOs,all you" "InsyntheticCDOs,all you  had to do was make a side bet had to do was make a side bet based on what would happen to based on what would happen to this group of mortgages and have this group of mortgages and have" "that be the basis of the CDO." "that be the basis of the CDO." "The fact that someone had done" "The fact that someone had done it one time wouldn't stop you it one time wouldn't stop you from doing it again and again from doing it again and again and again." "and again." "SMITH:" "Sohowisthat" "SMITH:" "Sohowisthat  different than betting on the different than betting on the outcome of the Super Bowl?" "outcome of the Super Bowl?" "Ora horseraceora craps" "Ora horseraceora craps table?" "table?" "There's no different at all." "There's no different at all." "It'sjustapurebetby" "It'sjustapurebetby somebody who has no economic somebody who has no economic interest in what they're betting interest in what they're betting on." "on." "You're gonna bet on the outcome" "You're gonna bet on the outcome of the Super Bowl, you're gonna of the Super Bowl, you're gonna bet on the outcome of a horse bet on the outcome of a horse race, or you're at the craps" "race, or you're at the craps table or you're betting on table or you're betting on which way the dice are gonna go." "which way the dice are gonna go." "I'mprettyconfidentthat" "I'mprettyconfidentthat the housing market's not going the housing market's not going to down at all." "to down at all." "It's just going to go up." "It's just going to go up." "Withina decade,youhavethe" "Withina decade,youhavethe most phenomenal machine most phenomenal machine anybody's ever seen." "anybody's ever seen." "Newhomesaresellingatthe" "Newhomesaresellingatthe second highest rate on record." "second highest rate on record." "Wearein ahousingboom ." "Wearein ahousingboom ." "It's quite strong right now and" "It's quite strong right now and housing prices are going up at a housing prices are going up at a rapid rate." "rapid rate." "...profitsoaredat 93 % profitsoaredat 93 % expectedtodoleout  ...expectedtodoleout" "$36 billion in bonuses this" "$36 billion in bonuses this year." "Everyonewashigh-fiving." "Everyonewashigh-fiving." "It seemed to be brilliant." "It seemed to be brilliant." "The combination of free" "The combination of free markets, innovation and markets, innovation and globalization appeared to have globalization appeared to have delivered this incredibly heady delivered this incredibly heady cocktail of tremendous growth." "cocktail of tremendous growth." "Topexecutiveswillearnas" "Topexecutiveswillearnas much as $20 to $50 million., much as $20 to $50 million.," "NARRATOR:" "Between2003and" "NARRATOR:" "Between2003and  2006, Dick Kovacevich, CEO of 2006, Dick Kovacevich, CEO of" "Wells Fargo, remembers attending" "Wells Fargo, remembers attending meetings with bankers and meetings with bankers and regulators." "regulators." "Oftentimeswhatwouldhappen" "Oftentimeswhatwouldhappen at these meetings is regulators at these meetings is regulators would be there, like Chairman would be there, like Chairman" "Bernanke, and there might be, I" "Bernanke, and there might be, I don't know, 30 to 40 bankers." "don't know, 30 to 40 bankers." "And they would often go around" "And they would often go around the room and say, "Well, what the room and say, "Well, what are you guys seeing out there?" "are you guys seeing out there?" "What's working?" "What's working?" "Are you concerned about" "Are you concerned about housing?"" "housing?"" "Trying to get input." "Trying to get input." "And when they came to me, I" "And when they came to me, I would say, "This is toxic waste." "would say, "This is toxic waste." "We're building a bubble." "We're building a bubble." "We're not going to like the" "We're not going to like the outcome."" "outcome."" "SMITH:" "Whatdidyourfellow" "SMITH:" "Whatdidyourfellow bankers say to you when you told bankers say to you when you told them that you thought this stuff them that you thought this stuff was toxic?" "was toxic?" "Well,theonesthatwere in" "Well,theonesthatwere in it said I was wrong." "it said I was wrong." "And everything is fine." "And everything is fine." "We don't see any losses" "We don't see any losses occurring in this." "occurring in this." "But we saw risk all over the" "But we saw risk all over the place." "place." "We didn't even participate in" "We didn't even participate in the exotic subprime side of the the exotic subprime side of the mortgage because we knew this mortgage because we knew this was absolutely wrong for our was absolutely wrong for our customers if we would have done" "customers if we would have done it and