WEBVTT 00:00:00.000 --> 00:00:02.279 Welcome back to the Deep Dive. Today, we're not 00:00:02.279 --> 00:00:04.660 just looking at a historical event. We are walking 00:00:04.660 --> 00:00:08.500 onto a crime scene. But this isn't your typical 00:00:08.500 --> 00:00:10.800 crime scene. There's no yellow tape, no chalk 00:00:10.800 --> 00:00:14.839 outlines. The weapon here was a calculator. The 00:00:14.839 --> 00:00:17.679 accomplices were, well, everyone from the highest 00:00:17.679 --> 00:00:20.019 paid bankers on Wall Street to maybe your neighbor 00:00:20.019 --> 00:00:22.719 who bought that third investment condo. And the 00:00:22.719 --> 00:00:25.739 victim was the entire global economy. It's good 00:00:25.739 --> 00:00:29.649 to be here. And crime scene is, I think. exactly 00:00:29.649 --> 00:00:31.829 the right way to frame this. It feels that way. 00:00:31.929 --> 00:00:34.469 It does. We're essentially reopening a cold case 00:00:34.469 --> 00:00:37.649 because the scale of the damage is still I mean, 00:00:37.670 --> 00:00:39.789 it's still hard to really wrap your head around. 00:00:39.969 --> 00:00:42.350 It really is. We're not talking about a bad quarter 00:00:42.350 --> 00:00:44.090 for the stock market. We're talking about the 00:00:44.090 --> 00:00:47.250 just the vaporization of wealth on a scale that's 00:00:47.250 --> 00:00:49.289 hard to comprehend. Right. Let's just hit our 00:00:49.289 --> 00:00:51.109 listeners with that headline number right away 00:00:51.109 --> 00:00:54.619 just to set the stage. $13 trillion. That is 00:00:54.619 --> 00:00:56.960 the number. U .S. household net worth plunged 00:00:56.960 --> 00:01:00.079 by nearly $13 trillion from its peak in 2007. 00:01:00.460 --> 00:01:02.939 That's a 20 percent drop. 20 percent. I mean, 00:01:02.939 --> 00:01:05.099 just stop and think about that. Imagine one fifth 00:01:05.099 --> 00:01:07.840 of everything American families owned, their 00:01:07.840 --> 00:01:10.000 savings, their home equity, their retirement 00:01:10.000 --> 00:01:13.219 funds, just gone. It vanished into thin air. 00:01:13.359 --> 00:01:15.739 It's a number so large it almost becomes abstract. 00:01:16.120 --> 00:01:18.060 You know, it sounds like something from astronomy, 00:01:18.140 --> 00:01:21.260 not economics. But if you lived through 2008, 00:01:21.579 --> 00:01:23.819 you felt it. Oh, absolutely. You saw the for 00:01:23.819 --> 00:01:26.939 sale signs just multiplying like weeds on every 00:01:26.939 --> 00:01:29.939 street. You saw office towers emptying out, people 00:01:29.939 --> 00:01:32.459 carrying those cardboard boxes. You felt that 00:01:32.459 --> 00:01:34.599 pit in your stomach when you went to the ATM 00:01:34.599 --> 00:01:36.359 wondering if it was actually going to give you 00:01:36.359 --> 00:01:39.879 cash. That fear was real. The system, and this 00:01:39.879 --> 00:01:42.370 isn't an exaggeration. The system actually froze. 00:01:42.530 --> 00:01:44.829 So today we're unpacking the subprime mortgage 00:01:44.829 --> 00:01:47.609 crisis, but we're not going to do the dry textbook 00:01:47.609 --> 00:01:49.609 version. We're going to treat this like a detective 00:01:49.609 --> 00:01:51.950 story. We want to understand how the American 00:01:51.950 --> 00:01:55.170 dream, the dream of homeownership, was weaponized. 00:01:55.329 --> 00:01:58.609 Exactly. Our mission today is to strip away the 00:01:58.609 --> 00:02:01.680 jargon. We've got a massive stack of sources 00:02:01.680 --> 00:02:04.159 here. Reports from the Financial Crisis Inquiry 00:02:04.159 --> 00:02:07.939 Commission, the FCIC. We've got Federal Reserve 00:02:07.939 --> 00:02:10.639 data, archives of what people were actually saying 00:02:10.639 --> 00:02:12.979 at the time. And looking at this stack, I have 00:02:12.979 --> 00:02:16.080 to say it reads like a conspiracy thriller. It 00:02:16.080 --> 00:02:19.360 does. But the twist is, it wasn't some secret 00:02:19.360 --> 00:02:21.680 conspiracy happening in the shadows. This was 00:02:21.680 --> 00:02:24.319 all happening in broad daylight. That's the crazy 00:02:24.319 --> 00:02:26.379 part. And as the experts in these reports note, 00:02:26.500 --> 00:02:28.800 this wasn't just one bad bank or one bad law. 00:02:28.960 --> 00:02:32.539 It was a multinational financial crisis. It involved 00:02:32.539 --> 00:02:35.159 regulators who were, frankly, asleep at the wheel, 00:02:35.280 --> 00:02:37.520 credit rating agencies that were playing a completely 00:02:37.520 --> 00:02:40.360 rigged game, and yes, consumers who were signing 00:02:40.360 --> 00:02:42.560 papers they just didn't read or understand. So 00:02:42.560 --> 00:02:45.180 let's find the smoking gun. Or... i guess the 00:02:45.180 --> 00:02:47.240 thousands of smoking guns i want to start with 00:02:47.240 --> 00:02:50.180 the aha moment i had digging through these sources 00:02:50.180 --> 00:02:52.620 there was this specific financial innovation 00:02:52.620 --> 00:02:55.219 and we're going to get into the weeds of it that 00:02:55.219 --> 00:02:59.240 essentially turned dross into gold i mean financial 00:02:59.240 --> 00:03:02.719 engineers found a way to take terrible incredibly 00:03:02.719 --> 00:03:06.719 risky loans and dress them up as the safest investments 00:03:06.719 --> 00:03:09.139 in the world And that innovation didn't just 00:03:09.139 --> 00:03:11.520 happen in a vacuum. It was fueled by something 00:03:11.520 --> 00:03:14.360 else, this giant pool of money that was just 00:03:14.360 --> 00:03:17.319 circling the globe looking for a home. That is 00:03:17.319 --> 00:03:19.520 the perfect place to start. To understand the 00:03:19.520 --> 00:03:21.180 collapse, we have to understand the setup. We 00:03:21.180 --> 00:03:23.139 have to go back to the years between 2000 and 00:03:23.139 --> 00:03:26.000 2006. The bubble years. Exactly. So paint the 00:03:26.000 --> 00:03:28.259 picture for us. The dot -com bubble had just 00:03:28.259 --> 00:03:31.759 burst. 9 -11 had happened. The economy was on 00:03:31.759 --> 00:03:34.780 the ropes. What did the Federal Reserve do? They 00:03:34.780 --> 00:03:38.090 panicked. Arguably. The Fed, led by Alan Greenspan 00:03:38.090 --> 00:03:40.330 at the time, was terrified of deflation. They 00:03:40.330 --> 00:03:42.250 saw what happened in Japan, the lost decade, 00:03:42.469 --> 00:03:45.250 and they wanted to stimulate growth at any cost. 00:03:45.449 --> 00:03:47.310 So they pulled the biggest lever they have. They 00:03:47.310 --> 00:03:48.770 did. They lowered interest rates. They did it 00:03:48.770 --> 00:03:50.669 aggressively. The federal funds rate went from 00:03:50.669 --> 00:03:54.189 6 .5 % in the year 2000 all the way down to just 00:03:54.189 --> 00:03:57.430 1 % by 2003. 1%. I mean, it's basically free 00:03:57.430 --> 00:03:59.069 money. If you're a bank, you can borrow from 00:03:59.069 --> 00:04:01.560 the Fed for... Almost nothing. Exactly. And when 00:04:01.560 --> 00:04:03.860 money is that cheap, you don't just sit on it. 00:04:03.900 --> 00:04:06.719 You have to lend it out to make a profit. But 00:04:06.719 --> 00:04:09.280 there was this other massive force at play here, 00:04:09.479 --> 00:04:12.240 something Ben Bernanke, who was a Fed governor 00:04:12.240 --> 00:04:16.180 then, called the global savings glut. The famous 00:04:16.180 --> 00:04:19.180 giant pool of money. I love how the team at NPR 00:04:19.180 --> 00:04:20.959 described this back in the day. It's such a great 00:04:20.959 --> 00:04:23.839 visual. It's like there was this massive reservoir 00:04:23.839 --> 00:04:26.639 of cash accumulating in the world and it just 00:04:26.639 --> 00:04:28.639 had to go somewhere. It's the perfect visual. 00:04:29.079 --> 00:04:30.879 Think about what was happening. You had these 00:04:30.879 --> 00:04:33.300 fast growing economies in Asia, particularly 00:04:33.300 --> 00:04:36.120 China, running huge trade surpluses with the 00:04:36.120 --> 00:04:39.199 U .S. So they're selling us TVs and toys and 00:04:39.199 --> 00:04:41.519 we're sending them billions of dollars. Billions 00:04:41.519 --> 00:04:43.500 and billions. And you also had oil producing 00:04:43.500 --> 00:04:46.699 nations, Saudi Arabia, Russia, making money hand 00:04:46.699 --> 00:04:49.579 over fist as oil prices soared. So by the mid 00:04:49.579 --> 00:04:52.540 2000s, there's about 70 trillion dollars with 00:04:52.540 --> 00:04:55.639 a T. 70 trillion. 