WEBVTT 00:00:00.000 --> 00:00:02.819 September 15th, 2008. It's a Monday morning. 00:00:03.000 --> 00:00:05.639 Yeah. And, you know, depending on where you were 00:00:05.639 --> 00:00:07.500 in the world, the sun was just coming up or the 00:00:07.500 --> 00:00:09.859 day was already halfway done. You might have 00:00:09.859 --> 00:00:11.900 been grabbing a coffee, getting the kids ready 00:00:11.900 --> 00:00:14.039 for school, or maybe you were already at your 00:00:14.039 --> 00:00:16.500 desk. But when you turned on the news that morning. 00:00:17.890 --> 00:00:19.730 Everything had changed. It was a fundamental 00:00:19.730 --> 00:00:23.050 shift, a watershed moment, really. Lehman Brothers 00:00:23.050 --> 00:00:25.010 had filed for bankruptcy. And we have to be clear 00:00:25.010 --> 00:00:27.589 here, this wasn't some, you know, fly -by -night 00:00:27.589 --> 00:00:29.929 startup or regional bank that took a few bad 00:00:29.929 --> 00:00:32.649 bets. No, no, no. This was an institution. I 00:00:32.649 --> 00:00:34.710 mean, this is a bank that had survived the U 00:00:34.710 --> 00:00:37.670 .S. Civil War. The Civil War. It survived the 00:00:37.670 --> 00:00:40.009 Great Depression. It survived two world wars. 00:00:40.450 --> 00:00:43.549 And then, poof. And the scale of it was just... 00:00:43.920 --> 00:00:46.460 It was massive. It was the fourth largest investment 00:00:46.460 --> 00:00:49.679 bank in the entire United States. You had Goldman, 00:00:49.899 --> 00:00:52.740 Morgan Stanley, Merrill Lynch, and then Lehman. 00:00:53.299 --> 00:00:55.600 And just like that, in the blink of an eye, it 00:00:55.600 --> 00:00:58.299 was gone. Insolvent. I think for a lot of us, 00:00:58.320 --> 00:01:00.600 even if we weren't following the financial pages 00:01:00.600 --> 00:01:03.159 every single day, that was the moment the ground 00:01:03.159 --> 00:01:06.590 actually shook. It was. Before that Monday, you 00:01:06.590 --> 00:01:08.810 heard rumblings, right? Maybe you saw a headline 00:01:08.810 --> 00:01:11.469 about housing prices softening a bit in Florida 00:01:11.469 --> 00:01:14.189 or something about subprime on the back page 00:01:14.189 --> 00:01:18.090 of the newspaper. But Lehman, that was the earthquake. 00:01:18.650 --> 00:01:21.230 It really was the climax of a tragedy that had 00:01:21.230 --> 00:01:23.049 been written really over the previous decade. 00:01:23.129 --> 00:01:25.250 But you're right. The psychological impact was 00:01:25.250 --> 00:01:27.689 just immediate. How do you even measure that? 00:01:27.950 --> 00:01:29.989 Well, there's a metric we look at called the 00:01:29.989 --> 00:01:32.510 TED spread. It sounds super technical, but it's 00:01:32.510 --> 00:01:34.989 not. It's basically a fear gauge. A fear gauge. 00:01:35.230 --> 00:01:37.109 I like that. It measures the difference between 00:01:37.109 --> 00:01:39.030 what the U .S. government pays to borrow money 00:01:39.030 --> 00:01:41.769 and what banks charge to lend to each other. 00:01:41.950 --> 00:01:44.549 So, OK, if the banks all trust each other, the 00:01:44.549 --> 00:01:46.329 spread is low. They're all on the same team. 00:01:46.750 --> 00:01:49.599 Exactly. But on that morning, the TED spread 00:01:49.599 --> 00:01:54.260 just. It spiked to record highs. Trust had completely 00:01:54.260 --> 00:01:56.560 evaporated from the system. It wasn't just that 00:01:56.560 --> 00:02:00.140 Lehman was gone. No, it was that no bank knew 00:02:00.140 --> 00:02:02.719 if the bank across the street was next. So what 00:02:02.719 --> 00:02:04.739 did they do? They just stopped lending to anyone. 00:02:04.959 --> 00:02:07.700 The plumbing of the entire global financial system 00:02:07.700 --> 00:02:12.009 just. clogged solid. And that is exactly what 00:02:12.009 --> 00:02:14.650 we are here to do today. We are going to go deep. 00:02:14.689 --> 00:02:17.330 I mean, deeper than just a timeline or a list 00:02:17.330 --> 00:02:19.789 of failed banks. We want to unpack the anatomy 00:02:19.789 --> 00:02:23.229 of this disaster. Right. How do you go from one 00:02:23.229 --> 00:02:26.710 guy in, I don't know, Ohio defaulting on a two 00:02:26.710 --> 00:02:29.229 hundred thousand dollar mortgage to the entire 00:02:29.229 --> 00:02:33.090 global economy almost turning off? It is a fascinating 00:02:33.090 --> 00:02:35.990 and frankly, a terrifying journey. It involves. 00:02:36.540 --> 00:02:38.580 Everything from the very bottom of the economic 00:02:38.580 --> 00:02:41.960 ladder. We're talking predatory loans given to 00:02:41.960 --> 00:02:44.259 people who had absolutely no hope of ever paying 00:02:44.259 --> 00:02:47.560 them back. all the way to the absolute peak of 00:02:47.560 --> 00:02:50.860 intellectual hubris, where mathematicians with 00:02:50.860 --> 00:02:52.919 PhDs convinced themselves they had conquered 00:02:52.919 --> 00:02:55.159 risk with these beautiful, elegant formulas. 00:02:55.379 --> 00:02:57.080 We're going to be looking at the so -called villains, 00:02:57.240 --> 00:02:59.300 or maybe it's better to call them the enablers. 00:02:59.419 --> 00:03:01.020 The enablers is a good word for it. The shadow 00:03:01.020 --> 00:03:04.319 banking system, the rating agencies, the regulators 00:03:04.319 --> 00:03:08.039 who were completely asleep at the wheel. And 00:03:08.039 --> 00:03:10.139 for this deep dive, we are going to be relying 00:03:10.139 --> 00:03:12.780 on a massive stack of sources. We have the financial 00:03:12.780 --> 00:03:15.659 crisis. Inquiry Commission report, which it's 00:03:15.659 --> 00:03:17.780 the official autopsy, really. We've got economic 00:03:17.780 --> 00:03:19.979 data from the Federal Reserve and we've got contemporary 00:03:19.979 --> 00:03:22.099 accounts of the panic as it was happening. And 00:03:22.099 --> 00:03:23.620 you're right. We have to start with the setup 00:03:23.620 --> 00:03:27.639 because a fire this big doesn't just. Yeah. It 00:03:27.639 --> 00:03:30.080 doesn't just start on its own. You need dry wood. 00:03:30.219 --> 00:03:32.280 You need a whole lot of gasoline and then you 00:03:32.280 --> 00:03:35.460 need a spark. So let's talk about the fuel before 00:03:35.460 --> 00:03:38.060 the panic, before the bailouts, even before the 00:03:38.060 --> 00:03:42.360 housing bubble really got inflated. How did the 00:03:42.360 --> 00:03:46.840 world get so awash in cash that we started doing 00:03:46.840 --> 00:03:48.800 really, really stupid things with it? You have 00:03:48.800 --> 00:03:51.800 to rewind the clock. Go back to the early 2000s. 00:03:51.800 --> 00:03:53.840 Yeah. And you have to think about where we were 00:03:53.840 --> 00:03:56.180 as a country psychologically. The dot -com bubble 00:03:56.180 --> 00:03:59.020 had just burst. Right, in 2000. That wiped out 00:03:59.020 --> 00:04:02.219 trillions in paper wealth. Trillions. Then, of 00:04:02.219 --> 00:04:04.419 course, the absolute tragedy of September 11, 00:04:04.560 --> 00:04:09.259 2001. The U .S. economy was reeling. It was vulnerable. 00:04:09.439 --> 00:04:11.300 I remember that time so clearly. There was this 00:04:11.300 --> 00:04:14.699 genuine, palpable fear that the economy would 00:04:14.699 --> 00:04:17.180 just grind to a halt. Precisely. So the Federal 00:04:17.180 --> 00:04:19.100 Reserve, which was led by Alan Greenspan at the 00:04:19.100 --> 00:04:21.319 time, decided to do what a central bank does 00:04:21.319 --> 00:04:23.259 in that situation. They decided to flood the 00:04:23.259 --> 00:04:25.319 engine with gas. They lowered interest rates. 00:04:25.540 --> 00:04:28.019 Dramatically. I mean, we went from interest rates 00:04:28.019 --> 00:04:31.379 of about 6 .5 % in the year 2000 all the way 00:04:31.379 --> 00:04:35.819 down to just 1 % by 2003. 1 %? That is... That's 00:04:35.819 --> 00:04:38.060 effectively free money. It's historically unbelievably 00:04:38.060 --> 00:04:41.540 low. And the idea was simple, right? To incentivize 00:04:41.540 --> 00:04:45.139 borrowing. If money is cheap, businesses will 00:04:45.139 --> 00:04:47.860 borrow to expand and people will borrow to buy 00:04:47.860 --> 00:04:51.300 houses and cars. And it worked. It did. It stimulated 00:04:51.300 --> 00:04:55.120 the economy. There was another massive factor 00:04:55.120 --> 00:04:58.079 at play here, something that Ben Bernanke, who 00:04:58.079 --> 00:05:00.500 would eventually succeed Greenspan, he called 00:05:00.500 --> 00:05:03.180 it the global savings glut. OK, let's stop and 00:05:03.180 --> 00:05:05.319 unpack that for a second. Global savings glut. 00:05:05.660 --> 00:05:07.959 It sounds like we just had too much money in 00:05:07.959 --> 00:05:09.800 the world's piggy bank. Why is having too much 00:05:09.800 --> 00:05:12.279 savings a bad thing? It's not bad in isolation, 00:05:12.560 --> 00:05:14.920 but it creates these massive distortions. You 00:05:14.920 --> 00:05:16.699 have to look at the geopolitics of the moment. 