would have been wrong for it and would have been wrong for us because we think this thing us because we think this thing was going to blow up." "was going to blow up." "There'sa greatsetof" "There'sa greatsetof adages on Wall Street about adages on Wall Street about where risk will flow." "where risk will flow." "And if you ask people, they're" "And if you ask people, they're basically split between two basically split between two camps." "camps." "One says that risk will flow to" "One says that risk will flow to the smarst person, the person the smarst person, the person who best understands it." "who best understands it." "And the other says that risk" "And the other says that risk will flow to the dumbest person, will flow to the dumbest person, the person who least understands the person who least understands it." "it." "And at least based on my" "And at least based on my experience and my understanding experience and my understanding of what has been happening in of what has been happening in the derivatives market, it's the the derivatives market, it's the latter." "latter." "Iwasamazedattheinterest" "Iwasamazedattheinterest on the part of investors to on the part of investors to invest in a product that was invest in a product that was highly complex and very risky on highly complex and very risky on" "top of it." "top of it." "SMITH:" "Soletmegetthis" "SMITH:" "Soletmegetthis straight, you were-- you were straight, you were-- you were first to the party." "first to the party." "You developed this tranching of" "You developed this tranching of stuff." "stuff." "That'sright." "That'sright." "SMITH:" "Andwritingcredit" "SMITH:" "Andwritingcredit default swaps on it." "default swaps on it." "But now, everybody else has" "But now, everybody else has jumped into the game." "jumped into the game." "Everybodywantsto do it ." "Everybodywantsto do it ." "SMITH:" "Butyourteam" "SMITH:" "Butyourteam decided to stop?" "decided to stop?" "Why did so many others keep" "Why did so many others keep going, marching towards the going, marching towards the cliff?" "cliff?" "The..." "The..." "I mean, there..." "I..." "I mean, there..." "I... look, very simply, there are look, very simply, there are certainly some investors, some certainly some investors, some banks, some borrowers, who banks, some borrowers, who are a bit greedier than they" "are a bit greedier than they should be." "should be." "GoldmanchiefLloyd" "GoldmanchiefLloyd" "Blankfein will take home $53" "Blankfein will take home $53 million." "million." "NARRATOR:" "Noonewantedthe" "NARRATOR:" "Noonewantedthe party to end." "party to end." "Mostanks believed housing" "Mostanks believed housing prices would never go down, let prices would never go down, let alone crash." "alone crash." "Toimaginelossesofthat" "Toimaginelossesofthat  severity required very severity required very significant assumptions about significant assumptions about the path of the economy, which the path of the economy, which were just not in people's mind." "were just not in people's mind." "So it required things like" "So it required things like assuming that house prices in assuming that house prices in the United States fell by 25%." "the United States fell by 25%." "People weren't thinking that way" "People weren't thinking that way and as long as house prices and as long as house prices never fell, then these risks never fell, then these risks would never come home to roost." "would never come home to roost." "And that ultimately was" "And that ultimately was obviously very flawed logic." "obviously very flawed logic." "Asinterestratesroseearly" "Asinterestratesroseearly this year, home sales slowed and this year, home sales slowed and after years of record after years of record appreciation, prices are now appreciation, prices are now dropping... dropping costofborrowingisgoing" "...costofborrowingisgoing up... up..." "NARRATOR:" "Theunraveling" "NARRATOR:" "Theunraveling began in late 2006." "began in late 2006." "Bigtroubleformillionsof" "Bigtroubleformillionsof" "American..." "American..." "NARRATOR:" "Whenhousingprices" "NARRATOR:" "Whenhousingprices started to drop, only a very few started to drop, only a very few bankers could see the bubble bankers could see the bubble they were trapped in." "they were trapped in." "...thehousingmarkethas  ...thehousingmarkethas  turned some mortgages into time turned some mortgages into time bombs." "bombs." "By2007,2008,all the" "By2007,2008,all the  smart money knew the game had smart money knew the game had ended and all the banks tried ended and all the banks tried to effectively repackage what to effectively repackage what they were stuck with as