70 trillion dollars worldwide 00:04:55.639 --> 00:04:58.569 in fixed income investments. All looking for 00:04:58.569 --> 00:05:00.470 a home. But they couldn't just, you know, stuff 00:05:00.470 --> 00:05:02.750 it under a mattress. They needed safety. Correct. 00:05:02.829 --> 00:05:05.230 We're talking about sovereign wealth funds, central 00:05:05.230 --> 00:05:07.629 banks. They aren't gambling on penny stocks. 00:05:08.430 --> 00:05:12.970 They want safety and a steady return. And historically, 00:05:13.029 --> 00:05:14.910 the safest place in the world for that money 00:05:14.910 --> 00:05:18.209 was U .S. Treasury bonds. But there's the catch. 00:05:18.730 --> 00:05:21.129 There's the catch. Remember, the Fed had cut 00:05:21.129 --> 00:05:24.490 rates to 1%. So if you buy a U .S. Treasury bond, 00:05:24.750 --> 00:05:27.250 you're making almost nothing. You're barely keeping 00:05:27.250 --> 00:05:30.310 up with inflation, if that. Exactly. So this 00:05:30.310 --> 00:05:33.490 $70 trillion was hunting for yield. It was desperate. 00:05:33.689 --> 00:05:35.790 It was basically knocking on Wall Street's door 00:05:35.790 --> 00:05:38.329 saying, I have billions. I need a safe place 00:05:38.329 --> 00:05:40.370 to put it, but you have to get me a better return 00:05:40.370 --> 00:05:43.290 than 1%. And Wall Street, being Wall Street, 00:05:43.350 --> 00:05:45.949 said, don't worry, we can build a product for 00:05:45.949 --> 00:05:48.959 you. And that product was mortgage debt. The 00:05:48.959 --> 00:05:51.079 U .S. housing market was seen as the safest bet 00:05:51.079 --> 00:05:53.420 on the planet. I mean, the phrase is safe as 00:05:53.420 --> 00:05:56.620 houses, right? That phrase safe as houses is 00:05:56.620 --> 00:05:59.879 doing a lot of heavy lifting here. Before we 00:05:59.879 --> 00:06:01.600 get into the financial engineering, we have to 00:06:01.600 --> 00:06:03.920 talk about the psychology on the ground. The 00:06:03.920 --> 00:06:06.579 mania. Yes, the mania. Reading these sources, 00:06:06.699 --> 00:06:09.319 the phrase irrational exuberance just keeps coming 00:06:09.319 --> 00:06:11.759 up over and over again. There is this widespread, 00:06:12.060 --> 00:06:15.180 unshakable belief that housing prices would never 00:06:15.180 --> 00:06:17.060 fall. Not just that they would go up, but that 00:06:17.060 --> 00:06:19.240 they literally could not go down on a national 00:06:19.240 --> 00:06:22.339 scale. It seems insane in retrospect. It's the 00:06:22.339 --> 00:06:25.160 definition of a bubble. It's a belief that defies 00:06:25.160 --> 00:06:27.750 all historical reality. And look at the data 00:06:27.750 --> 00:06:30.870 from the Fed archives. Between 1997 and 2006, 00:06:31.389 --> 00:06:33.870 the median house price in the U .S. increased 00:06:33.870 --> 00:06:38.230 by 124 percent. 124 percent. So let's just break 00:06:38.230 --> 00:06:40.529 that down. That's doubling and then adding another 00:06:40.529 --> 00:06:42.550 quarter on top of that in less than a decade. 00:06:42.990 --> 00:06:46.209 If you bought a house for $200 ,000, suddenly 00:06:46.209 --> 00:06:49.949 it's worth close to $450 ,000 and you didn't 00:06:49.949 --> 00:06:52.069 do a thing. You just lived there. It felt like 00:06:52.069 --> 00:06:54.110 magic. It felt like you were a financial genius 00:06:54.110 --> 00:06:56.589 just for owning a home. And because prices kept 00:06:56.589 --> 00:06:59.050 going up, homeownership rates hit an all -time 00:06:59.050 --> 00:07:03.889 high of 69 .2 % in 2004. It became a no -lose 00:07:03.889 --> 00:07:06.970 proposition in people's minds. Completely. Even 00:07:06.970 --> 00:07:08.449 if you couldn't really afford the monthly payment, 00:07:08.550 --> 00:07:10.769 the logic was, well, it doesn't matter. I'll 00:07:10.769 --> 00:07:13.129 just sell it in a year for a $50 ,000 profit, 00:07:13.290 --> 00:07:15.449 or I'll just refinance when the value goes up 00:07:15.449 --> 00:07:17.850 and pull out cash. It stopped being about shelter 00:07:17.850 --> 00:07:20.829 and started being about speculation. And the 00:07:20.829 --> 00:07:25.149 data here is just wild. By 2006, the sources 00:07:25.149 --> 00:07:29.529 say nearly 40 % of home purchases were not intended 00:07:29.529 --> 00:07:32.970 as primary residences. That's a staggering statistic. 00:07:33.189 --> 00:07:36.870 Let that sink in. 40%. These weren't families 00:07:36.870 --> 00:07:39.029 looking for a backyard for the dog or a good 00:07:39.029 --> 00:07:41.189 school district. These were investment properties, 00:07:41.430 --> 00:07:45.009 vacation homes, or just pure naked speculation. 00:07:45.410 --> 00:07:47.689 You had people flipping condos. Describe that 00:07:47.689 --> 00:07:49.709 for a second because that flipping culture was 00:07:49.709 --> 00:07:52.629 intense. You had entire TV shows dedicated to 00:07:52.629 --> 00:07:54.430 it. Oh, absolutely. It was everywhere. You had 00:07:54.430 --> 00:07:57.009 people in Miami or Las Vegas putting down a small 00:07:57.009 --> 00:07:59.189 deposit on a condo that hadn't even been built 00:07:59.189 --> 00:08:01.269 yet. They were buying the contract to purchase. 00:08:01.550 --> 00:08:03.430 So they're buying a piece of paper. They're buying 00:08:03.430 --> 00:08:06.850 a piece of paper. Then, six months later, before 00:08:06.850 --> 00:08:09.269 the building is even finished, they sell that 00:08:09.269 --> 00:08:12.009 paper contract to someone else for, say, $50 00:08:12.009 --> 00:08:15.230 ,000 more. The condo is still just a hole in 00:08:15.230 --> 00:08:18.350 the ground, but the paper value has skyrocketed. 00:08:18.389 --> 00:08:20.589 It turned housing into a form of day trading 00:08:20.589 --> 00:08:23.730 for amateurs. But here's the problem. To keep 00:08:23.730 --> 00:08:26.269 this machine going, to keep feeding that giant 00:08:26.269 --> 00:08:28.709 pool of money with new mortgages... You need 00:08:28.709 --> 00:08:31.430 more borrowers. Wall Street needed more raw material 00:08:31.430 --> 00:08:33.549 for their bonds. And this is where they hit a 00:08:33.549 --> 00:08:36.379 wall. In a normal functioning market, there are 00:08:36.379 --> 00:08:38.179 only so many people with good credit scores, 00:08:38.480 --> 00:08:41.659 a steady job, and a 20 % down payment. The prime 00:08:41.659 --> 00:08:45.919 borrowers. Right. By 2003, 2004, the banks had 00:08:45.919 --> 00:08:48.159 largely run out of those people. Everyone who 00:08:48.159 --> 00:08:49.899 was qualified and wanted a house pretty much 00:08:49.899 --> 00:08:51.940 already had one. But the giant pool of money 00:08:51.940 --> 00:08:53.960 is still hungry. It wants more of these mortgage 00:08:53.960 --> 00:08:57.799 bonds that pay 3, 4, 5%. So Wall Street had a 00:08:57.799 --> 00:09:00.240 choice. They could either stop selling the product 00:09:00.240 --> 00:09:03.000 that was making them fabulously wealthy or they 00:09:03.000 --> 00:09:06.259 could lower the standards for the raw material. 00:09:06.519 --> 00:09:09.059 And we know which one they chose. Which brings 00:09:09.059 --> 00:09:12.539 us to our second section, the fuel. We have to 00:09:12.539 --> 00:09:14.879 talk about subprime lending. This is the real 00:09:14.879 --> 00:09:17.960 turning point. Subprime technically isn't a dirty 00:09:17.960 --> 00:09:20.740 word. It just means borrowers with weakened credit 00:09:20.740 --> 00:09:23.159 histories. Maybe they missed some payments in 00:09:23.159 --> 00:09:25.379 the past. Maybe they have a high debt to income 00:09:25.379 --> 00:09:27.860 ratio. Right. It was a niche market for a long 00:09:27.860 --> 00:09:30.500 time. A very small niche. In 1994, it was about 00:09:30.500 --> 00:09:35.690 5 % of all mortgage originations. Maybe $35 billion. 00:09:35.990 --> 00:09:38.590 It was for people who were getting back on their 00:09:38.590 --> 00:09:43.090 feet. By 2006. By 2006, subprime was 20 % of 00:09:43.090 --> 00:09:46.370 the entire mortgage market. $600 billion in a 00:09:46.370 --> 00:09:49.090 single year. That's an explosion. It's a more 00:09:49.090 --> 00:09:51.570 than tenfold increase. But it's not just that 00:09:51.570 --> 00:09:53.190 they were lending to people with lower credit 00:09:53.190 --> 00:09:55.730 scores. It's how they were lending. The standards 00:09:55.730 --> 00:09:57.820 didn't just get lower, they... They vanished. 