00:05:17.360 --> 00:05:19.439 And in the late 90s, the Asian financial crisis 00:05:19.439 --> 00:05:21.660 absolutely devastated economies like Thailand, 00:05:21.779 --> 00:05:24.519 South Korea, Indonesia. Those countries learned 00:05:24.519 --> 00:05:29.339 a very, very hard lesson. Never, ever rely on 00:05:29.339 --> 00:05:32.060 foreign lenders who can pull their money out 00:05:32.060 --> 00:05:34.399 on a whim. So what did they start doing? They 00:05:34.399 --> 00:05:38.069 started saving. Aggressively, they ran huge trade 00:05:38.069 --> 00:05:40.629 surpluses with the U .S. and stockpiled cash. 00:05:40.870 --> 00:05:43.209 So you have these enormous pools of capital just 00:05:43.209 --> 00:05:46.389 sitting in Asian central banks. And at the same 00:05:46.389 --> 00:05:48.649 time, oil prices are rising. So the Middle East 00:05:48.649 --> 00:05:51.189 has tons of cash, too. Right. And all this capital. 00:05:51.329 --> 00:05:53.709 Yeah. It needs a home. It needs to be invested 00:05:53.709 --> 00:05:57.189 somewhere. But here's the key. These countries 00:05:57.189 --> 00:05:59.670 were terrified of risk. After what happened in 00:05:59.670 --> 00:06:02.399 the 90s. Exactly. They didn't want to buy tech 00:06:02.399 --> 00:06:04.800 stocks or risky ventures. They wanted safety. 00:06:04.899 --> 00:06:07.100 They wanted U .S. dollars. And specifically, 00:06:07.319 --> 00:06:09.819 they wanted what are called safe assets, things 00:06:09.819 --> 00:06:12.379 like U .S. treasury bonds. So you literally have 00:06:12.379 --> 00:06:15.300 a wall of money coming from overseas and it's 00:06:15.300 --> 00:06:17.839 all aimed at the U .S. financial system. A tsunami 00:06:17.839 --> 00:06:20.220 of money is a better word for it. Trillions of 00:06:20.220 --> 00:06:21.959 dollars flowing into the U .S. debt markets. 00:06:22.160 --> 00:06:24.600 And this, in turn, drove interest rates down 00:06:24.600 --> 00:06:26.459 even further. But here's the catch. What's the 00:06:26.459 --> 00:06:28.620 catch? There weren't enough U .S. treasury bonds 00:06:28.620 --> 00:06:31.579 to go around. The demand for safe assets completely 00:06:31.579 --> 00:06:33.939 outstripped the supply. And this is where the 00:06:33.939 --> 00:06:36.000 psychology gets so interesting, right? You have 00:06:36.000 --> 00:06:38.240 these huge investors. We're talking pension funds, 00:06:38.439 --> 00:06:40.740 foreign governments, insurance companies. And 00:06:40.740 --> 00:06:42.759 they need two things that usually don't go together. 00:06:43.500 --> 00:06:47.500 They need absolute safety, so a AAA rating, but 00:06:47.500 --> 00:06:49.379 they also desperately need a return on their 00:06:49.379 --> 00:06:52.220 investment. And with interest rates at 1%, you 00:06:52.220 --> 00:06:54.480 just can't make any money buying government bonds. 00:06:54.720 --> 00:06:56.199 You've hit the nail on the head. They were absolutely 00:06:56.199 --> 00:06:58.860 starving for yield. Starving for yield. Imagine 00:06:58.860 --> 00:07:01.699 you manage a pension fund for, say, a bunch of 00:07:01.699 --> 00:07:04.279 teachers. You have to pay them their retirement 00:07:04.279 --> 00:07:07.839 in 10 years. You need to make, let's say, 7 % 00:07:07.839 --> 00:07:11.160 or 8 % a year to meet those obligations. Right. 00:07:11.720 --> 00:07:14.120 If safe government bonds are only paying 1 % 00:07:14.120 --> 00:07:17.959 or 2%, you are in huge trouble. You are desperate 00:07:17.959 --> 00:07:20.180 for anything that pays more but is still quote 00:07:20.180 --> 00:07:23.259 -unquote safe. And Wall Street, being the helpful, 00:07:23.379 --> 00:07:25.920 innovative service provider that it is, basically 00:07:25.920 --> 00:07:27.879 said, don't you worry, we can fix that for you. 00:07:27.959 --> 00:07:30.920 Wall Street had a lightbulb moment. They realized 00:07:30.920 --> 00:07:32.860 they could manufacture a product that looked 00:07:32.860 --> 00:07:35.600 and felt like a safe bond but paid a much higher 00:07:35.600 --> 00:07:38.120 interest rate. And the raw material for that 00:07:38.120 --> 00:07:40.839 product was the American housing market. Which 00:07:40.839 --> 00:07:43.660 brings us to the housing mania. I think everyone, 00:07:43.860 --> 00:07:46.079 whether they owned a home or not, remembers this 00:07:46.079 --> 00:07:48.519 era. It just felt like the basic laws of economic 00:07:48.519 --> 00:07:51.160 gravity had been suspended. Oh, the numbers are 00:07:51.160 --> 00:07:54.439 just staggering. Between 1998 and 2006, the price 00:07:54.439 --> 00:07:57.500 of the typical American house increased by 124 00:07:57.500 --> 00:08:00.860 percent. 124 percent. That's more than double 00:08:00.860 --> 00:08:03.319 in less than a decade. And it wasn't supported 00:08:03.319 --> 00:08:05.399 by fundamentals. It wasn't supported by income 00:08:05.399 --> 00:08:08.709 growth. Historically, in the U .S., a house costs 00:08:08.709 --> 00:08:12.389 about 2 .9 to 3 .1 times the median annual income. 00:08:12.709 --> 00:08:15.629 It was this incredibly stable ratio for decades. 00:08:16.029 --> 00:08:18.269 And where did it go? The 2006, that ratio hit 00:08:18.269 --> 00:08:21.490 4 .6. Houses were becoming fundamentally unaffordable 00:08:21.490 --> 00:08:22.949 for the people who were supposed to be living 00:08:22.949 --> 00:08:25.550 in them. But people kept buying. The mania just 00:08:25.550 --> 00:08:28.009 took over. Because of the psychology of the bubble. 00:08:28.730 --> 00:08:31.430 If you believe, truly believe, that the price 00:08:31.430 --> 00:08:33.929 of your house will go up 10 % next year, it makes 00:08:33.929 --> 00:08:36.009 all the sense in the world to buy now. even if 00:08:36.009 --> 00:08:37.730 you have to stretch your budget to the breaking 00:08:37.730 --> 00:08:40.250 point. And it wasn't just buying. Homeowners 00:08:40.250 --> 00:08:43.629 started treating their houses like personal ATM 00:08:43.629 --> 00:08:45.769 machines. This is the home equity line of credit, 00:08:45.850 --> 00:08:49.450 or HELOC craze. Right. Exactly. You buy a house 00:08:49.450 --> 00:08:52.850 for $200 ,000. Two years later, the bank sends 00:08:52.850 --> 00:08:54.889 you a letter saying, congratulations, it's now 00:08:54.889 --> 00:08:58.409 worth $300 ,000. You feel $100 ,000 richer. So 00:08:58.409 --> 00:09:00.629 you refinance. You refinance, you pull out that 00:09:00.629 --> 00:09:03.210 equity, and you buy a boat. or a second car, 00:09:03.289 --> 00:09:06.529 or you go on a big vacation. Between 2001 and 00:09:06.529 --> 00:09:10.309 2005, American homeowners extracted nearly $5 00:09:10.309 --> 00:09:14.090 trillion in home equity. $5 trillion. That's 00:09:14.090 --> 00:09:17.129 an unbelievable amount of consumption that was 00:09:17.129 --> 00:09:19.950 just fueled by paper gains. It wasn't real. It 00:09:19.950 --> 00:09:21.990 propped up the entire U .S. economy for years, 00:09:22.110 --> 00:09:26.090 but it was all built on one single, incredibly 00:09:26.090 --> 00:09:28.610 fragile assumption. That prices would never fall. 00:09:28.710 --> 00:09:30.769 That they would never fall. Okay, so we have 00:09:30.769 --> 00:09:34.259 the fuel. All this cheap money, this global demand 00:09:34.259 --> 00:09:37.879 for safe assets. We have the raw material, the 00:09:37.879 --> 00:09:41.419 ever -rising price of American homes. Now we 00:09:41.419 --> 00:09:44.600 need to talk about the machine, the meat grinder 00:09:44.600 --> 00:09:47.200 that turned all of this into a global disaster. 00:09:47.620 --> 00:09:49.259 This is where we get into the plumbing of the 00:09:49.259 --> 00:09:51.360 crisis. And, you know, it starts with the loans 00:09:51.360 --> 00:09:55.039 themselves. In a normal functioning world. Banks 00:09:55.039 --> 00:09:58.100 lend to what we call prime borrowers. Good credit, 00:09:58.259 --> 00:10:00.960 steady job, 20 % down payment, the whole thing. 