quickly" "they were stuck with as quickly as possible and get it off as possible and get it off their books." "their books." "But there was second parallel" "But there was second parallel movement which was going on movement which was going on which was all about, "How can we which was all about, "How can we take advantage of it?"" "take advantage of it?"" "NARRATOR:" "Oneof theWall" "NARRATOR:" "Oneof theWall" "Street banks that took advantage" "Street banks that took advantage of a declining market was of a declining market was" "Goldman Sachs." "Goldman Sachs." "According to a Congressional" "According to a Congressional investigation, the bank created investigation, the bank created a series of CDOs containing a series of CDOs containing toxic subprime and then sold toxic subprime and then sold them to customers... them to customers..." "WeatGoldmanSachs" "WeatGoldmanSachs distinguish ourselves by our distinguish ourselves by our ability to get things done on ability to get things done on behalf of our clients." "behalf of our clients." "NARRATOR:...whileGoldman" "NARRATOR:...whileGoldman" "Sachs, using credit default" "Sachs, using credit default swaps, bet against them." "swaps, bet against them." "Theybetagainsttheirown" "Theybetagainsttheirown clients so when their clients clients so when their clients lost money, Goldman was making lost money, Goldman was making money." "money." "Goldman has a little slogan" "Goldman has a little slogan that the clients come first." "that the clients come first." "No, they didn't." "No, they didn't." "Not in these transactions." "Not in these transactions." "Goldman came first, second, and" "Goldman came first, second, and third." "third." "They were really, I think, the" "They were really, I think, the only major bank which made money only major bank which made money when the housing bubble burst." "when the housing bubble burst." "NARRATOR:" "Inasettlement" "NARRATOR:" "Inasettlement with the SEC, Goldman admitted with the SEC, Goldman admitted that some of their marketing that some of their marketing materials did not disclose materials did not disclose important information, but important information, but" "Goldman claimed that their" "Goldman claimed that their investors were highly investors were highly sophisticated institutions." "sophisticated institutions." "One customer was that German" "One customer was that German" "Landesbank IKB." "Landesbank IKB." "...anyoneassociatedwith ...anyoneassociatedwith the subprime market is going to the subprime market is going to pay the price." "pay the price." "Evenwhentherewas a" "Evenwhentherewas a downturn in the markets, they downturn in the markets, they were still buying." "were still buying." "I mean, the market is telling" "I mean, the market is telling them." "them." "It's on the screen." "It's on the screen." "There are headlines everywhere:" "There are headlines everywhere:" ""Danger."" ""Danger."" "But they still wanted to go" "But they still wanted to go ahead." "ahead." "SMITH:" "Didyoufeeltherewas" "SMITH:" "Didyoufeeltherewas an obligation on your part to an obligation on your part to tell them that, "Look, wake tell them that, "Look, wake up, the markets are going down." "up, the markets are going down." "Maybe you should stop buying" "Maybe you should stop buying this crap"?" "this crap"?" "Thosediscussions--theword" "Thosediscussions--theword" ""crap" wasn't used." ""crap" wasn't used." "But, I mean, those discussions" "But, I mean, those discussions definitely happened." "definitely happened." "But they felt that this was" "But they felt that this was just a temporary glitch in an just a temporary glitch in an overall bull market." "overall bull market." ""It will recover; it has to" ""It will recover; it has to recover."" "recover."" "NARRATOR:" "InJuly2007,the" "NARRATOR:" "InJuly2007,the" "German bank IKB, stuffed with" "German bank IKB, stuffed with subprime, was the first bank to subprime, was the first bank to fail." "fail." "It was only a matter of time" "It was only a matter of time before the crisis came back to before the crisis came back to" "Wall Street." "Wall Street." "Thatcouldhurtthe valueof" "Thatcouldhurtthe valueof homes nationwide." "homes nationwide." "Weknewthatthe housing" "Weknewthatthe housing bubble had burst." "bubble had burst." "But we'd been reassured that" "But we'd been reassured that the problem had been contained." "the problem had been contained." "But by the beginning of 2008," "But by the beginning of 2008, it was becoming clear that this it was becoming clear that this was a much, much bigger problem was a much, much bigger problem than anybody anticipated." "than anybody