How I Personally Caused the Financial Crisis (part 2)

"So, Tyler...why did this whole thing happen? And how?"

Truthfully, I don't really know that much. But I'll attempt to explain...using an analogy. I suck at analogies, but I'll try anyway.

Basically, as I'm sure you're all aware, this whole thing happened because of equal parts greed and stupidity. Folks like Matt Taibbi will argue that "criminal behavior" is a large component...though I'm not qualified to speak to that. He's much smarter than I am...and also a much better writer...and his penis is probably a lot longer than mine.

So I'll just confine myself to my own personal experience, and hopefully that will explain enough for the layperson to understand.

When I started working at WaMu we had two families of loans -- "portfolio loans," and "secondary market" loans. Our portfolio loans featured two boutique products -- the 1-month Option ARM, and the 5/1 Interest-Only. These products were geared toward people who wanted low monthly payments. Equity would be accrued when property values increased (as they had for decades), or when borrowers paid for home improvements.

Our secondary market loans were all of your standard 30-year, 15-year, 5/1, 3/1, and 1/1 loan types.

Because of the risk involved, portfolio loans were marketed to very dependable borrowers; folks with a stable income and good credit. Since these products were considered too risky to sell on the secondary market (I'll get to that later), portfolio loans were held and serviced by Washington Mutual. Hence, "portfolio."

With me so far? Okay. Good.

This went on for some time, continuing throughout the housing boom of the 1990s. It worked fairly well -- people were qualifying for loans, but banks were still being held accountable for their more risky offerings.

But in the early 2000s, the secondary market started purchasing those risky "portfolio loans." All of those absurd, low-monthly-payment loans looked pretty tasty, for some reason. The driving force behind that decision were the biggest investors on the secondary market: Fannie Mae and Freddie Mac. They are two government organizations that I still don't really understand (just like the rest of America, I'll wager). Though I do know a little bit. I'll also get to them later.

Anyhow, once Fannie Mae and Freddie Mac started buying all of these shitty loan pools...suddenly everyone wanted to get into the shitty loan pool business. Borrower credit standards were loosened. Property values started skyrocketing (which was okay, because anyone could get a loan!). Companies started targeting low-income borrowers via "sub-prime" "alt-a" and "emerging market" loans. Everyone was making money hand-over fist, and best of all, poor people were moving in to homes they couldn't normally afford. It was the American dream! Everyone wins!!!

Then the bubble popped, surprising nobody and everybody at the same time.

Now, for my analogy, where I will attempt to explain the issue with the "secondary market," what is meant by "the bubble," and why it suddenly "popped."

Imagine that money is a length of twine. You might own some twine, and you might make a good amount of twine...but it's not nearly enough to get you a home. So you go to a bank. Depending on how much twine you have and how much twine you make, the bank agrees to give you a much longer length of twine to buy a home with.

Shit, this analogy is falling apart already, isn't it? Keep it together, stupid...let's go.

Anyhow, after the bank gives you the twine, it measures that amount plus an extra amount (interest) and forms it into a little imaginary ball. Over time, this imaginary ball grows in theoretical size as other imaginary lengths of twine from other home owners are added to the theoretical ball...and pretty soon you've got a nifty, substantial, incorporeal ball of twine which you can take to the Twine Ball Avenue (Wall Street).

So the bank then goes to Twine Ball Avenue and shows a picture of that imaginary twine ball to twine investors.

"Look at the size of this damn thing!" the bank says.

"Wow. That's pretty big!" Twine Ball Avenue says.

"I know, right?"

"Totally."

"So, you want in on this action?"

"Sure, but, uh...where's all that twine going to be coming from?"

"Okay, I'll be real wichoo', because I like you. These borrowers aren't very good, so it's pretty risky. But the good news is that we're charging them massive interest rates, so the potential rewards are HUUUGE! High risk, yeah, but you could get a SUPER-DUPER HIGH REWARD!!! If you don't believe me, just ask those two."

The bank points to Fannie Mae and Freddie Mac...two immaculately dressed government officials with an armful of  "twine pictures" in their hands that they are cutting up and selling (mortgage-backed securities) to other hungry twine investors.

Behind Fred and Fanny is a boring poster that looks like this:

Yawn...amirite? The poster is pretty much ignored.

"GIMME DEM FINE-ASS TWINE PIKCHURZ, YO!!!!" Twine Ball Avenue screams...now literally frothing at the mouth.

And so it goes.

Essentially, the banks cobbled together a bunch of shitty loans. Fannie Mae and Freddie Mac decided (after pressure from the Department of Housing and Urban Development) that, to encourage home ownership for low-income borrowers, it would start purchasing these pools of shitty loans. These pools were then chopped up and sold as Mortgage-Backed Securities to investors who should have known better.

But that was the mid-2000s. Money was cheap. Homes prices were skyrocketing. Life wasn't good...but it was better than it had been in a long time.

I was personally doing incredibly well. I'd managed to save a crap-load of money (the most I've ever saved), and I was working in one of the most fun work environments I'd ever been in. On top of that all, I was doing professional theater...and literally earning  butt-loads of money. 

Wait, no. I mean figuratively. Figurative butt-loads.

Whoops.

Back to my analogy:

Of course, as it turns out, giving twine loans to shitty borrowers is not a very good idea. Collecting enormous imaginary balls of these shitty twine loans and selling them to investors is an even worse idea.