00:10:01.080 --> 00:10:03.399 The whole nine yards. But eventually you run 00:10:03.399 --> 00:10:06.159 out of those people. Right. But Wall Street's 00:10:06.159 --> 00:10:08.860 appetite for mortgages was insatiable. They just 00:10:08.860 --> 00:10:10.860 kept demanding more and more raw material to 00:10:10.860 --> 00:10:12.600 package up for those global investors we talked 00:10:12.600 --> 00:10:15.759 about. So when the prime borrowers ran out, they 00:10:15.759 --> 00:10:17.539 didn't stop. They just lowered the standards. 00:10:17.779 --> 00:10:20.139 And this is where subprime comes in. Enter subprime. 00:10:20.200 --> 00:10:22.659 It generally refers to borrowers with FICO scores 00:10:22.659 --> 00:10:26.029 below 660. But as the bubble inflated, they went 00:10:26.029 --> 00:10:28.970 lower and lower and lower, eventually lending 00:10:28.970 --> 00:10:31.529 to people with scores below 620. But it wasn't 00:10:31.529 --> 00:10:33.690 just the credit score, was it? It was the documentation, 00:10:33.950 --> 00:10:36.649 or the lack of it. That was the real scandal. 00:10:36.809 --> 00:10:39.809 We went from full documentation loans to low 00:10:39.809 --> 00:10:43.279 -doc, and then finally... to no -doc loans. I've 00:10:43.279 --> 00:10:46.299 heard the stories. This is the era of the non 00:10:46.299 --> 00:10:48.779 -in -angel loan. That's right. No income, no 00:10:48.779 --> 00:10:51.440 job, no assets. Just walk me through this because 00:10:51.440 --> 00:10:53.940 it sounds insane. I walk into a bank. I have 00:10:53.940 --> 00:10:56.000 no job. I have no income to show you. I have 00:10:56.000 --> 00:10:58.379 no assets. And you're going to give me half a 00:10:58.379 --> 00:11:00.340 million dollars for a house. How does a loan 00:11:00.340 --> 00:11:03.440 officer even justify that on paper? Well, in 00:11:03.440 --> 00:11:06.860 the old days, it's a wonderful life banking model. 00:11:07.500 --> 00:11:09.700 The bank wouldn't do it. It's that simple. Because 00:11:09.700 --> 00:11:12.440 the bank kept the loan on its books. If you didn't 00:11:12.440 --> 00:11:14.820 pay, the bank lost money. But the model had changed. 00:11:15.120 --> 00:11:17.320 The model had completely changed to originate 00:11:17.320 --> 00:11:20.340 to distribute. The mortgage broker and the lender, 00:11:20.480 --> 00:11:23.120 they originate the loan, they take a fat commission 00:11:23.120 --> 00:11:26.019 fee right up front, and then they instantly sell 00:11:26.019 --> 00:11:27.820 that loan to a Wall Street bank. So they have 00:11:27.820 --> 00:11:31.429 zero skin in the game. None. Zero. In fact, the 00:11:31.429 --> 00:11:33.149 worse the loan, often the higher the commission 00:11:33.149 --> 00:11:35.669 because these were higher interest, riskier loans. 00:11:35.870 --> 00:11:38.169 And this led to the rise of what were called 00:11:38.169 --> 00:11:41.750 liar loans. Liar loans. Where lenders would essentially 00:11:41.750 --> 00:11:43.830 tell borrowers, look, just write down that you 00:11:43.830 --> 00:11:45.769 make $100 ,000 a year. We're not going to check. 00:11:45.970 --> 00:11:49.070 There's that famous, almost apocryphal story 00:11:49.070 --> 00:11:51.610 of the strawberry picker in California. I know 00:11:51.610 --> 00:11:54.429 the one you mean. Making something like $14 ,000 00:11:54.429 --> 00:11:59.179 a year. And was given a loan for a $720 ,000 00:11:59.179 --> 00:12:02.320 house. And it happened everywhere. Countrywide 00:12:02.320 --> 00:12:05.700 Financial, run by Angelo Mozilo, was the absolute 00:12:05.700 --> 00:12:08.559 poster child for this. Their internal culture 00:12:08.559 --> 00:12:11.340 was just volume, volume, volume. Their motto 00:12:11.340 --> 00:12:15.059 was fund them. If the borrower had a pulse. They 00:12:15.059 --> 00:12:16.899 got a loan. OK, but this is the part I always 00:12:16.899 --> 00:12:19.559 get stuck on. I get why the local mortgage broker 00:12:19.559 --> 00:12:21.840 doesn't care. He gets his fee and moves on. I 00:12:21.840 --> 00:12:23.799 get why Countrywide sells it to Wall Street. 00:12:23.860 --> 00:12:26.259 But why does Wall Street buy it? Why does Lehman 00:12:26.259 --> 00:12:28.899 Brothers or Bear Stearns want a big box full 00:12:28.899 --> 00:12:31.820 of these obviously toxic loans? Because of the 00:12:31.820 --> 00:12:34.620 alchemy of securitization. This is the sausage 00:12:34.620 --> 00:12:37.259 making process you hear about. Wall Street takes 00:12:37.259 --> 00:12:40.399 thousands of these individual loans. Some are 00:12:40.399 --> 00:12:42.600 OK, some are terrible, and they put them all 00:12:42.600 --> 00:12:44.830 into a trust. They bundle them together into 00:12:44.830 --> 00:12:46.590 what's called a mortgage -backed security, or 00:12:46.590 --> 00:12:50.590 MBS. But a bundle of bad loans is still, well, 00:12:50.649 --> 00:12:53.009 it's still a bundle of bad loans, isn't it? Ah, 00:12:53.350 --> 00:12:56.649 but then they slice them up. This is the critical 00:12:56.649 --> 00:13:00.610 concept. The CDO, or collateralized debt obligation. 00:13:01.409 --> 00:13:03.789 The best way to think about it is to imagine 00:13:03.789 --> 00:13:06.570 a waterfall. Okay, I'm with you. A waterfall. 00:13:06.769 --> 00:13:09.370 The money from all those thousands of homeowners 00:13:09.370 --> 00:13:12.049 paying their mortgages every month. That's the 00:13:12.049 --> 00:13:14.769 water flowing down from the top. And the investors 00:13:14.769 --> 00:13:16.750 are all standing at different levels of this 00:13:16.750 --> 00:13:19.470 waterfall holding buckets. The investors at the 00:13:19.470 --> 00:13:21.350 very, very top, they're in what's called the 00:13:21.350 --> 00:13:23.330 senior tranche. They get to fill their buckets 00:13:23.330 --> 00:13:26.029 first. So if a few people default and the flow 00:13:26.029 --> 00:13:28.250 of water slows down a little bit, the guys at 00:13:28.250 --> 00:13:29.889 the top, they're fine. They still get all their 00:13:29.889 --> 00:13:33.110 water. Exactly. They are protected. You would 00:13:33.110 --> 00:13:35.789 need a massive, catastrophic amount of defaults 00:13:35.789 --> 00:13:38.049 for the water to stop reaching the top of that 00:13:38.049 --> 00:13:41.450 waterfall. And because they are so safe, the 00:13:41.450 --> 00:13:44.629 credit rating agencies, we're talking S &P, Moody's, 00:13:44.789 --> 00:13:48.269 Fitch, they come in and they stamp that top tranche 00:13:48.269 --> 00:13:51.169 with a AAA rating. The highest rating there is, 00:13:51.230 --> 00:13:53.250 the same rating as the U .S. government. Very 00:13:53.250 --> 00:13:55.330 same. Then you have the middle tranches, the 00:13:55.330 --> 00:13:57.429 mezzanine tranches. And finally, at the very 00:13:57.429 --> 00:14:00.470 bottom, you have the equity tranche or what Wall 00:14:00.470 --> 00:14:03.070 Street insiders call the toxic waste. The toxic 00:14:03.070 --> 00:14:06.269 waste. These guys only get paid if everyone down 00:14:06.269 --> 00:14:08.690 to the last person pays their mortgage on time. 00:14:08.750 --> 00:14:10.490 If there are any defaults at all, they get hit 00:14:10.490 --> 00:14:13.220 first. But in exchange for taking on all that 00:14:13.220 --> 00:14:15.740 risk, they get a huge interest rate. So Wall 00:14:15.740 --> 00:14:17.639 Street essentially convinced the entire world 00:14:17.639 --> 00:14:20.100 that they had taken a pile of risky subprime 00:14:20.100 --> 00:14:22.639 loans. And through the magic of financial engineering, 00:14:22.799 --> 00:14:25.340 slicing and dicing, they had created brand new 00:14:25.340 --> 00:14:29.159 risk -free assets. Yes. And the global investors 00:14:29.159 --> 00:14:31.320 we talked about earlier, they couldn't buy them 00:14:31.320 --> 00:14:34.679 fast enough. The volume was just insane. CDO 00:14:34.679 --> 00:14:38.960 issuance peaked at over $180 billion in just 00:14:38.960 --> 00:14:42.259 the first quarter of 2007 alone. We have to talk 00:14:42.259 --> 00:14:44.019 about the math behind this for a minute because 00:14:44.019 --> 00:14:46.620 there was a specific Nobel Prize winning formula 00:14:46.620 --> 00:14:48.879 that everyone was using to justify this whole 00:14:48.879 --> 00:14:51.960 thing. The Gaussian Copula. Right. This gets 00:14:51.960 --> 00:14:54.879 a little nerdy, but it's absolutely crucial to 00:14:54.879 --> 00:14:56.759 understanding the intellectual failure here. 00:14:56.940 --> 00:15:00.399 The Gaussian copula was a formula that was adopted 00:15:00.399 --> 00:15:02.899 by Wall Street to measure the correlation between 00:15:02.899 --> 00:15:05.440 defaults. So basically, what are the odds that 00:15:05.440 --> 00:15:08.139 if person A defaults on their mortgage? their 00:15:08.139 --> 00:15:10.580 neighbor, person B, will also default. Exactly. 