00:09:58.059 --> 00:10:00.320 They did. The sources described this alphabet 00:10:00.320 --> 00:10:03.220 soup of loan types that sound like a comedy sketch 00:10:03.220 --> 00:10:06.019 if the consequences weren't so tragic. This is 00:10:06.019 --> 00:10:08.340 the race to the bottom. It really was. It started 00:10:08.340 --> 00:10:11.000 with things like SEVA loans. That's stated income, 00:10:11.100 --> 00:10:13.779 verified assets. Stated income. That's a very 00:10:13.779 --> 00:10:15.919 polite way of saying liar's loan, isn't it? Pretty 00:10:15.919 --> 00:10:18.129 much. The borrower just states on the application, 00:10:18.389 --> 00:10:20.970 I make $100 ,000 a year. And the bank says, OK, 00:10:21.049 --> 00:10:23.450 great. We believe you. Yeah. They might verify 00:10:23.450 --> 00:10:26.230 your assets, like your bank account, but they 00:10:26.230 --> 00:10:28.549 don't ask for pay stubs or tax returns. And then 00:10:28.549 --> 00:10:31.029 it got worse. Then it got worse. You had neither 00:10:31.029 --> 00:10:33.909 no income, verified assets, and then finally 00:10:33.909 --> 00:10:36.570 the absolute bottom of the barrel, the NINO. 00:10:37.259 --> 00:10:40.500 The NINJ loan, which stands for? No income, no 00:10:40.500 --> 00:10:44.039 job, or assets. No income, no job, no assets. 00:10:44.419 --> 00:10:46.580 You could literally walk into a mortgage broker's 00:10:46.580 --> 00:10:49.500 office, have no job, no money in the bank, and 00:10:49.500 --> 00:10:52.100 walk out with a loan for half a million dollars. 00:10:52.639 --> 00:10:54.759 The running joke at the time, which was not a 00:10:54.759 --> 00:10:57.519 joke, was if you can fog a mirror, you can get 00:10:57.519 --> 00:10:59.820 a loan. I was reading this one anecdote in the 00:10:59.820 --> 00:11:02.700 FCIC report about a strawberry picker in California. 00:11:03.100 --> 00:11:07.860 This guy made maybe $14 ,000 a year. almost no 00:11:07.860 --> 00:11:11.059 English, and somehow he was given a loan for 00:11:11.059 --> 00:11:14.179 a house worth over $700 ,000. And you have to 00:11:14.179 --> 00:11:16.220 ask, how does that even happen? Who signs off 00:11:16.220 --> 00:11:18.419 on that? The mortgage broker signs off on it. 00:11:18.460 --> 00:11:20.720 And this is the key to the whole puzzle. The 00:11:20.720 --> 00:11:23.200 broker doesn't care if the loan is ever repaid. 00:11:23.720 --> 00:11:26.740 The incentives were completely perverse. Explain 00:11:26.740 --> 00:11:30.480 that. The broker gets paid a commission, an origination 00:11:30.480 --> 00:11:33.879 fee, for selling the loan. The minute the papers 00:11:33.879 --> 00:11:36.639 are signed, The broker gets their check, and 00:11:36.639 --> 00:11:38.720 the loan is sold up the chain to a big bank. 00:11:38.980 --> 00:11:41.940 The broker has zero risk. So their job isn't 00:11:41.940 --> 00:11:44.080 to make a good loan. It's just to make a loan, 00:11:44.220 --> 00:11:47.799 any loan. In fact, it was worse than that. Brokers 00:11:47.799 --> 00:11:50.440 were often paid more, something called the yield 00:11:50.440 --> 00:11:53.600 spread premium. If they could convince the borrower 00:11:53.600 --> 00:11:55.759 to take a loan with a higher interest rate than 00:11:55.759 --> 00:11:58.179 they actually qualified for. That's predatory. 00:11:58.200 --> 00:12:00.600 That is literally incentivizing someone to rip 00:12:00.600 --> 00:12:02.720 off their own customer. It was standard practice. 00:12:03.450 --> 00:12:05.409 And the loan products themselves were traps. 00:12:06.029 --> 00:12:08.629 We have to talk about the teaser rates. The exploding 00:12:08.629 --> 00:12:12.269 loans. Yes. Imagine a 228 adjustable rate mortgage, 00:12:12.409 --> 00:12:15.129 an ARM. For the first two years, the interest 00:12:15.129 --> 00:12:18.370 rate is practically zero, 1%, 2%. Your monthly 00:12:18.370 --> 00:12:20.429 payment looks incredibly affordable. So you think 00:12:20.429 --> 00:12:24.169 you can handle it. You do. But at month 25, the 00:12:24.169 --> 00:12:26.889 rate resets. It jumps to whatever the market 00:12:26.889 --> 00:12:29.710 rate is plus a margin. It could explode to 9, 00:12:29.889 --> 00:12:33.090 10, 11 percent. Your monthly payment could double 00:12:33.090 --> 00:12:35.649 or triple overnight. And the sales pitch from 00:12:35.649 --> 00:12:37.450 the broker was always, don't worry about the 00:12:37.450 --> 00:12:39.750 reset. In two years, your house will be worth 00:12:39.750 --> 00:12:42.090 so much more. You can just refinance into a better 00:12:42.090 --> 00:12:44.529 loan. Exactly. The entire system was predicated 00:12:44.529 --> 00:12:46.950 on one thing. House prices going up forever. 00:12:47.149 --> 00:12:49.210 And then there were the option AROMs. These are 00:12:49.210 --> 00:12:51.529 the ones that really blow my mind. You could 00:12:51.529 --> 00:12:53.970 choose to pay less than the interest you owed 00:12:53.970 --> 00:12:56.070 each month. It's called negative amortization. 00:12:56.750 --> 00:12:59.570 And it's as bad as it sounds. Let's say the actual 00:12:59.570 --> 00:13:03.389 interest on your loan is $2 ,000 a month. The 00:13:03.389 --> 00:13:06.029 bank says, hey, you only have to pay $1 ,000 00:13:06.029 --> 00:13:08.669 this month if you want. Sounds great. It sounds 00:13:08.669 --> 00:13:11.450 great. But that missing $1 ,000 doesn't just 00:13:11.450 --> 00:13:14.590 disappear. It gets added to your total loan balance. 00:13:14.769 --> 00:13:16.669 So your debt is actually increasing every month, 00:13:16.669 --> 00:13:18.990 even though you're making payments. You are literally 00:13:18.990 --> 00:13:22.250 paying the bank. to go deeper into debt. It is 00:13:22.250 --> 00:13:24.549 financial suicide. But again, if you believe 00:13:24.549 --> 00:13:26.970 your house is gaining $5 ,000 in value every 00:13:26.970 --> 00:13:29.490 month, you don't care. You think the house is 00:13:29.490 --> 00:13:31.129 earning money faster than you're borrowing it. 00:13:31.250 --> 00:13:35.029 The stats from the period are just. They're shocking. 00:13:35.250 --> 00:13:38.570 In 2005, the median down payment for first -time 00:13:38.570 --> 00:13:41.840 homebuyers was only 2%. 43 % put nothing down 00:13:41.840 --> 00:13:44.419 at all. Zero down. You could buy a $400 ,000 00:13:44.419 --> 00:13:47.600 asset with no skin in the game whatsoever. So, 00:13:47.700 --> 00:13:50.639 okay, we have the strawberry picker with the 00:13:50.639 --> 00:13:53.320 $700 ,000 loan. We have the mortgage broker who 00:13:53.320 --> 00:13:55.259 got his commission and, I don't know, bought 00:13:55.259 --> 00:13:59.139 a boat. But here's the mystery. Why would a big 00:13:59.139 --> 00:14:02.220 bank, a sophisticated financial institution like 00:14:02.220 --> 00:14:04.990 Bear Stearns or Lehman Brothers, buy that loan. 00:14:05.149 --> 00:14:07.629 Why would they want a loan that is almost guaranteed 00:14:07.629 --> 00:14:10.250 to default? Ah, and that brings us to the engine 00:14:10.250 --> 00:14:12.850 of the crisis, the machine that made it all possible, 00:14:13.149 --> 00:14:15.830 securitization. We need to unpack this carefully 00:14:15.830 --> 00:14:17.570 because this is where a lot of people's eyes 00:14:17.570 --> 00:14:20.029 glaze over. But it's actually not that complicated 00:14:20.029 --> 00:14:23.149 if you use the right analogy. It's not. The concept 00:14:23.149 --> 00:14:26.590 is simple. Historically, banking was what's called 00:14:26.590 --> 00:14:29.470 originate to hold. Like in It's a Wonderful Life. 00:14:29.830 --> 00:14:32.669 Exactly. George Bailey at the Bailey Building 00:14:32.669 --> 00:14:35.299 and Loan. He lends you money to buy a house. 00:14:35.559 --> 00:14:37.879 You pay the building and loan back every month 00:14:37.879 --> 00:14:40.940 for 30 years. If you don't pay, the building 00:14:40.940 --> 00:14:43.659 and loan loses money. They knew you. They checked 00:14:43.659 --> 00:14:45.639 your credit. They had a stake in your success. 00:14:45.899 --> 00:14:47.960 But that's not what was happening in the 2000s. 00:14:47.960 --> 00:14:50.940 No, the model shifted completely to originate 00:14:50.940 --> 00:14:53.799 to distribute. The local bank or mortgage broker 00:14:53.799 --> 00:14:55.840 originates the loan, but they don't keep it. 00:14:55.940 --> 00:14:58.659 They sell it almost immediately to an investment 00:14:58.659 --> 00:15:01.049 bank on Wall Street. This creates what the economists 00:15:01.049 --> 00:15:03.950 call a moral hazard. A massive moral hazard. 00:15:04.129 --> 00:15:06.490 If the bank sells the risk the moment the loan 00:15:06.490 --> 00:15:09.210 is made, do they care if the borrower defaults? 