This is because people tend to pay more attention to the "Higher Expected Yield" part of a graph, while ignoring the "Highest Risk" part. It's human nature. That's why lottery tickets continue to make millionaires out practically 0% of people every year. It's also why, when I was asked to pick an 401k investment option, I chose the "super-aggressive" portfolio and pretty much lost the entire thing in 2008.

Anyhow, after these shitty twine ball pictures are sold by a bunch of stupid bankers to even dumber investors, a couple of things started to happen. The pretend twine balls start unraveling (homeowners start foreclosing), and the dumb investors started to realize that maybe paying real twine to purchase a piece of a shitty imaginary twine ball wasn't such a great idea after all.

At a certain point, Twine Ball Avenue says: "Sorry! We're not buying these any more!"

"Whoa, wait, what? Why?" the bank asks.

"Yeah, those pictures of twine you've been selling us? Turns out, the paper was made of actual compressed dog shit."

"But, we've got, like, fifty warehouses full of those! What are we supposed to do with them?"

"Not our problem. Sorry, guys. Good luck!"

So the banks were now stuck with several warehouses full of dog-shit-paper pictures of twine balls, and those warehouses are really starting to stink. Of course, they own another smaller warehouse full of actual twine...but there isn't nearly enough to account for all of the pictures of twine, and plus, even the real twine keeps exploding into massive fireballs of stinky poo goo.

So when the going gets tough, the tough put their companies up for sale...or (depending on their political clout) they go begging for money. For those without political connections, the only option was "selling all your shit." Unfortunately, no one wants to buy a bunch of warehouses full of poo paper or twine ball poo goo.

Luckily, the banks had a back-up plan.

See...these banks were smart enough to know that investors would eventually figure out that most of their twine ball pictures were made of dogshit. This is why they bought "dog shit insurance" (credit default swap).

As the shit started to explode or fester, the bank called their dog shit insurance guy:

"Yeah, who dis?" the insurance guy asked, after picking up his telephone receiver, located on his desk in his office in his building in the state and country in which he lived.

"Hey bro!" the bank chirped cheerily into the receiver.

"Hey bank! What up?"

"Oh, you know, not much. Just chillin', mostly."

"Awesome."

"Oh hey, so, you remember that insurance policy we bought from you guys?"

"Yeah, thanks for buying that!"

"No problem, guy! Thank you! But, um...hey...as it turns out we've got a couple warehouses full of pictures of twine and they're starting to stink pretty bad. Can you come exchange all of those pictures with actual twine?"

There was a stunned silence on the other end.

"Uh, dude...we don't have that much twine."

"But we bought that insurance policy from you guys."

"Yeah, but we never thought you'd call us on it. Because, um...we don't actually have that much twine, bro."

"Oh. Well. Guess you shouldn't have insured us then, huh?"

"Probably not, but whatever, right?"

"No, dude. We need that twine, like, now."

"LOL Bankruptcy!"

"OH NOES!!!!!!!"

Three examples of those dog shit insurers were Lehman Brothers, AIG, and Bear Stearns. As you know now, things did not go well for those three in 2008-2009.

And thus began the great cascading failure of our economy.

At least...that was my view of it.

Of course, as the economy started disintegrating, I made the comparatively safe financial decision of "moving with my wife to Los Angeles to make a living as a creative professional." You know...like what I was supposed to be doing with my Theatre Arts degree all along?

Thus ends my analysis. I've pretty much forsaken the financial field ever since then...and good riddance, frankly.


I thought entertainment was a volatile business. Holy cow.

Anyway, I'm sure I'm missing a lot of details, but I'm writing a blog entry not a book. As I wrote in a lengthy comment to faithful reader, commenter, and friend Evan on my last blog, pretty much everyone (republican, democrat, banker, borrower) deserves their fair share of blame for this.

Some people had good intentions ("We should also give poor families more help to move into homes of their own." -- Bill Clinton at the 1998 state of the union address). Some people had not-so-good intentions ("Despite the problems in the subprime market, emerging markets still represent the future of the mortgage industry. As this nation becomes more racially and ethnically diverse, most of the growth in homeownership will come from minorities." -- Steven Holland, in a May 2007 article in Mortgage Banking magazine).

But there are two commonalities -- most people believed they were doing the right thing, and most people were, in fact, doing something incredibly risky, short-sighted, and stupid.

Myself included...to a lesser extent. I mean, there is nothing I could have conceivably done to fix things -- I was far too low-level. But at the same time, I knew that I was being vastly overpaid, and I knew that I was witnessing some very peculiar things first-hand.

In my next blog, I'll talk about how even low-level employees like myself were confused by the lax lending standards at the time. I'll also talk about the three people I hold personally accountable for the failure of Washington Mutual...which I consider to be a microcosm of the industry at the time.

If I ever write that entry...of course. I mean, shouldn't I finish the entry about how I was almost on a game show first? Or do maybe start the series about the three theater companies I helped found?

Well, for someone with less than 3,000 page views (THANKS FOR THE HUMILIATION, GOOGLE ANALYTICS!!!!) I guess I can just do whatever the hell I want. Like, right now, I'm just going to post one of my theatrical headshots, because I can. Suck it, readers. SUCK IT!

Gorgeous.

Click here to read part 3.