00:15:10.759 --> 00:15:12.740 And what did the model assume? It assumed very 00:15:12.740 --> 00:15:15.080 low correlation. What does that mean in simple 00:15:15.080 --> 00:15:17.460 terms? Well, think of it like this. If it starts 00:15:17.460 --> 00:15:19.019 raining in Seattle, does that mean it's also 00:15:19.019 --> 00:15:21.179 raining in Miami? No, of course not. They're 00:15:21.179 --> 00:15:23.980 completely independent events. Right. So if you're 00:15:23.980 --> 00:15:26.460 an insurance company and you insure houses against 00:15:26.460 --> 00:15:29.220 rain damage in 50 different states, you're pretty 00:15:29.220 --> 00:15:31.350 safe. They're not all going to flood at once. 00:15:31.669 --> 00:15:34.009 That is exactly how they viewed mortgages. They 00:15:34.009 --> 00:15:36.370 thought real estate is local. If the housing 00:15:36.370 --> 00:15:38.909 market in Florida crashes, Texas might be booming. 00:15:39.029 --> 00:15:42.370 If Arizona goes down, Ohio will be fine. But 00:15:42.370 --> 00:15:44.529 what if it's not rain? What if it's a giant asteroid 00:15:44.529 --> 00:15:47.070 that's heading for Earth? Exactly. If an asteroid 00:15:47.070 --> 00:15:49.870 hits, it burns everywhere at the same time. The 00:15:49.870 --> 00:15:52.399 correlation goes to one. The model, the Gaussian 00:15:52.399 --> 00:15:55.559 Copula, it did not account for a national decline 00:15:55.559 --> 00:15:58.259 in housing prices. It assumed that was impossible 00:15:58.259 --> 00:16:00.580 because it hadn't happened since the Great Depression. 00:16:00.779 --> 00:16:03.120 So when prices started falling everywhere at 00:16:03.120 --> 00:16:06.200 once? The math just broke. The models failed 00:16:06.200 --> 00:16:09.299 spectacularly. The AAA tranches weren't safe 00:16:09.299 --> 00:16:11.500 at all. They were just the last to drown. And 00:16:11.500 --> 00:16:13.940 it gets even worse because they didn't just stop 00:16:13.940 --> 00:16:15.840 at betting on the actual loans. They started 00:16:15.840 --> 00:16:18.740 making side bets. This is when we enter the shadow 00:16:18.740 --> 00:16:21.700 world of derivatives and credit default swaps 00:16:21.700 --> 00:16:26.179 or CDS. A CDS is basically an insurance policy. 00:16:26.360 --> 00:16:29.159 You pay a premium every month. And if a bond 00:16:29.159 --> 00:16:32.559 or a CDO defaults, the insurer pays you the full 00:16:32.559 --> 00:16:35.100 value. OK, that sounds like a prudent thing to 00:16:35.100 --> 00:16:37.419 do if I actually own the bond. I'm insuring my 00:16:37.419 --> 00:16:40.059 investment. But here's the crazy part. You didn't 00:16:40.059 --> 00:16:42.279 have to own the bond to buy the insurance on 00:16:42.279 --> 00:16:43.600 it. Wait, hold on. Let me get this straight. 00:16:43.700 --> 00:16:45.700 If I want to buy fire insurance on my house, 00:16:45.840 --> 00:16:47.980 I have to actually own the house. I can't buy 00:16:47.980 --> 00:16:50.139 insurance on your house and then, you know, hope 00:16:50.139 --> 00:16:52.360 it burns down so I can collect. That's illegal. 00:16:52.799 --> 00:16:55.399 In the normal insurance world, yes, it's illegal. 00:16:55.639 --> 00:16:57.759 It's called not having an insurable interest. 00:16:58.279 --> 00:17:00.779 In the completely unregulated derivatives world, 00:17:00.980 --> 00:17:03.519 it was perfectly legal and incredibly common. 00:17:03.740 --> 00:17:06.380 It's like standing at a racetrack. You aren't 00:17:06.380 --> 00:17:08.880 riding the horse. You don't own the horse. But 00:17:08.880 --> 00:17:10.980 you can bet millions of dollars that the horse 00:17:10.980 --> 00:17:13.099 will break its leg. So this is what created the 00:17:13.099 --> 00:17:16.059 synthetic CDO. That's right. They created these 00:17:16.059 --> 00:17:20.359 new, purely synthetic bundles of bets. This meant 00:17:20.359 --> 00:17:22.900 that while there might be, say, only $10 million 00:17:22.900 --> 00:17:26.460 of actual bad loans in existence, there could 00:17:26.460 --> 00:17:28.960 be $100 million or $1 billion of bets riding 00:17:28.960 --> 00:17:32.400 on whether those loans failed or not. It magnified 00:17:32.400 --> 00:17:34.819 the potential losses exponentially. And this 00:17:34.819 --> 00:17:37.720 is where the insurance giant AIG steps into the 00:17:37.720 --> 00:17:40.579 picture. AIG was at the time the biggest insurance 00:17:40.579 --> 00:17:43.259 company in the world. They had a small division 00:17:43.259 --> 00:17:45.660 based in London called AIG Financial Products 00:17:45.660 --> 00:17:48.079 that sold trillions of dollars worth of these 00:17:48.079 --> 00:17:50.759 swaps. They were essentially selling fire insurance 00:17:50.759 --> 00:17:53.910 on houses that were already smoldering. but they 00:17:53.910 --> 00:17:56.710 treated the premiums they collected as pure risk 00:17:56.710 --> 00:17:59.230 -free profit. They didn't put aside enough capital 00:17:59.230 --> 00:18:01.990 reserves to actually pay out if the fire started. 00:18:02.009 --> 00:18:04.089 Not even close. It was just breathtaking recklessness. 00:18:04.410 --> 00:18:06.289 Okay, we have one more crucial piece of this 00:18:06.289 --> 00:18:08.190 machine to assemble before we can watch the whole 00:18:08.190 --> 00:18:11.170 thing blow up. The shadow banking system. This 00:18:11.170 --> 00:18:13.150 is a term that sounds like something out of a 00:18:13.150 --> 00:18:15.529 spy novel, but it is probably the most important 00:18:15.529 --> 00:18:18.410 structural flaw in the entire system. So what 00:18:18.410 --> 00:18:20.819 exactly is a shadow bank? It's any financial 00:18:20.819 --> 00:18:22.640 institution that acts like a bank, so it's lending 00:18:22.640 --> 00:18:25.400 and borrowing. But it isn't a traditional commercial 00:18:25.400 --> 00:18:27.839 bank with deposits. We are talking about the 00:18:27.839 --> 00:18:29.839 big investment banks like Lehman Brothers and 00:18:29.839 --> 00:18:32.460 Bear Stearns, hedge funds, and these strange 00:18:32.460 --> 00:18:35.599 entities called SIVs or structured investment 00:18:35.599 --> 00:18:37.779 vehicles. What's the fundamental difference between 00:18:37.779 --> 00:18:40.700 them and my local Bank of America branch? Two 00:18:40.700 --> 00:18:44.339 things, regulation and insurance. Your deposit 00:18:44.339 --> 00:18:47.859 at Bank of America is insured by the FDIC up 00:18:47.859 --> 00:18:51.140 to a certain limit. If the bank fails, the government 00:18:51.140 --> 00:18:53.319 guarantees you'll get your money back. Lehman 00:18:53.319 --> 00:18:55.640 Brothers had no such guarantee. None. And they 00:18:55.640 --> 00:18:58.759 operated on a scale that is just hard to comprehend. 00:18:59.180 --> 00:19:02.140 By 2007, the shadow banking system was actually 00:19:02.140 --> 00:19:04.619 larger than the traditional banking system. Investment 00:19:04.619 --> 00:19:07.039 banks alone held around $4 trillion in assets. 00:19:07.359 --> 00:19:10.059 But here's the fatal flaw, the Achilles heel. 00:19:10.279 --> 00:19:12.759 Which is? The asset liability mismatch. Okay, 00:19:12.819 --> 00:19:15.220 break that down for us. A traditional bank takes 00:19:15.220 --> 00:19:17.579 your deposit. which is a short -term liability. 00:19:17.720 --> 00:19:20.440 You can ask for it back anytime. And it lends 00:19:20.440 --> 00:19:23.119 it out for 30 years in a mortgage, a long -term 00:19:23.119 --> 00:19:25.759 asset. That's always a bit risky. But shadow 00:19:25.759 --> 00:19:27.960 banks were doing something far, far riskier. 00:19:28.079 --> 00:19:30.619 They were funding their massive operations using 00:19:30.619 --> 00:19:33.119 something called the repo market. The repo market. 00:19:33.220 --> 00:19:35.160 This is one of those terms that Wall Street people 00:19:35.160 --> 00:19:37.099 throw around that makes normal people's eyes 00:19:37.099 --> 00:19:39.519 glaze over. But you're saying it's critical. 