00:15:09.210 --> 00:15:11.610 They have no reason to. The risk is gone. So 00:15:11.610 --> 00:15:14.370 Wall Street buys thousands of these loans, good 00:15:14.370 --> 00:15:17.389 ones, bad ones, NINJ loans, and throws them all 00:15:17.389 --> 00:15:20.269 into a giant digital pot. They bundle them. And 00:15:20.269 --> 00:15:22.090 these bundles are called mortgage -backed securities, 00:15:22.330 --> 00:15:26.029 or MBS. Correct. Now imagine that pot of loans 00:15:26.029 --> 00:15:29.399 is like... Well, a giant vat of chili. You've 00:15:29.399 --> 00:15:31.840 got some prime cuts of steak in there, but you've 00:15:31.840 --> 00:15:34.879 also got a lot of gristle and fat and things 00:15:34.879 --> 00:15:37.139 you'd rather not identify. A wonderful image. 00:15:37.360 --> 00:15:40.679 Go on. Wall Street takes that vat and they create 00:15:40.679 --> 00:15:43.100 a product from it. And here's the magic trick. 00:15:43.559 --> 00:15:46.080 They slice that product into different layers. 00:15:46.320 --> 00:15:48.220 These are called tranches, which is just French 00:15:48.220 --> 00:15:51.360 for slice. And this is the water bucket analogy 00:15:51.360 --> 00:15:53.899 I saw in a few of the sources. I think this really 00:15:53.899 --> 00:15:56.820 helps clarify it. It's the best one. Imagine 00:15:56.820 --> 00:15:59.740 a waterfall. The water is the monthly mortgage 00:15:59.740 --> 00:16:02.559 payments coming in from all the homeowners. And 00:16:02.559 --> 00:16:04.799 that waterfall flows into several buckets stacked 00:16:04.799 --> 00:16:06.720 vertically, one on top of the other. The top 00:16:06.720 --> 00:16:08.620 bucket gets filled first. The top bucket gets 00:16:08.620 --> 00:16:10.919 filled first. It's the senior tranche. As long 00:16:10.919 --> 00:16:14.000 as money is flowing, this bucket gets full. So 00:16:14.000 --> 00:16:16.100 if you buy a bond from this top bucket, you get 00:16:16.100 --> 00:16:18.669 paid first. Even if a few homeowners stop paying, 00:16:18.889 --> 00:16:21.690 if the water flow slows down a bit, that top 00:16:21.690 --> 00:16:23.190 bucket is still going to get filled. And because 00:16:23.190 --> 00:16:26.210 it's so safe, so likely to get filled. The credit 00:16:26.210 --> 00:16:29.669 rating agencies, Moody's, Standard & Poor's, 00:16:29.730 --> 00:16:32.789 Fitch, they come in and they stamp that top bucket 00:16:32.789 --> 00:16:35.789 AAA. They say it is as safe as a U .S. Treasury 00:16:35.789 --> 00:16:38.929 bond, the safest investment on Earth. OK, so 00:16:38.929 --> 00:16:41.549 once the top bucket is full, the water overflows 00:16:41.549 --> 00:16:44.110 into the next one down. Right. That's the mezzanine 00:16:44.110 --> 00:16:46.830 tranche. It only gets paid after the senior guys 00:16:46.830 --> 00:16:49.970 are paid in full. So it's riskier. To compensate 00:16:49.970 --> 00:16:52.710 you for that risk, it pays a higher interest 00:16:52.710 --> 00:16:56.350 rate. This might be rated, say, BBB. And the 00:16:56.350 --> 00:16:58.649 very bottom bucket. That's the equity tranche, 00:16:58.649 --> 00:17:01.559 or as the traders on Wall Street called it. the 00:17:01.559 --> 00:17:04.740 toxic waste. This bucket takes the first losses. 00:17:05.039 --> 00:17:07.640 If even a few homeowners default and the water 00:17:07.640 --> 00:17:10.980 flow slows, this bucket stays empty. The investors 00:17:10.980 --> 00:17:13.119 who bought this piece get nothing. They're wiped 00:17:13.119 --> 00:17:15.500 out. OK, so on the surface, this seems logical. 00:17:15.799 --> 00:17:18.130 Investors can choose their level of risk. The 00:17:18.130 --> 00:17:20.549 problem, as the FCIC report points out, was that 00:17:20.549 --> 00:17:23.089 Wall Street had too many subprime loans. They 00:17:23.089 --> 00:17:25.509 had too much of this toxic waste and this mezzanine 00:17:25.509 --> 00:17:27.630 stuff that nobody wanted to buy. That's right. 00:17:27.730 --> 00:17:30.009 The giant pool of money, those global investors, 00:17:30.150 --> 00:17:32.849 they only wanted the safe AAA stuff. There was 00:17:32.849 --> 00:17:35.049 a glut of the risky slices. So what did they 00:17:35.049 --> 00:17:37.589 do? So they did something that was either brilliant 00:17:37.589 --> 00:17:40.089 or diabolical, depending on your point of view. 00:17:40.329 --> 00:17:43.250 They took those unwanted, risky middle buckets. 00:17:43.900 --> 00:17:46.559 the BBB -rated stuff from hundreds of different 00:17:46.559 --> 00:17:48.740 mortgage bonds, and they pulled those together 00:17:48.740 --> 00:17:51.220 into a new pile. So they're creating a new pile 00:17:51.220 --> 00:17:54.220 made up of purely risky stuff. A pile of nothing 00:17:54.220 --> 00:17:57.460 but B -level tranches. And they ran that pile 00:17:57.460 --> 00:18:00.440 through the waterfall machine again. This new 00:18:00.440 --> 00:18:04.759 structure is called a CDO, a collateralized debt 00:18:04.759 --> 00:18:07.250 obligation. So it's a security made up of other 00:18:07.250 --> 00:18:10.250 securities, a bond made out of other bonds. It's 00:18:10.250 --> 00:18:12.250 a sausage made out of the gristle and leftover 00:18:12.250 --> 00:18:15.069 bits from the first sausage. That is. Deeply 00:18:15.069 --> 00:18:17.650 unappetizing. It's financial alchemy. Through 00:18:17.650 --> 00:18:20.289 complex statistical modeling, they argued that 00:18:20.289 --> 00:18:22.450 because these BDB tranches came from different 00:18:22.450 --> 00:18:24.289 mortgage pools all over the country, some in 00:18:24.289 --> 00:18:26.109 Florida, some in California, some in Arizona, 00:18:26.309 --> 00:18:28.430 they were diversified. They wouldn't all default 00:18:28.430 --> 00:18:30.630 at once. So they convinced the rating agencies. 00:18:31.049 --> 00:18:33.829 They convinced the rating agencies that the top 00:18:33.829 --> 00:18:37.410 portion of this new pile of risky debt was somehow. 00:18:38.279 --> 00:18:40.240 magically safe again. I mean, it's unbelievable. 00:18:40.440 --> 00:18:43.539 But 70 to 80 percent of this new CDO structure 00:18:43.539 --> 00:18:46.819 was rated AAA. This is the draws into gold moment. 00:18:47.000 --> 00:18:49.839 They took financial junk, repackaged it and slapped 00:18:49.839 --> 00:18:52.779 a AAA sticker on it. And the rating agencies, 00:18:52.799 --> 00:18:54.759 the so -called independent referees, they just 00:18:54.759 --> 00:18:57.019 went along with this. Went along with it is putting 00:18:57.019 --> 00:19:00.500 it very mildly. The sources highlight a massive, 00:19:00.579 --> 00:19:03.160 glaring conflict of interest here. You have to 00:19:03.160 --> 00:19:06.690 ask who pays for the rating? The bank. The investment 00:19:06.690 --> 00:19:09.089 bank that's creating and selling the CDO. Correct. 00:19:09.210 --> 00:19:12.009 The issuer pays. So imagine you're Goldman Sachs. 00:19:12.049 --> 00:19:14.609 You go to Moody's and say, here's our new CDO. 00:19:14.609 --> 00:19:17.269 We want a AAA rating. If Moody's says, wait a 00:19:17.269 --> 00:19:18.910 minute, this stuff looks like garbage. We're 00:19:18.910 --> 00:19:20.910 going to rate it junk. What does Goldman do? 00:19:21.069 --> 00:19:22.890 They just walk down the street to S &P. Exactly. 00:19:23.069 --> 00:19:24.789 They say, fine, we'll take our business to S 00:19:24.789 --> 00:19:27.230 &P. Maybe they'll be more cooperative. It was 00:19:27.230 --> 00:19:29.269 called rating shopping. And the agencies were 00:19:29.269 --> 00:19:31.630 competing for this business. Viciously. Yeah. 00:19:31.730 --> 00:19:34.029 They were making hundreds of millions of dollars 00:19:34.029 --> 00:19:37.450 in fees from this business. There are internal 00:19:37.450 --> 00:19:39.890 emails that came out in the NCIC report where 00:19:39.890 --> 00:19:41.869 analysts are basically joking about it. I remember 00:19:41.869 --> 00:19:44.309 one of these. One S &P analyst writes to another, 00:19:44.470 --> 00:19:46.589 let's hope we are all wealthy and retired by 00:19:46.589 --> 00:19:49.549 the time this house of cards blows up. Another 00:19:49.549 --> 00:19:52.509 one famously said, we rate every deal. It could 00:19:52.509 --> 00:19:54.789 be structured by cows and we would rate it. Structured 00:19:54.789 --> 00:19:57.009 by cows. That tells you everything you need to 00:19:57.009 --> 00:19:58.890 know about the integrity of the process. They 00:19:58.890 --> 00:20:00.930 had every financial incentive to look the other 00:20:00.930 --> 00:20:03.700 way. And their computer models, the things they 00:20:03.700 --> 00:20:06.200 used to justify the ratings, were fundamentally 00:20:06.200 --> 00:20:09.079 flawed. Because of that one big assumption. That 00:20:09.079 --> 00:20:11.500 one core assumption. They assumed that because 00:20:11.500 --> 00:20:14.180 housing prices had never fallen nationwide all 00:20:14.180 --> 00:20:16.579 at once since the Great Depression, that they 00:20:16.579 --> 00:20:19.220 never would. The famous diversification fallacy. 