anticipated." "Therewasabroad" "Therewasabroad misperception of the risk in misperception of the risk in housing prices." "housing prices." "Thwidespread view that we" "Thwidespread view that we could have a regional decline could have a regional decline in housing prices but never a in housing prices but never a national decline in housing national decline in housing prices proved to be horribly prices proved to be horribly" "wrong." "wrong." "..lastweekwasadifficult" "..lastweekwasadifficult time in the mortgage business." "time in the mortgage business." "There was talk about problems in" "There was talk about problems in funds that were invested." "funds that were invested." "...therearepeopletalking ...therearepeopletalking about even pulling funds from about even pulling funds from" "Bear." "Bear." "That's the problem..." "That's the problem..." "NARRATOR:" "InNewYork,banks" "NARRATOR:" "InNewYork,banks were trying to unload what they were trying to unload what they could." "could." "But there was confusion." "But there was confusion." "At Citigroup they were running" "At Citigroup they were running in circles." "in circles." "Oneoftheincrediblethings" "Oneoftheincrediblethings about CitiGroup we now know was about CitiGroup we now know was although it was tossing these although it was tossing these risks off its balance sheet, risks off its balance sheet, those risks came right back," "those risks came right back, almost like a boomerang." "almost like a boomerang." "Without knowing it, they had set" "Without knowing it, they had set up one business to offload risk, up one business to offload risk, and then completely reversed and then completely reversed that business taking those risks that business taking those risks back onto its balance sheet." "back onto its balance sheet." "Itwasquitecleartome" "Itwasquitecleartome  that a number of really quite that a number of really quite large financial institutions had large financial institutions had not had the kind of management not had the kind of management information systems which" "information systems which allowed them even to know what allowed them even to know what all their risks were." "all their risks were." "SMITH:" "Thatwasastoundingto" "SMITH:" "Thatwasastoundingto you." "you." "Itwasastoundingtome." "Itwasastoundingtome." "...thesortof originationof ...thesortof originationof the subprime loans, the creation the subprime loans, the creation of the CDOs-- that business is of the CDOs-- that business is gone." "gone." "All those credit default" "All those credit default swaps... swaps..." "NARRATOR:" "Itwouldall come" "NARRATOR:" "Itwouldall come down to those credit default down to those credit default swaps." "swaps." "Would they pay off as they were" "Would they pay off as they were designed to do?" "designed to do?" "Wehaveknownfor generations" "Wehaveknownfor generations that banks are susceptible to that banks are susceptible to runs." "runs." "Banks can't function if" "Banks can't function if everybody comes and wants their everybody comes and wants their money at the same moment." "money at the same moment." "...MerrillLynch,devastated ...MerrillLynch,devastated by losses... by losses..." "LehmanBrothersandthe" "LehmanBrothersandthe  fire sale of Merrill Lynch... fire sale of Merrill Lynch..." "NARRATOR:" "Thistimeitwould" "NARRATOR:" "Thistimeitwould be a run on an insurance be a run on an insurance company." "company." "AIG was on the hook for $440" "AIG was on the hook for $440 billion worth of credit default billion worth of credit default swaps." "swaps." "Rememberaninsurance" "Rememberaninsurance contract is only as good as the contract is only as good as the credit quality of the insurer." "credit quality of the insurer." "They have to pay you." "They have to pay you." "And if they can't pay you for" "And if they can't pay you for whatever reason, then this whole whatever reason, then this whole process of risk transfer breaks process of risk transfer breaks down." "down." "...weneedto stabilizethis ...weneedto stabilizethis industry." "industry." "It can spread throughout the" "It can spread throughout the economy; it could be a very, economy; it could be a very, very dangerous... very dangerous..." "September18of 2008," "September18of 2008, when..." "I have a conference of when..." "I have a conference of my CEOs." "my CEOs." "And CEOs traditionally don't" "And CEOs traditionally don't read their BlackBerrys during read their BlackBerrys during meetings." "meetings." "But I kept looking around and" "But I kept looking around and noticing that a number of 'em noticing that a number of 'em were." "were." "And so I turned to one. we" "And so I turned to