00:19:39.660 --> 00:19:41.769 So how does it work? Think of it like a pawn 00:19:41.769 --> 00:19:44.630 shop for billionaires. Okay, I like that. Lehman 00:19:44.630 --> 00:19:47.650 Brothers holds a mortgage -backed security that's 00:19:47.650 --> 00:19:51.890 worth, say, $100. But they need cash today to 00:19:51.890 --> 00:19:54.829 pay their staff, make trades. So they go to a 00:19:54.829 --> 00:19:57.210 lender, maybe a big money market fund, and say, 00:19:57.289 --> 00:20:01.890 here is this $100 bond. Lend me $98 in cash just 00:20:01.890 --> 00:20:04.369 for tonight. I promise I'll buy the bond back 00:20:04.369 --> 00:20:07.250 from you tomorrow morning for $98 plus a tiny 00:20:07.250 --> 00:20:09.400 bit of interest. So they are borrowing massive 00:20:09.400 --> 00:20:12.319 amounts of money for literally 24 hours. Yes. 00:20:12.619 --> 00:20:15.539 They are rolling this debt over every single 00:20:15.539 --> 00:20:19.240 day. Now, imagine Lehman is doing this with billions 00:20:19.240 --> 00:20:22.240 and billions of dollars. They are borrowing billions 00:20:22.240 --> 00:20:25.240 every night to fund assets, these mortgages. 00:20:25.420 --> 00:20:28.200 That won't pay off for 30 years. It only works 00:20:28.200 --> 00:20:30.319 as long as the lender agrees to renew the loan 00:20:30.319 --> 00:20:33.079 the next morning. Exactly. But what happens if 00:20:33.079 --> 00:20:35.940 that lender wakes up? reads the news that mortgages 00:20:35.940 --> 00:20:38.400 are going bad across the country, and says, you 00:20:38.400 --> 00:20:40.660 know what, I don't really trust that bond you're 00:20:40.660 --> 00:20:43.039 giving me as collateral anymore. I want my cash 00:20:43.039 --> 00:20:45.140 back. And I'm not lending to you again today. 00:20:45.339 --> 00:20:47.980 The bank has no cash. They're insolvent. Instantly. 00:20:48.140 --> 00:20:50.539 That is what we call a run on the repo market. 00:20:50.900 --> 00:20:54.059 It's an electronic, invisible bank run. There 00:20:54.059 --> 00:20:55.759 are no lines of people outside a teller window, 00:20:56.000 --> 00:20:58.480 just funding that disappears at the speed of 00:20:58.480 --> 00:21:01.400 light. And these banks were so leveraged. Insanely 00:21:01.400 --> 00:21:04.200 leveraged, borrowing $30, sometimes $40 for every 00:21:04.200 --> 00:21:07.220 $1 of their own money they had. A tiny, tiny 00:21:07.220 --> 00:21:09.519 drop in the value of their assets was enough 00:21:09.519 --> 00:21:11.740 to wipe them out completely. So the tank is full 00:21:11.740 --> 00:21:15.680 of gas. The fumes are literally everywhere. Let's 00:21:15.680 --> 00:21:17.720 talk about the tremors, because this disaster 00:21:17.720 --> 00:21:20.200 didn't happen all at once on September 15. No, 00:21:20.279 --> 00:21:23.240 not at all. The cracks started to appear well 00:21:23.240 --> 00:21:26.859 into 2007. We saw housing prices peak in mid 00:21:26.859 --> 00:21:30.420 -2006 and then start to roll over. Defaults started 00:21:30.420 --> 00:21:32.900 to tick up. And you had these classic warning 00:21:32.900 --> 00:21:35.500 signs, like the inverted yield curve in August 00:21:35.500 --> 00:21:38.400 of 2006, which is a textbook recession signal. 00:21:38.579 --> 00:21:40.160 And some people saw it coming, right? Right. 00:21:40.220 --> 00:21:41.960 Michael Burry, the guy from the movie The Big 00:21:41.960 --> 00:21:44.079 Short. He did. He was betting against the subprime 00:21:44.079 --> 00:21:47.059 market as early as 2005. But, you know, the mainstream 00:21:47.059 --> 00:21:48.519 completely ignored him. They thought he was a 00:21:48.519 --> 00:21:50.720 crank. So what was the first real crack in the 00:21:50.720 --> 00:21:54.000 dam? In early 2007, a huge subprime lender called 00:21:54.000 --> 00:21:56.579 New Century Financial went bankrupt. That was 00:21:56.579 --> 00:22:00.299 a big deal. Then in June of 2007, two hedge funds 00:22:00.299 --> 00:22:03.000 run by Bear Stearns completely collapsed. But 00:22:03.000 --> 00:22:05.220 the real oh crap moment for the global system 00:22:05.220 --> 00:22:08.519 was in August 2007 with that French bank BNP 00:22:08.519 --> 00:22:11.779 Paribas, right? Yes. That was the moment the 00:22:11.779 --> 00:22:15.559 music stopped. BNP Paribas is a massive global 00:22:15.559 --> 00:22:18.980 bank. They froze three of their investment funds. 00:22:19.140 --> 00:22:21.359 And they sent out this letter to their investors 00:22:21.359 --> 00:22:24.400 saying essentially, we cannot calculate the fair 00:22:24.400 --> 00:22:27.019 value of the assets in these funds because there 00:22:27.019 --> 00:22:29.359 is a complete evaporation of liquidity. Which 00:22:29.359 --> 00:22:32.559 is banker speak for. We have no idea what this 00:22:32.559 --> 00:22:34.720 junk is worth and absolutely no one on earth 00:22:34.720 --> 00:22:37.200 will buy it from us at any price. That's a perfect 00:22:37.200 --> 00:22:39.720 translation. And that was the moment the credit 00:22:39.720 --> 00:22:42.640 market seized up for the first time. Banks stopped 00:22:42.640 --> 00:22:45.200 trusting each other's collateral. The fear was 00:22:45.200 --> 00:22:47.559 spreading. Let's fast forward a bit to March 00:22:47.559 --> 00:22:50.480 2008. The first of the giants starts to fall. 00:22:50.839 --> 00:22:53.500 Bear Stearns. Bear Stearns was the smallest of 00:22:53.500 --> 00:22:55.700 the big five investment banks, but it was by 00:22:55.700 --> 00:22:57.559 far the most exposed to the mortgage market. 00:22:57.799 --> 00:23:00.039 And just as we described, they face a classic 00:23:00.039 --> 00:23:02.140 run on their repo funding. They were just bleeding 00:23:02.140 --> 00:23:04.140 cash every single day. And the government had 00:23:04.140 --> 00:23:06.039 to step in. The Federal Reserve and the Treasury, 00:23:06.240 --> 00:23:09.119 led by Hank Paulson, engineered a forced marriage. 00:23:09.599 --> 00:23:11.920 They strong -armed JPMorgan Chase into buying 00:23:11.920 --> 00:23:14.460 Bear Stearns over a single weekend. But the price, 00:23:14.500 --> 00:23:17.700 the price was the real shocker. It was unbelievable. 00:23:18.099 --> 00:23:21.420 A year earlier, Bear Stearns stock was trading 00:23:21.420 --> 00:23:25.140 at $170 a share. The initial deal that was announced 00:23:25.140 --> 00:23:28.940 was for $2 a share. $2! You couldn't buy a cup 00:23:28.940 --> 00:23:30.559 of coffee in New York City for the price of a 00:23:30.559 --> 00:23:32.640 share of a Wall Street Titan. They eventually 00:23:32.640 --> 00:23:35.539 had to bump it up to $10 a share to keep the 00:23:35.539 --> 00:23:37.900 shareholders from suing everyone into oblivion. 00:23:38.140 --> 00:23:40.980 But the message was sent. You can be a giant 00:23:40.980 --> 00:23:42.839 one day and be completely wiped out the next. 00:23:43.019 --> 00:23:44.740 But the Fed did something else, didn't they? 00:23:44.779 --> 00:23:46.720 They sweetened the deal for J .P. Morgan. They 00:23:46.720 --> 00:23:49.279 did. And this set a very dangerous precedent. 00:23:49.900 --> 00:23:53.420 The Fed agreed to take $30 billion of Bayer's 00:23:53.420 --> 00:23:57.099 most toxic assets onto its own books, onto the 00:23:57.099 --> 00:23:59.559 taxpayer's balance sheet, to make the deal happen. 00:23:59.700 --> 00:24:01.680 And the market saw this and thought. The market 00:24:01.680 --> 00:24:04.359 thought, oh, OK, Uncle Sam is here. He won't 00:24:04.359 --> 00:24:07.910 let the big boys fail. It created this massive 00:24:07.910 --> 00:24:10.990 sense of moral hazard. The Fed put. Exactly. 