00:20:19.359 --> 00:20:22.200 They thought a default in Miami had no connection 00:20:22.200 --> 00:20:25.519 to a default in Las Vegas. Exactly. They didn't 00:20:25.519 --> 00:20:27.819 realize that the financing was the national contagion. 00:20:28.059 --> 00:20:30.420 When the credit spigot turned off, it would turn 00:20:30.420 --> 00:20:32.700 off everywhere at once, and all their diversification 00:20:32.700 --> 00:20:35.440 models would be worthless. So to recap, we have 00:20:35.440 --> 00:20:38.740 the bad loans, the fuel. We have the CDO machine 00:20:38.740 --> 00:20:41.619 turning them into fake safe assets, the engine. 00:20:42.140 --> 00:20:44.859 But there's one more piece that turned this from 00:20:44.859 --> 00:20:48.380 a messy housing correction into a global system 00:20:48.380 --> 00:20:51.190 -threatening catastrophe. We need to talk about 00:20:51.190 --> 00:20:53.109 the accelerant. This is where the story gets 00:20:53.109 --> 00:20:55.710 really dark. This is the shadow banking system 00:20:55.710 --> 00:20:58.390 and the concept of leverage. What is shadow banking? 00:20:58.670 --> 00:21:00.789 When we think of a bank, we think of that building 00:21:00.789 --> 00:21:03.539 on Main Street with a vault and tellers. That's 00:21:03.539 --> 00:21:06.299 a depository bank, like Bank of America. It takes 00:21:06.299 --> 00:21:08.640 deposits from you and me. It's heavily regulated. 00:21:08.859 --> 00:21:11.079 It has to keep a certain amount of cash on hand. 00:21:11.299 --> 00:21:13.400 But there was this whole other system operating 00:21:13.400 --> 00:21:15.680 in parallel. The shadow barking system. These 00:21:15.680 --> 00:21:17.460 are the big investment banks. Lehman Brothers, 00:21:17.759 --> 00:21:21.019 Bear Stearns, Goldman Sachs, hedge funds, strange 00:21:21.019 --> 00:21:24.220 entities called SIVs, structured investment vehicles. 00:21:24.480 --> 00:21:27.059 What did they do? They acted like banks. They 00:21:27.059 --> 00:21:29.480 borrowed short term and lent long term, but they 00:21:29.480 --> 00:21:31.480 didn't take deposits. They weren't regulated 00:21:31.480 --> 00:21:35.200 like banks. And they funded themselves by borrowing 00:21:35.200 --> 00:21:38.119 massive amounts of money, often overnight. And 00:21:38.119 --> 00:21:40.759 they used extreme leverage. Leverage is just 00:21:40.759 --> 00:21:43.140 a fancy word for using borrowed money to invest. 00:21:43.380 --> 00:21:46.900 If I have $1 of my own money and I borrow $9 00:21:46.900 --> 00:21:50.720 to buy a $10 asset, I am leveraged 10 to 1. Which 00:21:50.720 --> 00:21:53.380 is great if the value of that asset goes up. 00:21:53.400 --> 00:21:56.079 It's fantastic. If that $10 asset goes up by 00:21:56.079 --> 00:22:00.319 10 % to $11, I've doubled my money. I made a 00:22:00.319 --> 00:22:03.200 dollar on my original dollar, 100 % return. But 00:22:03.200 --> 00:22:05.720 if the asset drops by 10%. You've lost everything. 00:22:05.900 --> 00:22:08.339 The asset is now worth $9. You still owe the 00:22:08.339 --> 00:22:11.480 $9 you borrowed. Your original $1 is gone. Your 00:22:11.480 --> 00:22:14.279 equity is completely wiped out. So now consider 00:22:14.279 --> 00:22:17.420 this fact from the sources. By 2007, some of 00:22:17.420 --> 00:22:19.819 these major investment banks had leverage ratios 00:22:19.819 --> 00:22:22.819 as high as 40 to 1. 40 to 1. Let's just do the 00:22:22.819 --> 00:22:25.400 math on that. That means for every $1 of their 00:22:25.400 --> 00:22:28.299 own capital, they were playing with $40 of borrowed 00:22:28.299 --> 00:22:31.319 money. So a tiny drop in the value of their assets 00:22:31.319 --> 00:22:34.420 would wipe them out. A tiny drop. At 40 to 1 00:22:34.420 --> 00:22:37.140 leverage, a drop in your asset value of just 00:22:37.140 --> 00:22:40.400 2 .5 % makes you insolvent. Your capital is gone. 00:22:40.619 --> 00:22:43.839 2 .5%, that's nothing. That's a bad Tuesday in 00:22:43.839 --> 00:22:45.680 the stock market. And we're talking about housing 00:22:45.680 --> 00:22:50.180 prices that had risen 124%. A 2 .5 % correction 00:22:50.180 --> 00:22:52.940 was not just possible, it was inevitable. It 00:22:52.940 --> 00:22:56.380 was. But they felt safe. Why? Because they were 00:22:56.380 --> 00:22:59.200 holding all these AAA -rated CDOs. They believed 00:22:59.200 --> 00:23:01.480 their own lie. They thought these assets were 00:23:01.480 --> 00:23:03.839 bulletproof. And to make matters even crazier, 00:23:04.000 --> 00:23:06.160 they were buying and selling insurance on these 00:23:06.160 --> 00:23:09.299 assets. But this wasn't normal insurance. This 00:23:09.299 --> 00:23:12.339 brings us to Credit Default Swap's CDS. A credit 00:23:12.339 --> 00:23:16.130 default swap is, at its core, a side bet. It's 00:23:16.130 --> 00:23:18.390 an insurance policy against a bond going bust. 00:23:18.589 --> 00:23:21.390 If I buy a bond, I can also buy a CDS from you. 00:23:21.450 --> 00:23:24.589 I pay you a small premium. If the bond defaults, 00:23:24.589 --> 00:23:27.369 you, the seller of the swap, have to pay me the 00:23:27.369 --> 00:23:30.150 full face value of the bond. But here's the twist 00:23:30.150 --> 00:23:32.089 that turned it into a weapon of mass destruction. 00:23:32.430 --> 00:23:34.569 You didn't have to own the underlying bond to 00:23:34.569 --> 00:23:37.630 buy the insurance on it. That is the critical 00:23:37.630 --> 00:23:40.230 world -changing difference. It's like buying 00:23:40.230 --> 00:23:43.799 fire insurance on your neighbor's house. You 00:23:43.799 --> 00:23:46.779 don't own the house. You have no insurable interest. 00:23:47.180 --> 00:23:49.740 You are simply betting that it will burn down, 00:23:49.880 --> 00:23:52.480 and you want to get paid if it does. And it's 00:23:52.480 --> 00:23:55.119 not just you. Ten other people, a hundred other 00:23:55.119 --> 00:23:57.519 people can all buy fire insurance on that same 00:23:57.519 --> 00:24:00.880 house. Exactly. You could have a CDO worth $100 00:24:00.880 --> 00:24:03.599 million, but you could have a billion dollars 00:24:03.599 --> 00:24:07.559 in CDS bets riding on its performance. This is 00:24:07.559 --> 00:24:09.900 how the potential losses in the system were magnified 00:24:09.900 --> 00:24:13.339 infinitely. This led to the creation of synthetic 00:24:13.339 --> 00:24:16.460 CDOs. Synthetic, meaning it's purely artificial. 00:24:16.779 --> 00:24:19.160 It means there are no actual mortgages, no actual 00:24:19.160 --> 00:24:22.000 homeowners involved anymore. It is just gamblers 00:24:22.000 --> 00:24:23.839 making bets on the performance of other bets. 00:24:24.039 --> 00:24:26.079 You had hedge funds who would actually help banks 00:24:26.079 --> 00:24:28.359 design CDOs that they knew were full of garbage 00:24:28.359 --> 00:24:30.380 loans. They could bet against them. Precisely. 00:24:30.380 --> 00:24:32.480 So they could turn around and buy CDS from someone 00:24:32.480 --> 00:24:34.839 else, betting that the very product they helped 00:24:34.839 --> 00:24:37.319 create would fail. It's like helping someone 00:24:37.319 --> 00:24:39.339 build a car with no brakes just so you can bet 00:24:39.339 --> 00:24:42.119 on it crashing. The big short trade. That's the 00:24:42.119 --> 00:24:45.960 one. But for every person making that bet, there 00:24:45.960 --> 00:24:48.400 had to be someone on the other side. Someone 00:24:48.400 --> 00:24:50.200 selling all that insurance. And that someone 00:24:50.200 --> 00:24:53.319 was an AIG, American International Group, a big, 00:24:53.319 --> 00:24:55.859 boring global insurance company. Or so everyone 00:24:55.859 --> 00:24:58.740 thought. But there was a tiny division, a little 00:24:58.740 --> 00:25:01.849 office in London called AIG. financial products. 00:25:02.009 --> 00:25:04.349 And what were they doing? They were selling these 00:25:04.349 --> 00:25:06.789 credit default swaps by the hundreds of billions. 00:25:07.470 --> 00:25:09.930 They looked at the AAA ratings on these CDOs 00:25:09.930 --> 00:25:11.869 and thought it was free money. They said, these 00:25:11.869 --> 00:25:14.109 bonds will never default. We'll just collect 00:25:14.109 --> 00:25:16.309 the insurance premiums forever and get rich. 00:25:16.569 --> 00:25:19.029 They were picking up nickels in front of a steamroller. 