one. we recessed, and I said, "You recessed, and I said, "You look like the world has ended."" "look like the world has ended."" "And he said, "I think it has."" "And he said, "I think it has."" "...theenormityof the ...theenormityof the situation-- a financial nuclear situation-- a financial nuclear holocaust." "holocaust." "Some $400-odd billion of credit" "Some $400-odd billion of credit default swaps... default swaps..." "Anothergovernmentbailout" "Anothergovernmentbailout" "AIG securing an $85 billion..." "AIG securing an $85 billion..." "AIGcouldnotconceivably" "AIGcouldnotconceivably have paid off all of those have paid off all of those credit derivatives, because it credit derivatives, because it had misunderstood the risks had misunderstood the risks and did not have what we'd call" "and did not have what we'd call a balanced book or nearly enough a balanced book or nearly enough capital to back their losses." "capital to back their losses." "SMITH:" "Didn'teverybodyknow" "SMITH:" "Didn'teverybodyknow that AIG was holding a lot of that AIG was holding a lot of" "CDSs?" "CDSs?" "No." "No." "There was no disclosure." "There was no disclosure." "That's the whole point." "That's the whole point." "They haven't reported this to" "They haven't reported this to anyone else." "anyone else." "The other dealers have no idea" "The other dealers have no idea what's going on." "what's going on." "The other banks don't know." "The other banks don't know." "Nobody knows." "Nobody knows." "The banks turned this market" "The banks turned this market into their own private game." "into their own private game." "Itwas,in fact,afinancial" "Itwas,in fact,afinancial shell game where we were shell game where we were manipulating banking results by manipulating banking results by moving the risk out through one moving the risk out through one door but bringing it back into" "door but bringing it back into the banking system by another the banking system by another door." "door." "The risk was not leaving the" "The risk was not leaving the banking system." "banking system." "And everybody in the world was" "And everybody in the world was connected through these chains connected through these chains of risk." "of risk." "Any if part of that chain breaks" "Any if part of that chain breaks down because they can't honor down because they can't honor the contract, the entire system the contract, the entire system implodes." "NARRATOR:" "Theideadreamedup" "NARRATOR:" "Theideadreamedup by a group of young J.P. Morgan by a group of young J.P. Morgan bankers at a weekend retreat bankers at a weekend retreat many years ago was supposed to many years ago was supposed to reduce risk." "reduce risk." "Theiroriginalideahad been" "Theiroriginalideahad been taken and it turned into a taken and it turned into a" "Frankenstein monster, which they" "Frankenstein monster, which they never dreamt would become so big never dreamt would become so big and spin out of control to that and spin out of control to that degree." "degree." "Itwasaveryscarytime." "Itwasaveryscarytime." "We were in totally new territory" "We were in totally new territory and the notion that Lehman and the notion that Lehman" "Brothers could be filing for" "Brothers could be filing for bankruptcy and AIG could be at bankruptcy and AIG could be at risk of the sameate was risk of the sameate was absolutely unprecedented." "absolutely unprecedented." "And the implications, thinking" "And the implications, thinking through the implications of through the implications of that, for the health of not just that, for the health of not just the U.S. economy, but the the U.S. economy, but the" "world" " I mean, it wasn't world" " I mean, it wasn't really conceivable to do that." "really conceivable to do that." "I couldn't get my mind around" "I couldn't get my mind around it, I know others couldn't." "it, I know others couldn't." "Weneversawitcoming." "Weneversawitcoming." "We never saw that coming." "We never saw that coming." "And I was disappointed." "And I was disappointed." "Hugely disappointed." "Hugely disappointed." "I mean I was part of a market" "I mean I was part of a market that I believed was doing the that I believed was doing the right thing." "right thing." "And maybe I was idealistic," "And maybe I was idealistic, maybe I was young, maybe I maybe I was young, maybe I didn't fully appreciate where we didn't fully appreciate where we were going, but there was a were going, but there was a" "whole system going on, all the whole system going on, all the way from the borrower of the way from the borrower of the mortgage, all the way through to mortgage, all the way through to the investor." "the