00:24:11.029 --> 00:24:13.450 Everyone assumed there was a Fed put, that the 00:24:13.450 --> 00:24:15.190 government would always be there to bail them 00:24:15.190 --> 00:24:17.549 out no matter how reckless they were. But before 00:24:17.549 --> 00:24:19.950 we get to the main event in September, I want 00:24:19.950 --> 00:24:22.109 to zoom in on a story from that summer that I 00:24:22.109 --> 00:24:24.710 think just perfectly captures the human panic 00:24:24.710 --> 00:24:29.630 of this whole era. IndyMac Bank. IndyMac is such 00:24:29.630 --> 00:24:32.109 a crucial case study. It was a big savings and 00:24:32.109 --> 00:24:34.630 loan based in Pasadena, California. And they 00:24:34.630 --> 00:24:37.630 were. They were aggressive. They specialized 00:24:37.630 --> 00:24:40.450 in what were called alt -A loans. What's an alt 00:24:40.450 --> 00:24:42.990 -A loan? Sort of the gray area between prime 00:24:42.990 --> 00:24:46.289 and subprime. Low documentation, but maybe for 00:24:46.289 --> 00:24:48.769 a borrower with a decent credit score. And it 00:24:48.769 --> 00:24:50.589 turned out they had been fabricating their capital 00:24:50.589 --> 00:24:53.250 strength for years. And Senator Chuck Schumer 00:24:53.250 --> 00:24:55.630 got wind of this. He did. He released a public 00:24:55.630 --> 00:24:58.670 letter in late June of 2008 questioning whether 00:24:58.670 --> 00:25:01.609 IndyMac was actually solvent. And when the public 00:25:01.609 --> 00:25:04.519 saw that letter, It triggered an old -fashioned 00:25:04.519 --> 00:25:07.359 1930s -style bank run. You can picture it. Oh, 00:25:07.380 --> 00:25:09.400 I want you to picture it. It's July in Southern 00:25:09.400 --> 00:25:11.440 California. It's hot. And there are hundreds, 00:25:11.599 --> 00:25:13.460 thousands of people lining up around the block, 00:25:13.500 --> 00:25:15.819 sweating, holding their passbooks and their bank 00:25:15.819 --> 00:25:17.740 statements, just desperate to get their life 00:25:17.740 --> 00:25:19.619 savings out of that bank. It's a scene from Mary 00:25:19.619 --> 00:25:21.740 Poppins or, like you said, the Great Depression 00:25:21.740 --> 00:25:27.160 in 2008. In 2008. In about 10 days, depositors 00:25:27.160 --> 00:25:31.369 pulled $1 .5 billion out. The bank completely 00:25:31.369 --> 00:25:35.069 collapsed. The FDIC seized it on July 11th. And 00:25:35.069 --> 00:25:37.589 here is the really terrifying part for the average 00:25:37.589 --> 00:25:40.910 person. People lost money. That's right. The 00:25:40.910 --> 00:25:44.089 FDIC insurance limit at the time was $100 ,000. 00:25:44.630 --> 00:25:46.609 If you had more than that in your account, you 00:25:46.609 --> 00:25:49.589 took a haircut. Uninsured depositors lost about 00:25:49.589 --> 00:25:53.660 $270 million. And that sent a shockwave through 00:25:53.660 --> 00:25:55.920 the public consciousness. It meant safe wasn't 00:25:55.920 --> 00:25:58.319 safe anymore. Exactly. So the tension is just 00:25:58.319 --> 00:26:00.799 building and building all summer. And then the 00:26:00.799 --> 00:26:03.200 two pillars of the entire U .S. mortgage market, 00:26:03.400 --> 00:26:05.680 Fannie Mae and Freddie Mac, they start to shake. 00:26:05.839 --> 00:26:08.880 And these aren't just banks. These are quasi 00:26:08.880 --> 00:26:11.259 -governmental. They owned or guaranteed something 00:26:11.259 --> 00:26:13.900 like $5 trillion in mortgages, half the entire 00:26:13.900 --> 00:26:17.440 market. By September, they were effectively insolvent. 00:26:17.579 --> 00:26:19.579 So on September 7th, the government took them 00:26:19.579 --> 00:26:22.000 over. Placed them into conservatorship. It was 00:26:22.000 --> 00:26:23.960 the biggest nationalization in American history. 00:26:24.180 --> 00:26:25.680 You would think that would calm the markets down. 00:26:25.819 --> 00:26:27.460 Okay, the government has stepped in and secured 00:26:27.460 --> 00:26:30.920 the mortgage market. You would think. But the 00:26:30.920 --> 00:26:33.900 market is like a predator. It looks for the next 00:26:33.900 --> 00:26:36.500 wounded animal in the herd. And that animal, 00:26:36.599 --> 00:26:39.460 without a doubt, was Lehman Brothers. So take 00:26:39.460 --> 00:26:42.460 us into that room. The weekend of September 13th 00:26:42.460 --> 00:26:46.779 and 14th, the now infamous Lehman Weekend. The 00:26:46.779 --> 00:26:48.619 meetings took place at the Federal Reserve Bank 00:26:48.619 --> 00:26:52.589 of New York. It's this imposing fortress -like 00:26:52.589 --> 00:26:55.289 building in downtown Manhattan. You had the three 00:26:55.289 --> 00:26:57.369 most powerful financial figures in the country 00:26:57.369 --> 00:26:59.970 in a room. Hank Paulson, the treasury secretary, 00:27:00.609 --> 00:27:03.470 Ben Bernanke, the Fed chair, and Tim Geithner, 00:27:03.589 --> 00:27:05.549 the president of the NY Fed. And they summoned 00:27:05.549 --> 00:27:07.529 all the Wall Street CEOs. That's right. They 00:27:07.529 --> 00:27:08.930 basically locked them in a room and said, you 00:27:08.930 --> 00:27:11.049 guys are going to figure this out. The smell 00:27:11.049 --> 00:27:13.470 of fear in that room must have been potent. And 00:27:13.470 --> 00:27:15.670 the plan was to find a buyer for Lehman, just 00:27:15.670 --> 00:27:17.329 like they did with Bear Stearns. They were trying 00:27:17.329 --> 00:27:19.829 to get Barclays or Bank of America to step up. 00:27:19.950 --> 00:27:22.309 They were. But Hank Paulson, who was getting 00:27:22.309 --> 00:27:24.309 hammered by the public and by Congress about 00:27:24.309 --> 00:27:27.589 bailouts, he drew a line in the sand. He said 00:27:27.589 --> 00:27:29.569 there would be no government money this time, 00:27:29.630 --> 00:27:32.769 no taxpayer funds. He wanted the market to solve 00:27:32.769 --> 00:27:35.109 its own problem. He was playing a very, very 00:27:35.109 --> 00:27:38.990 dangerous game of chicken. And he lost. Barclays 00:27:38.990 --> 00:27:41.349 wanted to buy Lehman. but British regulators 00:27:41.349 --> 00:27:43.690 wouldn't approve of the deal without a U .S. 00:27:43.690 --> 00:27:46.990 government guarantee. Paulson said no, so Barclays 00:27:46.990 --> 00:27:49.650 walked away. Bank of America, meanwhile, took 00:27:49.650 --> 00:27:52.230 a look at Lehman's toxic books, saw the absolute 00:27:52.230 --> 00:27:55.029 sludge in their balance sheet, and said, no thanks. 00:27:55.269 --> 00:27:58.029 And instead, they bought Merrill Lynch. That's 00:27:58.029 --> 00:28:00.190 right. Merrill was also teetering on the brink, 00:28:00.230 --> 00:28:02.589 so in a stunning move, Bank of America bought 00:28:02.589 --> 00:28:05.049 Merrill Lynch that same weekend, saving it from 00:28:05.049 --> 00:28:08.190 collapse. Which left Lehman... All alone. All 00:28:08.190 --> 00:28:10.970 alone at the dance. So on Monday morning, September 00:28:10.970 --> 00:28:13.390 15th, at about one in the morning, Lehman Brothers 00:28:13.390 --> 00:28:15.950 filed for Chapter 11 bankruptcy protection. And 00:28:15.950 --> 00:28:18.730 the world broke. It did. The Dow plunged over 00:28:18.730 --> 00:28:21.410 500 points. But the real disaster wasn't the 00:28:21.410 --> 00:28:23.430 stock market. It was the interconnectedness. 00:28:23.450 --> 00:28:25.829 We talked about AIG earlier and all those credit 00:28:25.829 --> 00:28:28.269 default swaps they had written. When Lehman failed, 00:28:28.529 --> 00:28:31.009 it was a credit event. It triggered a clause 00:28:31.009 --> 00:28:34.069 in all those CDS contracts AIG had sold. So the 00:28:34.069 --> 00:28:36.430 people who bought the insurance from AIG, they 00:28:36.430 --> 00:28:38.950 all came knocking at once. They came knocking. 00:28:39.089 --> 00:28:42.029 They said, Lehman just died. The world is a much 00:28:42.029 --> 00:28:44.329 more dangerous place. We don't trust you anymore, 00:28:44.470 --> 00:28:47.210 AIG. You need to post collateral. You need to 00:28:47.210 --> 00:28:50.490 give us cash right now to prove you can pay us 00:28:50.490 --> 00:28:53.069 if we need it. And AIG needed billions of dollars 00:28:53.069 --> 00:28:55.390 instantly, and they didn't have it. Not even 00:28:55.390 --> 00:28:59.230 close. So if AIG fails... What happens next? 00:28:59.470 --> 00:29:03.170 If AIG fails, the entire global financial system 00:29:03.170 --> 00:29:05.670 implodes. The banks that bought the insurance 00:29:05.670 --> 00:29:07.589 from them, we're talking Goldman Sachs, Deutsche 00:29:07.589 --> 00:29:10.930 Bank, Sustagen are all in France. They all take 00:29:10.930 --> 00:29:13.190 catastrophic losses. Their capital is wiped out. 00:29:13.230 --> 00:29:16.150 They fail. Then the companies that rely on those 00:29:16.150 --> 00:29:19.710 banks for funding fail. It's a chain of dominoes, 00:29:19.710 --> 00:29:21.490 but the dominoes are the size of skyscrapers. 00:29:21.509 --> 00:29:23.970 So on Tuesday, September 16th, just one single 00:29:23.970 --> 00:29:26.230 day after letting Lehman die on principle, the 00:29:26.230 --> 00:29:28.710 government does a complete 180. A complete 180. 00:29:28.930 --> 00:29:32.150 They bailed out AIG with an $85 billion loan 00:29:32.150 --> 00:29:35.390 from the Federal Reserve. $85 billion. It's a 00:29:35.390 --> 00:29:37.869 number that's hard to wrap your head around. 