00:25:19.269 --> 00:25:23.109 A perfect analogy. And because CDS were unregulated. 00:25:23.960 --> 00:25:25.539 They didn't have to put up any real collateral. 00:25:25.819 --> 00:25:27.700 They didn't have the cash reserves to actually 00:25:27.700 --> 00:25:30.420 pay out if all those houses they insured started 00:25:30.420 --> 00:25:32.839 to burn down at the same time. They were insuring 00:25:32.839 --> 00:25:35.180 the apocalypse, betting that the apocalypse would 00:25:35.180 --> 00:25:37.579 never happen. And that's the final piece of the 00:25:37.579 --> 00:25:40.819 puzzle. The stage is completely set. You have 00:25:40.819 --> 00:25:43.720 a housing bubble. fueled by toxic subprime loans, 00:25:44.059 --> 00:25:46.700 which are then securitized into fake safe bonds, 00:25:46.920 --> 00:25:49.619 which are held by massively leveraged banks, 00:25:49.799 --> 00:25:52.119 all of which is insured by a company that doesn't 00:25:52.119 --> 00:25:54.779 actually have the money to pay the claims. It's 00:25:54.779 --> 00:25:57.279 a house of cards soaked in gasoline. And in 2006, 00:25:57.599 --> 00:26:00.420 the match was lit. It was. Which brings us to 00:26:00.420 --> 00:26:05.319 Section 5, the collapse. From contained to catastrophe. 00:26:06.589 --> 00:26:09.009 What was the first domino to fall? What was the 00:26:09.009 --> 00:26:11.269 trigger? You know, it wasn't a sudden explosion 00:26:11.269 --> 00:26:14.109 at first. It was more like a slow leak. Housing 00:26:14.109 --> 00:26:16.269 prices officially peaked in the U .S. in mid 00:26:16.269 --> 00:26:18.789 -2006. They went flat, and then they started 00:26:18.789 --> 00:26:20.589 to tick down. And at the same time, the Federal 00:26:20.589 --> 00:26:22.549 Reserve had started raising interest rates to 00:26:22.549 --> 00:26:24.630 try and cool down the economy. That was the double 00:26:24.630 --> 00:26:27.849 whammy. Those teaser rates on the 228 ARM started 00:26:27.849 --> 00:26:30.710 to reset. Suddenly, homeowners saw their payments 00:26:30.710 --> 00:26:33.009 jump by hundreds, sometimes thousands of dollars 00:26:33.009 --> 00:26:34.750 a month. So they tried to do what the broker 00:26:34.750 --> 00:26:36.849 told them to do. They tried to refinance. But 00:26:36.849 --> 00:26:39.549 they couldn't. Because to refinance, you need 00:26:39.549 --> 00:26:42.400 equity in your home. And for the first time in 00:26:42.400 --> 00:26:44.640 years, the value of their house hadn't gone up. 00:26:44.640 --> 00:26:47.039 It had gone down. Many of them were underwater. 00:26:47.420 --> 00:26:49.539 They owed more on the mortgage than the house 00:26:49.539 --> 00:26:52.319 was even worth. So the defaults started to spike. 00:26:52.500 --> 00:26:54.000 And this is the beginning of the vicious cycle. 00:26:55.059 --> 00:26:57.819 Defaults lead to foreclosures. The bank takes 00:26:57.819 --> 00:27:00.279 the house and puts it on the market. That adds 00:27:00.279 --> 00:27:02.240 more supply to the market, which pushes prices 00:27:02.240 --> 00:27:05.500 down even further. Lower prices put more homeowners 00:27:05.500 --> 00:27:08.130 underwater. which leads to more defaults. It 00:27:08.130 --> 00:27:11.230 just feeds on itself. It does. And as those defaults 00:27:11.230 --> 00:27:15.089 rose, the waterfalls in those CDOs started to 00:27:15.089 --> 00:27:18.529 dry up. The toxic waste bucket emptied. Then 00:27:18.529 --> 00:27:20.849 the mezzanine bucket. And then the moment no 00:27:20.849 --> 00:27:23.089 one thought was possible, the AAA bucket of the 00:27:23.089 --> 00:27:25.670 safe money wasn't getting paid. And that's when 00:27:25.670 --> 00:27:28.269 the panic hit Wall Street. The timeline here 00:27:28.269 --> 00:27:30.609 is important. The first signs of trouble were 00:27:30.609 --> 00:27:32.950 the subprime lenders themselves going bankrupt 00:27:32.950 --> 00:27:36.059 in early 2007. Companies you've never heard of, 00:27:36.099 --> 00:27:38.819 like New Century Financial. At the time, the 00:27:38.819 --> 00:27:41.440 Fed said the problems were contained to the subprime 00:27:41.440 --> 00:27:43.339 sector. They did. That was the official line. 00:27:43.700 --> 00:27:45.920 But the contagion spread to Wall Street in the 00:27:45.920 --> 00:27:49.640 summer of 2007. July 2007 is when it got real. 00:27:50.079 --> 00:27:52.980 Bear Stearns. Two of Bear Stearns' internal hedge 00:27:52.980 --> 00:27:56.000 funds completely imploded. They were stuffed 00:27:56.000 --> 00:27:58.819 to the gills with these subprime CDOs. That was 00:27:58.819 --> 00:28:01.859 the... Proximate catalyst, as the SCIC called 00:28:01.859 --> 00:28:03.819 it. It was the moment Wall Street looked around 00:28:03.819 --> 00:28:07.200 and realized, oh, no, the toxic waste isn't just 00:28:07.200 --> 00:28:09.859 out there. It's inside the house. It's on our 00:28:09.859 --> 00:28:13.059 own balance sheets. And this leads to the modern 00:28:13.059 --> 00:28:15.859 version of a run on the bank. But it wasn't people 00:28:15.859 --> 00:28:18.259 lining up at teller windows like in the old movies. 00:28:18.319 --> 00:28:21.200 No, this is a silent, invisible run happening 00:28:21.200 --> 00:28:23.339 in the repo market. We need to explain the repo 00:28:23.339 --> 00:28:25.400 market because this is the plumbing of the entire 00:28:25.400 --> 00:28:28.160 financial system that nobody sees. Think of the 00:28:28.160 --> 00:28:31.119 repo market as a giant overnight pawn shop for 00:28:31.119 --> 00:28:33.839 banks. Investment banks like Bear Stearns and 00:28:33.839 --> 00:28:36.000 Lehman Brothers need massive amounts of cash 00:28:36.000 --> 00:28:38.140 every single day to operate and settle their 00:28:38.140 --> 00:28:40.000 trades. So where do they get it? Every night 00:28:40.000 --> 00:28:42.839 they take their assets, their bonds, their CDOs, 00:28:42.900 --> 00:28:45.259 and they essentially pawn them to other lenders 00:28:45.259 --> 00:28:48.839 like money market funds. for cash. They sign 00:28:48.839 --> 00:28:50.839 an agreement to buy those assets back the next 00:28:50.839 --> 00:28:53.180 morning for a slightly higher price. That's the 00:28:53.180 --> 00:28:55.359 repurchase agreement or repo. So they are literally 00:28:55.359 --> 00:28:58.619 living hand to mouth, night to night. Every single 00:28:58.619 --> 00:29:01.319 night. They are rolling over billions, hundreds 00:29:01.319 --> 00:29:03.880 of billions of dollars every night. The system 00:29:03.880 --> 00:29:06.539 works fine as long as the lenders trust the collateral, 00:29:06.740 --> 00:29:08.920 as long as they trust the bonds being pawned. 00:29:08.920 --> 00:29:11.819 But in 2007, they stopped trusting the collateral. 00:29:12.140 --> 00:29:13.700 They looked at the mortgage backed securities 00:29:13.700 --> 00:29:16.630 being offered up by Bear Stearns and said, Wait 00:29:16.630 --> 00:29:18.990 a minute. We don't know what this stuff is worth. 00:29:19.029 --> 00:29:20.890 We don't want your bonds anymore. We want our 00:29:20.890 --> 00:29:23.829 cash back. The pawn shop closed its doors. And 00:29:23.829 --> 00:29:25.589 if you're an investment bank and you can't get 00:29:25.589 --> 00:29:27.910 that overnight loan, you are dead by morning. 00:29:28.009 --> 00:29:30.670 You can't open for business. That is what happened 00:29:30.670 --> 00:29:33.509 to Bear Stearns in March of 2008. They ran out 00:29:33.509 --> 00:29:36.390 of cash. The Federal Reserve had to step in and 00:29:36.390 --> 00:29:39.509 orchestrate a fire sale to JPMorgan Chase just 00:29:39.509 --> 00:29:42.529 to prevent a disorderly collapse that could take 00:29:42.529 --> 00:29:44.750 down the whole system. And after that, everyone 00:29:44.750 --> 00:29:47.630 took a breath. They thought, OK, the Fed saved 00:29:47.630 --> 00:29:50.609 Bear. The worst is over. They thought they had 00:29:50.609 --> 00:29:53.470 dodged a bullet. But it was just the warm -up 00:29:53.470 --> 00:29:56.730 act for September 2008. The critical month. September 00:29:56.730 --> 00:29:59.390 was the avalanche. First, early in the month, 00:29:59.670 --> 00:30:02.329 Fannie Mae and Freddie Mac, the two government 00:30:02.329 --> 00:30:05.089 -sponsored giants that owned or guarantee half 00:30:05.089 --> 00:30:07.609 of all the mortgages in America, were effectively 00:30:07.609 --> 00:30:09.970 bankrupt. The government had to take them over, 00:30:10.069 --> 00:30:12.869 nationalize them. Then Lehman Brothers. Lehman 00:30:12.869 --> 00:30:14.990 was in the same boat as Bear Stearns, but much 00:30:14.990 --> 00:30:17.619 worse. They were leveraged to the hilt with toxic 00:30:17.619 --> 00:30:19.839 commercial and residential real estate assets. 