investor." "There's a whole system of" "There's a whole system of people who maybe were turning a people who maybe were turning a blind eye." "blind eye." "Maybe were, you know, just, I" "Maybe were, you know, just, I don't know, it's--it's don't know, it's--it's frustrating to see, certainly." "Itshouldn'thavehappened." "Itshouldn'thavehappened." "Most of our financial crises in" "Most of our financial crises in the past is due to some the past is due to some macroeconomic event-- an oil macroeconomic event-- an oil disruption, war." "disruption, war." "This was caused by a few" "This was caused by a few institutions, about 20, who, in institutions, about 20, who, in my opinion, lost all my opinion, lost all credibility relative to managing credibility relative to managing their risk." "their risk." "And the sad thing is it should" "And the sad thing is it should never have happened." "never have happened." "The management should have" "The management should have stopped it before it got big, stopped it before it got big, and people are suffering for and people are suffering for something that should never have something that should never have happened." "NARRATOR:" "Today,thefallout" "NARRATOR:" "Today,thefallout is felt mostly in places that is felt mostly in places that had seen the highest growth, had seen the highest growth, like Georg." "like Georg." "Ground zero of the subprime" "Ground zero of the subprime crisis:" "local neighborhoods, crisis:" "local neighborhoods, city streets." "city streets." "CitiesthroughouttheUnited" "CitiesthroughouttheUnited" "States are seeing a rise in" "States are seeing a rise in vacant and abandoned properties." "vacant and abandoned properties." "And that's where the neighbors" "And that's where the neighbors feel it." "feel it." "As neighbors we're concerned" "As neighbors we're concerned not so much with the not so much with the complexities of the subprime complexities of the subprime mortgage market and derivatives;" "mortgage market and derivatives;" "these things we will hardly ever these things we will hardly ever understand." "understand." "What we feel on the street is" "What we feel on the street is the fact that the house next to the fact that the house next to us is vacant, abandoned, us is vacant, abandoned, partially burned." "partially burned." "And we wonder how long it's" "And we wonder how long it's going to be there, how long we going to be there, how long we will pay the price for that will pay the price for that abandonment." "abandonment." "A neighborhood cannot survive" "A neighborhood cannot survive long when it has a growing long when it has a growing inventory of vacant, abandoned inventory of vacant, abandoned properties." "properties." "NARRATOR:" "Sometimesno one" "NARRATOR:" "Sometimesno one even knows who owns the even knows who owns the properties." "properties." "It'shardto knowwho ownsit" "It'shardto knowwho ownsit because it's been sliced and because it's been sliced and diced so many ways by investors diced so many ways by investors that it could be somebody in that it could be somebody in" "Ireland who owns it." "Ireland who owns it." "You have these securitized" "You have these securitized pools, where investors own pools, where investors own pieces of it." "pieces of it." "The investors are around the" "The investors are around the world, literally, and so it's world, literally, and so it's just in no-person's land." "just in no-person's land." "It's a vacant property, mostly" "It's a vacant property, mostly vandalized, and it just sits vandalized, and it just sits here, and we can't do anything here, and we can't do anything with it." "with it." "And the reality is that" "And the reality is that that plays out across this that plays out across this neighborhood hundreds of times." "neighborhood hundreds of times." "Thathousehasaloan that is" "Thathousehasaloan that is somewhere lost in a huge somewhere lost in a huge financial vehicle put together financial vehicle put together by some young turks on Wall by some young turks on Wall" "Street." "Street." "It's lost in that billion-dollar" "It's lost in that billion-dollar package." "package." "There's nobody assigned to look" "There's nobody assigned to look after it." "after it." "And there're whole subdivisions" "And there're whole subdivisions like this, by the way, that are like this, by the way, that are just lost in this great momoss." "just lost in this great momoss." "And so it affects Main Street" "And so it affects Main Street because Wall Street was too because Wall Street was too greedy." "greedy." "The greed of Wall Street broke" "The greed of Wall Street broke" "Main Street."