00:29:38.190 --> 00:29:40.490 It was necessary to stop the immediate bleeding, 00:29:40.569 --> 00:29:44.480 but the inconsistency. Saving Bear Stearns, killing 00:29:44.480 --> 00:29:47.440 Lehman, then saving AIG. It absolutely terrified 00:29:47.440 --> 00:29:49.519 the markets. They didn't know what the rules 00:29:49.519 --> 00:29:51.920 of the game were anymore. And amidst all this 00:29:51.920 --> 00:29:55.339 chaos, we have what might be the single scariest 00:29:55.339 --> 00:29:59.460 moment for the real autonomy. The moment a money 00:29:59.460 --> 00:30:02.890 market fund. Broke the buck. This was the reserve 00:30:02.890 --> 00:30:05.150 primary fund. It was one of the oldest and largest 00:30:05.150 --> 00:30:07.390 money market funds in the country. And these 00:30:07.390 --> 00:30:09.849 funds are supposed to be the most boring, safest 00:30:09.849 --> 00:30:11.710 investment on the planet. You put a dollar in, 00:30:11.769 --> 00:30:14.390 you get a dollar back, plus a tiny bit of interest. 00:30:14.549 --> 00:30:16.549 Yeah. It's where big corporations park their 00:30:16.549 --> 00:30:19.430 cash to make payroll. But they held Lehman debt. 00:30:19.609 --> 00:30:21.750 They held a lot of Lehman commercial paper. And 00:30:21.750 --> 00:30:23.890 when Lehman went to zero, the fund's assets dropped 00:30:23.890 --> 00:30:26.170 in value. The share price, which is always supposed 00:30:26.170 --> 00:30:29.559 to be $1, fell to $0 .97. It broke the buck. 00:30:29.720 --> 00:30:32.099 Why does three cents matter so much? Because 00:30:32.099 --> 00:30:35.220 it caused a global panic. If a money market fund 00:30:35.220 --> 00:30:38.920 isn't safe, then nothing is safe. Investors pulled 00:30:38.920 --> 00:30:42.440 $144 billion out of money market funds in just 00:30:42.440 --> 00:30:45.359 a couple of days. It was a massive silent run 00:30:45.359 --> 00:30:47.500 on the system. And here's the connection to you, 00:30:47.599 --> 00:30:50.279 the listener, and your job. Those money market 00:30:50.279 --> 00:30:52.819 funds are the primary buyers of something called 00:30:52.819 --> 00:30:55.930 commercial paper. Exactly. A company like General 00:30:55.930 --> 00:30:59.490 Electric or Ford or Toyota, they issue this short 00:30:59.490 --> 00:31:01.730 -term debt, this commercial paper, to pay for 00:31:01.730 --> 00:31:04.789 their daily operations, to make payroll, to buy 00:31:04.789 --> 00:31:07.130 steel for their factories. And when the money 00:31:07.130 --> 00:31:09.509 market funds emptied out? They stopped buying 00:31:09.509 --> 00:31:11.730 commercial paper. The market completely froze 00:31:11.730 --> 00:31:14.660 solid. So suddenly, a company like General Electric 00:31:14.660 --> 00:31:17.119 can't borrow the money it needs to operate day 00:31:17.119 --> 00:31:20.359 to day. We were days, maybe hours, away from 00:31:20.359 --> 00:31:22.720 major U .S. corporations not being able to write 00:31:22.720 --> 00:31:25.279 paychecks to their employees. And that is the 00:31:25.279 --> 00:31:27.519 moment when Bernanke and Paulson went to Congress, 00:31:27.740 --> 00:31:30.059 looked them in the eye, and basically said the 00:31:30.059 --> 00:31:32.319 financial world was looking into the abyss. They 00:31:32.319 --> 00:31:35.380 proposed PARP, the Troubled Asset Relief Program. 00:31:35.880 --> 00:31:39.299 $700 billion to buy up the bad assets from the 00:31:39.299 --> 00:31:41.660 banks and stabilize the system. And in a moment 00:31:41.660 --> 00:31:45.160 of just stunning political theater, on September 00:31:45.160 --> 00:31:48.380 29th, the House of Representatives voted no. 00:31:48.619 --> 00:31:51.460 They voted it down. I remember watching CSPAN 00:31:51.460 --> 00:31:53.660 that day. The ticker on the screen for the vote 00:31:53.660 --> 00:31:55.440 and the stock market ticker right next to it. 00:31:55.440 --> 00:31:58.339 Just going down and down and down. The Dow Jones 00:31:58.339 --> 00:32:01.799 Industrial Average dropped 777 points in a single 00:32:01.799 --> 00:32:05.099 day. At the time, it was the largest point drop 00:32:05.099 --> 00:32:08.240 in history. One point two trillion dollars in 00:32:08.240 --> 00:32:11.279 market wealth just evaporated. The government 00:32:11.279 --> 00:32:13.960 was told the economy will collapse without this. 00:32:14.079 --> 00:32:16.480 And Congress said, we don't care. Our voters 00:32:16.480 --> 00:32:19.000 back home hate bailouts. It took that massive 00:32:19.000 --> 00:32:21.299 market crash to force their hand. They held another 00:32:21.299 --> 00:32:23.220 vote on October 3rd and this time it passed. 00:32:23.420 --> 00:32:26.019 But the damage was done. The fear was entrenched. 00:32:26.099 --> 00:32:28.480 The recession, what we now call the Great Recession, 00:32:28.599 --> 00:32:30.920 was fully underway. So let's look at the fallout 00:32:30.920 --> 00:32:32.839 from all this. Because while the banks and the 00:32:32.839 --> 00:32:34.940 big institutions got the lifeboats, the passengers 00:32:34.940 --> 00:32:37.240 on the ship, the American people, they were left 00:32:37.240 --> 00:32:39.500 in the freezing water. The human cost was just 00:32:39.500 --> 00:32:43.740 devastating. $11 trillion in household wealth 00:32:43.740 --> 00:32:45.839 was lost in the United States. $11 trillion. 00:32:45.920 --> 00:32:49.099 That's retirement accounts, 401ks, college funds, 00:32:49.299 --> 00:32:52.339 and, of course, home equity. All gone. Unemployment 00:32:52.339 --> 00:32:54.640 doubled, eventually hitting 10%, but even that 00:32:54.640 --> 00:32:57.960 number hides the real pain. We lost 8 .7 million 00:32:57.960 --> 00:33:01.440 jobs. Long -term unemployment skyrocketed. You 00:33:01.440 --> 00:33:03.359 had men in their 50s who lost good manufacturing 00:33:03.359 --> 00:33:05.619 jobs and never worked at the same level again. 00:33:05.839 --> 00:33:08.579 And the foreclosures, the images of people's 00:33:08.579 --> 00:33:11.119 belongings out on the curb. It was heartbreaking. 00:33:11.559 --> 00:33:13.539 Neighborhoods were just hollowed out. In places 00:33:13.539 --> 00:33:15.359 that were at the center of the bubble, like Las 00:33:15.359 --> 00:33:18.819 Vegas, Phoenix, parts of Florida, prices fell. 00:33:19.160 --> 00:33:22.400 50 % or more. So people were underwater. Deeply 00:33:22.400 --> 00:33:25.480 underwater. Owing $400 ,000 on a house that was 00:33:25.480 --> 00:33:28.359 now worth $200 ,000, millions of families lost 00:33:28.359 --> 00:33:30.420 their homes. And it wasn't just a U .S. crisis. 00:33:30.619 --> 00:33:32.660 You mentioned Iceland earlier. Iceland is the 00:33:32.660 --> 00:33:35.160 most extreme example of what happens when a country's 00:33:35.160 --> 00:33:38.400 banking system grows to a monstrous size relative 00:33:38.400 --> 00:33:41.119 to its economy. Their banks were something like 00:33:41.119 --> 00:33:44.319 10 times the size of their entire GDP. 10 times. 00:33:44.640 --> 00:33:47.380 So when global credit froze, they couldn't fund 00:33:47.380 --> 00:33:49.779 themselves. The entire country went bankrupt 00:33:49.779 --> 00:33:52.299 overnight. Their currency collapsed. Their stock 00:33:52.299 --> 00:33:55.259 market fell over 90%. It was total, complete 00:33:55.259 --> 00:33:57.539 economic devastation. And then, of course, it 00:33:57.539 --> 00:34:00.180 spread throughout Europe, triggering the sovereign 00:34:00.180 --> 00:34:03.660 debt crisis in Greece, Spain, Portugal. It was 00:34:03.660 --> 00:34:06.299 the ultimate painful lesson in globalization. 00:34:06.720 --> 00:34:09.059 It showed us that we are all tied together now. 00:34:09.179 --> 00:34:12.420 A bad mortgage written in Nevada can bankrupt 00:34:12.420 --> 00:34:14.639 a town in Norway. Let's talk about the recovery. 00:34:15.289 --> 00:34:17.070 Because I think for a lot of people, this is 00:34:17.070 --> 00:34:18.789 where the lasting anger comes from. The recovery 00:34:18.789 --> 00:34:21.610 wasn't shared equally. Not at all. Not even close. 00:34:21.730 --> 00:34:24.150 The stock market bottomed out in March of 2009 00:34:24.150 --> 00:34:26.590 and then went on one of the most historic bull 00:34:26.590 --> 00:34:29.349 runs in history. So the wealthy, who own most 00:34:29.349 --> 00:34:31.630 of the stocks, they did great. The wealthy recovered 00:34:31.630 --> 00:34:34.809 their lost wealth relatively quickly. But the 00:34:34.809 --> 00:34:37.349 middle class and the poor, whose primary source 00:34:37.349 --> 00:34:39.530 of wealth is tied up in the value of their home, 00:34:39.690 --> 00:34:43.079 it took a decade or even longer. for housing 00:34:43.079 --> 00:34:45.420 prices to recover in many areas. So it widened 00:34:45.420 --> 00:34:48.260 the wealth gap. It widened the wealth gap dramatically. 