00:30:20.099 --> 00:30:22.339 They were running out of cash. They desperately 00:30:22.339 --> 00:30:24.660 needed a buyer or a bailout. But the government, 00:30:24.900 --> 00:30:27.420 specifically Treasury Secretary Hank Paulson, 00:30:27.539 --> 00:30:30.519 decided to draw a line in the sand. No more bailouts. 00:30:30.640 --> 00:30:32.869 They were worried about moral hazard. They wanted 00:30:32.869 --> 00:30:35.029 to teach Wall Street a lesson to show that there 00:30:35.029 --> 00:30:37.289 are consequences for reckless behavior. So on 00:30:37.289 --> 00:30:40.410 Monday, September 15th, 2008, Lehman Brothers 00:30:40.410 --> 00:30:43.210 filed for bankruptcy. It was and still is the 00:30:43.210 --> 00:30:46.009 largest bankruptcy filing in U .S. history. And 00:30:46.009 --> 00:30:49.329 the result was immediate global chaos. The system 00:30:49.329 --> 00:30:52.710 broke. The TED spread, which is a key measure 00:30:52.710 --> 00:30:55.849 of trust between banks, it skyrocketed to levels 00:30:55.849 --> 00:30:58.890 never seen before. It meant banks stopped lending 00:30:58.890 --> 00:31:01.910 to each other, period. The circulatory system 00:31:01.910 --> 00:31:04.430 of the global economy stopped flowing. And then 00:31:04.430 --> 00:31:06.710 the panic, which had been confined to Wall Street, 00:31:06.890 --> 00:31:09.809 hit the average person. It hit Main Street with 00:31:09.809 --> 00:31:12.630 the money market funds. This, for me, is the 00:31:12.630 --> 00:31:15.130 single scariest moment of the entire crisis. 00:31:15.369 --> 00:31:19.029 The Reserve Primary Fund, a boring, safe money 00:31:19.029 --> 00:31:21.109 market fund where regular people and companies 00:31:21.109 --> 00:31:24.670 kept their cash. It held some Lehman debt. When 00:31:24.670 --> 00:31:27.579 Lehman failed, the fund... Broke the buck. Meaning 00:31:27.579 --> 00:31:29.519 a dollar that you invested was suddenly worth 00:31:29.519 --> 00:31:32.359 only 97 cents. It doesn't sound like much, but 00:31:32.359 --> 00:31:34.500 it was earth shattering. It was like discovering 00:31:34.500 --> 00:31:36.960 the laws of physics no longer applied. It caused 00:31:36.960 --> 00:31:39.440 a stampede. People and corporations started pulling 00:31:39.440 --> 00:31:41.039 hundreds of billions of dollars out of every 00:31:41.039 --> 00:31:42.839 money market fund. Because they were terrified. 00:31:43.240 --> 00:31:45.140 If the government hadn't stepped in within 48 00:31:45.140 --> 00:31:48.019 hours to guarantee those funds, the entire economy 00:31:48.019 --> 00:31:49.980 would have ceased to function. Companies wouldn't 00:31:49.980 --> 00:31:51.960 have been able to make payroll. ATMs might have 00:31:51.960 --> 00:31:54.279 gone dark. It was that close. It was the brink 00:31:54.279 --> 00:31:56.900 of a second Great Depression. And in the middle 00:31:56.900 --> 00:32:00.420 of all this, AIG collapsed. All those credit 00:32:00.420 --> 00:32:02.759 default swaps they had sold came due at once. 00:32:02.960 --> 00:32:04.579 And they didn't have the money. Not even close. 00:32:04.819 --> 00:32:07.180 And the government realized they couldn't let 00:32:07.180 --> 00:32:11.000 AIG fail because AIG owed money to everyone. 00:32:11.180 --> 00:32:14.680 If AIG went down, Goldman Sachs goes down, major 00:32:14.680 --> 00:32:16.859 European banks go down, it would have been a 00:32:16.859 --> 00:32:18.880 global financial Armageddon. So they bailed them 00:32:18.880 --> 00:32:21.880 out, $85 billion initially. It eventually grew 00:32:21.880 --> 00:32:24.299 to much, much more. It was a total, complete 00:32:24.299 --> 00:32:27.680 systemic meltdown. So naturally, after a catastrophe 00:32:27.680 --> 00:32:30.980 of this magnitude, we have to ask, who is to 00:32:30.980 --> 00:32:33.579 blame? And the sources we've reviewed, they present 00:32:33.579 --> 00:32:36.440 a few different, often competing narratives. 00:32:36.519 --> 00:32:39.039 It's not just one villain twirling a mustache. 00:32:39.240 --> 00:32:42.200 It's a cast of thousands. The first and maybe 00:32:42.200 --> 00:32:44.400 the most prominent narrative is Wall Street greed 00:32:44.400 --> 00:32:47.519 and deregulation. This one focuses on the idea 00:32:47.519 --> 00:32:49.200 that the government took the referees off the 00:32:49.200 --> 00:32:51.859 field and let the players run wild. Exactly. 00:32:52.720 --> 00:32:55.359 Proponents of this view point to a few key decisions. 00:32:55.619 --> 00:32:58.220 The repeal of the Glass -Steagall Act in 1999, 00:32:58.599 --> 00:33:00.940 which tore down the wall between boring commercial 00:33:00.940 --> 00:33:04.039 banking and risky investment banking. So banks 00:33:04.039 --> 00:33:06.619 could gamble with their depositors' money. In 00:33:06.619 --> 00:33:09.720 a way, yes. They also point to the Commodity 00:33:09.720 --> 00:33:13.000 Futures Modernization Act of 2000, which specifically 00:33:13.000 --> 00:33:15.880 stated that derivatives like credit default swaps 00:33:15.880 --> 00:33:18.200 would not be regulated by anyone. They created 00:33:18.200 --> 00:33:21.400 a completely dark, multi -trillion dollar corner 00:33:21.400 --> 00:33:23.680 of the market where anything goes. And then there 00:33:23.680 --> 00:33:27.000 was the SEC's decision in 2004 to allow the biggest 00:33:27.000 --> 00:33:29.440 investment banks to dramatically increase their 00:33:29.440 --> 00:33:31.859 leverage. The regulators were operating under 00:33:31.859 --> 00:33:34.339 this free market philosophy that markets correct 00:33:34.339 --> 00:33:37.779 themselves. Well, they didn't. And the FBI warned 00:33:37.779 --> 00:33:39.960 of an epidemic of mortgage fraud as early as 00:33:39.960 --> 00:33:42.819 2004, but very little was done. OK, so that's 00:33:42.819 --> 00:33:44.759 narrative one. But then there's a competing narrative, 00:33:44.859 --> 00:33:47.099 one you still hear a lot, which is that this 00:33:47.099 --> 00:33:48.900 was actually the government's fault. It was government 00:33:48.900 --> 00:33:51.279 housing policy. Right. This is the argument that 00:33:51.279 --> 00:33:53.559 the government essentially forced banks to lend 00:33:53.559 --> 00:33:55.980 to people who couldn't afford it. This argument 00:33:55.980 --> 00:33:58.519 focuses on things like the Community Reinvestment 00:33:58.519 --> 00:34:01.779 Act, or CRA, and the affordable housing goals 00:34:01.779 --> 00:34:03.839 that were set for Fannie Mae and Freddie Mac. 00:34:04.410 --> 00:34:07.470 The claim is that bureaucrats in Washington were 00:34:07.470 --> 00:34:10.289 pushing for looser lending standards to promote 00:34:10.289 --> 00:34:12.590 homeownership among lower -income communities. 00:34:12.929 --> 00:34:15.989 But the sources, especially the official FCIC 00:34:15.989 --> 00:34:19.710 report, seem to debunk this pretty hard. They 00:34:19.710 --> 00:34:23.090 do. The FCIC conducted a very thorough investigation 00:34:23.090 --> 00:34:26.969 and concluded that, one, the vast majority of 00:34:26.969 --> 00:34:29.869 the toxic subprime loans were made by independent 00:34:29.869 --> 00:34:31.969 mortgage companies that weren't even subject 00:34:31.969 --> 00:34:34.719 to the CRA. So the law didn't apply to them anyway. 00:34:34.880 --> 00:34:37.260 Right. And two, the loans that were made under 00:34:37.260 --> 00:34:39.940 the CRA's framework actually performed better 00:34:39.940 --> 00:34:42.539 on average than the private label subprime stuff 00:34:42.539 --> 00:34:44.460 that Wall Street was churning out. And again, 00:34:44.559 --> 00:34:46.960 there was a massive housing bubble in Spain and 00:34:46.960 --> 00:34:49.260 in Ireland and the UK. They don't have a Community 00:34:49.260 --> 00:34:51.960 Reinvestment Act. Exactly. It's hard to blame 00:34:51.960 --> 00:34:54.179 a U .S. domestic policy for a global speculative 00:34:54.179 --> 00:34:57.119 mania. Which brings us to the third narrative, 00:34:57.320 --> 00:35:00.460 the one that maybe hits a little closer to home 00:35:00.460 --> 00:35:03.340 for all of us, the consumer. We can't let ourselves 00:35:03.340 --> 00:35:06.500 as a society off the hook completely. Households 00:35:06.500 --> 00:35:08.920 took on massive, unsustainable amounts of debt. 00:35:09.280 --> 00:35:11.940 People began to treat their homes like ATM machines. 