00:34:49.019 --> 00:34:52.360 And it also widened the racial wealth gap. There's 00:34:52.360 --> 00:34:54.960 overwhelming evidence that a disproportionate 00:34:54.960 --> 00:34:57.880 amount of the most predatory subprime lending 00:34:57.880 --> 00:35:00.960 was targeted at minority communities. So when 00:35:00.960 --> 00:35:03.400 the crash came, black and Hispanic households 00:35:03.400 --> 00:35:06.760 lost wealth at a much faster rate and recovered 00:35:06.760 --> 00:35:09.519 much, much slower than white households. The 00:35:09.519 --> 00:35:11.809 effects are still with us today. So let's talk 00:35:11.809 --> 00:35:13.989 about the government response. We had TARP, but 00:35:13.989 --> 00:35:16.250 we also had the Fed going, as you said, all in. 00:35:16.329 --> 00:35:19.250 The Fed cut interest rates to zero. But even 00:35:19.250 --> 00:35:21.690 that wasn't enough to unfreeze the system. So 00:35:21.690 --> 00:35:24.289 they embarked on a series of unprecedented programs 00:35:24.289 --> 00:35:27.429 called quantitative easing, or QE. This is the 00:35:27.429 --> 00:35:30.210 part everyone calls printing money. That's effectively 00:35:30.210 --> 00:35:33.019 what it is, yes. The Fed created trillions of 00:35:33.019 --> 00:35:35.199 dollars of new electronic money out of thin air 00:35:35.199 --> 00:35:38.099 to buy up government bonds and those toxic mortgage 00:35:38.099 --> 00:35:40.179 -backed securities from the banks. And the goal 00:35:40.179 --> 00:35:42.840 was what? The goal was to force long -term interest 00:35:42.840 --> 00:35:45.800 rates down across the entire economy and to push 00:35:45.800 --> 00:35:48.539 investors back into taking risks, back into buying 00:35:48.539 --> 00:35:51.559 stocks. It absolutely saved the banking system 00:35:51.559 --> 00:35:54.159 from collapse, but it also had the side effect 00:35:54.159 --> 00:35:57.039 of massively inflating asset prices, which again 00:35:57.039 --> 00:35:59.960 exacerbated inequality. And on the legal front. 00:36:00.480 --> 00:36:03.840 The justice part of this. Who went to jail? This 00:36:03.840 --> 00:36:05.800 is the statistic that just makes people's blood 00:36:05.800 --> 00:36:08.820 boil, and for good reason. In the United States, 00:36:08.820 --> 00:36:10.659 for their role in the worst financial crisis 00:36:10.659 --> 00:36:13.719 since the Great Depression, only one single top 00:36:13.719 --> 00:36:16.579 banker, a guy named Kareem Sarageldin from Credit 00:36:16.579 --> 00:36:19.539 Suisse, went to prison. One guy. Out of an entire 00:36:19.539 --> 00:36:21.579 industry that was shown to have committed fraud 00:36:21.579 --> 00:36:24.309 on an industrial scale. One guy. The Justice 00:36:24.309 --> 00:36:26.489 Department under President Obama made a strategic 00:36:26.489 --> 00:36:29.210 decision to focus on extracting huge fines from 00:36:29.210 --> 00:36:31.389 the banks rather than prosecuting individuals. 00:36:31.710 --> 00:36:33.989 And they did. Banks paid hundreds of billions 00:36:33.989 --> 00:36:36.309 in fines. Golden, J .P. Morgan, Bank of America. 00:36:36.469 --> 00:36:39.489 But the individuals, the CEOs, they kept their 00:36:39.489 --> 00:36:41.429 bonuses. They kept their jobs. And you contrast 00:36:41.429 --> 00:36:43.510 that with a country like Iceland. It's a night 00:36:43.510 --> 00:36:45.449 and day difference. Iceland let their big banks 00:36:45.449 --> 00:36:48.889 fail and they jailed 47 bankers and executives. 00:36:49.389 --> 00:36:51.309 They took a completely different approach to 00:36:51.309 --> 00:36:54.530 justice. So as we wrap up this incredibly complex 00:36:54.530 --> 00:36:57.429 deep dive, we have to come back to the big question. 00:36:57.510 --> 00:37:00.210 Why? The Financial Crisis Inquiry Commission, 00:37:00.570 --> 00:37:02.789 the official government report, their conclusion 00:37:02.789 --> 00:37:06.269 was that the crisis was avoidable. That is the 00:37:06.269 --> 00:37:09.190 most damning verdict of all. This wasn't an earthquake 00:37:09.190 --> 00:37:12.760 or a hurricane. It wasn't an act of God. It was 00:37:12.760 --> 00:37:15.539 man -made. So who do they blame? They blame a 00:37:15.539 --> 00:37:19.099 widespread failure of regulators who were captured 00:37:19.099 --> 00:37:21.820 by the industry and who truly believed that markets 00:37:21.820 --> 00:37:24.400 could police themselves. They blame a catastrophic 00:37:24.400 --> 00:37:27.579 failure of corporate governance boards of directors 00:37:27.579 --> 00:37:30.679 who allowed executives to take insane risks in 00:37:30.679 --> 00:37:33.139 pursuit of short -term bonuses. And it was a 00:37:33.139 --> 00:37:34.980 failure of the system itself, wasn't it? The 00:37:34.980 --> 00:37:37.300 incentives were just all wrong. The incentives 00:37:37.300 --> 00:37:40.059 were completely perverse. If you pay a banker... 00:37:40.219 --> 00:37:43.400 A huge bonus to take risks. And you implicitly 00:37:43.400 --> 00:37:45.460 tell him, hey, if you win, you get to keep the 00:37:45.460 --> 00:37:48.119 money and buy a Ferrari. If you lose, don't worry. 00:37:48.219 --> 00:37:51.659 The taxpayer will pay for the crash. What do 00:37:51.659 --> 00:37:53.420 you think he's going to do? He is going to crash 00:37:53.420 --> 00:37:56.039 the car every single time. So the final question, 00:37:56.340 --> 00:37:59.530 have we fixed it? We got the Dodd -Frank Act 00:37:59.530 --> 00:38:03.030 in 2010. Banks are required to hold more capital 00:38:03.030 --> 00:38:05.929 now. The banking system is definitely, without 00:38:05.929 --> 00:38:08.309 a doubt, safer and better capitalized than it 00:38:08.309 --> 00:38:10.829 was in 2008. They have more of a loss absorbing 00:38:10.829 --> 00:38:13.309 capital buffer. We have annual stress tests now. 00:38:13.449 --> 00:38:15.949 Those things are real improvements. But I can 00:38:15.949 --> 00:38:18.429 hear a but coming in your voice. The but is a 00:38:18.429 --> 00:38:20.809 big one. It's what some economists call the paradox 00:38:20.809 --> 00:38:23.789 of deleveraging. In 2008, the problem was that 00:38:23.789 --> 00:38:25.949 the private sector households and companies had 00:38:25.949 --> 00:38:28.590 way too much debt. To solve that crisis, the 00:38:28.590 --> 00:38:30.170 government essentially took all that private 00:38:30.170 --> 00:38:32.710 debt onto its own public balance sheet. We solved 00:38:32.710 --> 00:38:35.989 the debt crisis with more debt. Global debt is 00:38:35.989 --> 00:38:38.130 significantly higher today than it was in 2008. 00:38:38.389 --> 00:38:41.090 And by keeping interest rates at basically zero 00:38:41.090 --> 00:38:43.550 for a decade, did we just blow a bunch of new 00:38:43.550 --> 00:38:46.469 bubbles in other places, in tech stocks, in crypto, 00:38:46.690 --> 00:38:49.570 in other assets? That is the billion dollar or 00:38:49.570 --> 00:38:52.639 rather trillion dollar question. That's the fear. 00:38:52.920 --> 00:38:55.480 We trained an entire generation of investors 00:38:55.480 --> 00:38:57.659 to believe that the Fed will always be there 00:38:57.659 --> 00:39:01.119 to save them, to backstop the market. We may 00:39:01.119 --> 00:39:03.360 have stabilized the system, but we may have also 00:39:03.360 --> 00:39:05.860 made it more fragile in new and unpredictable 00:39:05.860 --> 00:39:08.599 ways. We just kicked the can down the road. We 00:39:08.599 --> 00:39:11.059 kicked a very, very big can a long way down the 00:39:11.059 --> 00:39:14.320 road. The question we all have to ask is, what 00:39:14.320 --> 00:39:17.000 happens when we finally run out of road? On that 00:39:17.000 --> 00:39:20.349 uplifting thought. It is truly a story of hubris, 00:39:20.349 --> 00:39:23.190 of greed, and of the fragile interconnected complexity 00:39:23.190 --> 00:39:25.829 of our modern world. It really is. It is the 00:39:25.829 --> 00:39:27.849 most important economic and historical lesson 00:39:27.849 --> 00:39:30.409 of our lifetimes. Because if we forget how this 00:39:30.409 --> 00:39:33.570 machine broke, we are absolutely doomed to break 00:39:33.570 --> 00:39:35.590 it all over again. Thanks for going on this journey 00:39:35.590 --> 00:39:37.530 with us. This has been The Deep Dive. We'll see 00:39:37.530 --> 00:39:38.050 you next time.