00:35:12.300 --> 00:35:14.780 Cash out refinancing. Yes. They would see their 00:35:14.780 --> 00:35:17.159 home value go up, so they'd refinance a mortgage, 00:35:17.420 --> 00:35:20.179 take tens of thousands of dollars of equity out 00:35:20.179 --> 00:35:24.159 in cash, and use it to buy boats, cars, vacations, 00:35:24.159 --> 00:35:28.139 flat screen TVs. The national savings rate plummeted. 00:35:28.349 --> 00:35:31.269 And there was also the new phenomenon of strategic 00:35:31.269 --> 00:35:33.690 default. This was a really interesting and controversial 00:35:33.690 --> 00:35:36.110 new behavior. This wasn't people who couldn't 00:35:36.110 --> 00:35:37.670 afford to pay their mortgage. This was people 00:35:37.670 --> 00:35:39.909 who could afford to pay. But they looked at their 00:35:39.909 --> 00:35:42.710 home's value, saw it was now worth less than 00:35:42.710 --> 00:35:45.570 the loan, and they made a cold, rational business 00:35:45.570 --> 00:35:48.369 decision to just walk away. They mailed the keys 00:35:48.369 --> 00:35:51.429 back to the bank. Jingle mail. Jingle mail. And 00:35:51.429 --> 00:35:53.829 left. It arguably broke the social contract of 00:35:53.829 --> 00:35:55.969 debt, the idea that you pay back what you owe. 00:35:56.090 --> 00:35:58.489 So it sounds like everyone is guilty. The regulators, 00:35:58.789 --> 00:36:01.170 the bankers, the rating agencies, and the borrowers 00:36:01.170 --> 00:36:04.210 all playing a role. The result was Section 7, 00:36:04.429 --> 00:36:07.550 the aftermath. The human cost was just immense. 00:36:07.969 --> 00:36:10.650 We talked about the $13 trillion in lost wealth. 00:36:11.150 --> 00:36:13.869 But in terms of jobs, nearly 9 million jobs were 00:36:13.869 --> 00:36:16.429 lost in the U .S. Unemployment doubled, hitting 00:36:16.429 --> 00:36:18.909 10%. And the foreclosures. The number is just 00:36:18.909 --> 00:36:21.510 gut -wrenching. Up to 9 million homes entered 00:36:21.510 --> 00:36:24.429 foreclosure between 2009 and 2011. Think about 00:36:24.429 --> 00:36:26.969 the trauma of that. 9 million families evicted, 00:36:27.010 --> 00:36:29.329 lives upended, communities blighted with vacant 00:36:29.329 --> 00:36:32.010 homes. And the recovery was the slowest since 00:36:32.010 --> 00:36:34.630 World War II. We had this zombie economy for 00:36:34.630 --> 00:36:36.829 years. The government's response was, of course, 00:36:36.889 --> 00:36:39.070 the controversial TARP, the Troubled Asset Relief 00:36:39.070 --> 00:36:42.230 Program. The $700 billion bailout for the banks. 00:36:42.429 --> 00:36:44.210 And the Federal Reserve's response was to slash 00:36:44.210 --> 00:36:46.590 interest rates to near zero, where they stayed 00:36:46.590 --> 00:36:48.969 for years, and to start quantitative easing. 00:36:49.409 --> 00:36:51.469 Basically printing money to buy bonds and inject 00:36:51.469 --> 00:36:53.610 cash into the system. Now, here is a fact that 00:36:53.610 --> 00:36:55.170 always surprises people when you bring it up. 00:36:55.190 --> 00:36:57.070 The bailout money for the banks. We actually 00:36:57.070 --> 00:37:00.369 got it all back, didn't we? We did. With interest. 00:37:00.949 --> 00:37:04.329 As of 2021, the sources say the Treasury had 00:37:04.329 --> 00:37:06.820 fully recovered all the TARP funds. plus about 00:37:06.820 --> 00:37:10.480 $109 billion in profit for the taxpayer. Financially, 00:37:10.579 --> 00:37:12.400 the government came out ahead. But socially? 00:37:13.039 --> 00:37:15.539 Politically. Socially and politically, the cost 00:37:15.539 --> 00:37:18.199 was incalculable. There was this profound sense 00:37:18.199 --> 00:37:21.380 of injustice. We bailed out the banks, the architects 00:37:21.380 --> 00:37:23.639 of the crisis, but we didn't really bail out 00:37:23.639 --> 00:37:25.699 the homeowners who were losing everything. The 00:37:25.699 --> 00:37:27.860 arsonists got a golden parachute while the victims 00:37:27.860 --> 00:37:30.239 got burned. That perceived unfairness changed 00:37:30.239 --> 00:37:33.000 American politics forever. You can draw a straight 00:37:33.000 --> 00:37:35.800 line from that anger to the rise of the Tea Party 00:37:35.800 --> 00:37:38.219 on the right, Occupy Wall Street on the left, 00:37:38.260 --> 00:37:40.460 and the populist movements we still see today. 00:37:40.619 --> 00:37:43.059 And we got the Dodd -Frank Act in 2010. The big 00:37:43.059 --> 00:37:45.239 regulatory reform package. It was an attempt 00:37:45.239 --> 00:37:48.099 to fix the too big to fail problem. It created 00:37:48.099 --> 00:37:50.460 the Consumer Financial Protection Bureau to stop 00:37:50.460 --> 00:37:52.900 predatory lending. It tried to bring some light 00:37:52.900 --> 00:37:55.719 and regulation to the shadow banking system and 00:37:55.719 --> 00:37:57.400 the derivatives market. But the big question 00:37:57.400 --> 00:37:59.860 is, did it fix the root cause? That is the... 00:38:00.230 --> 00:38:02.570 multi -trillion dollar question. And I think 00:38:02.570 --> 00:38:04.710 that leads us perfectly to our final synthesis. 00:38:05.269 --> 00:38:07.630 You look at this whole story and it really was 00:38:07.630 --> 00:38:10.150 a perfect storm. You had low interest rates from 00:38:10.150 --> 00:38:13.250 the Fed mixed with that giant global pool of 00:38:13.250 --> 00:38:16.010 money hunting for yield combined with lax regulation 00:38:16.010 --> 00:38:19.889 and a free market ideology fueled by financial 00:38:19.889 --> 00:38:22.710 innovation that was brilliant but ultimately 00:38:22.710 --> 00:38:24.989 toxic. And all of it built on a foundation of 00:38:24.989 --> 00:38:27.329 bad incentives and a mass delusion about housing 00:38:27.329 --> 00:38:29.730 prices. It was a disaster waiting to happen. 00:38:29.809 --> 00:38:32.630 It was. And the recovery, what some call the 00:38:32.630 --> 00:38:35.010 zombie economy, had these lingering effects, 00:38:35.190 --> 00:38:37.570 especially on millennials. They entered the workforce 00:38:37.570 --> 00:38:40.570 in the worst job market in generations, saddled 00:38:40.570 --> 00:38:42.969 with student debt, and their rates of homeownership 00:38:42.969 --> 00:38:45.550 still lagged behind previous generations. The 00:38:45.550 --> 00:38:49.460 crisis left deep scars. So for our final provocative 00:38:49.460 --> 00:38:51.500 closing thought, I want to reference something 00:38:51.500 --> 00:38:54.519 the economist Robert Shiller said. He argued 00:38:54.519 --> 00:38:57.539 that bubbles are primarily social phenomena. 00:38:57.760 --> 00:38:59.400 That's the thought that keeps me up at night. 00:38:59.500 --> 00:39:01.360 I think we've done a decent job of fixing the 00:39:01.360 --> 00:39:04.219 plumbing, the specific mechanisms of the 2008 00:39:04.219 --> 00:39:07.300 crisis. Banks have more capital. The rules around 00:39:07.300 --> 00:39:10.039 mortgages are stricter. But have we fixed the 00:39:10.039 --> 00:39:12.760 psychology? Have we fixed the human brain? Exactly. 00:39:13.179 --> 00:39:15.980 Have we cured ourselves of the fear of missing 00:39:15.980 --> 00:39:20.780 out? of greed, of the belief that this time is 00:39:20.780 --> 00:39:23.659 different. The mechanisms change, but the behavior 00:39:23.659 --> 00:39:26.219 stays the same. It does. Maybe the next time 00:39:26.219 --> 00:39:28.840 is not subprime mortgages. Maybe it's crypto 00:39:28.840 --> 00:39:33.099 or private credit or some new tech stock bubble. 00:39:33.400 --> 00:39:35.860 But as long as you have a period of cheap money 00:39:35.860 --> 00:39:38.260 and a compelling story that says prices can only 00:39:38.260 --> 00:39:40.869 go up. you will get a bubble. And you will have 00:39:40.869 --> 00:39:43.030 financial engineers in the background figuring 00:39:43.030 --> 00:39:45.690 out new ways to turn dross into gold. Always. 00:39:45.869 --> 00:39:48.849 A very sobering thought to end on. We have barely 00:39:48.849 --> 00:39:51.269 scratched the surface of the thousands of pages 00:39:51.269 --> 00:39:53.849 in these reports. If you want to see the emails, 00:39:54.130 --> 00:39:56.510 the charts, the actual crime scene photos from 00:39:56.510 --> 00:39:58.530 the financial collapse, check out the links in 00:39:58.530 --> 00:40:01.090 our show notes. It's a deep rabbit hole, but 00:40:01.090 --> 00:40:02.650 it's worth going down. Thanks for taking the 00:40:02.650 --> 00:40:04.050 deep dive with us. We'll see you next time.