My brother has long urged me to read "Liar's Poker" and recently, I've come back to it. Typically, I jump among a dozen or so books on my Kindle and lately I've spent more time among Hamilton, Burr and the founding fathers, but in between watching coverage of the Million Women's March on TV, I got deep into "Liar's Poker."
Of course, I could not help but think where I was in the story lines Michael Lewis outlines. Reading along, I could see I was simply one twig borne along by a swift and tumultuous flood. Big things happened which affected my life in ways I was unaware of. My own ideas, philosophy were shaped in ways I was barely aware of. My own behavior helped shaped larger events, although, again I was not aware of how. All this is put into perspective by Lewis.
In 1979 Paul Volker of the Federal Reserve decided to raise interest rates, and in doing so, he crushed the markets for mortgages. Mortgages were given by local banks "thrift" institutions aka "Savings and Loans. These local lenders scrutinized the likelihood the people seeking mortgage loans would repay them by examining the details of their income, their other debts and their credit history. It was a meticulous process and one which required considerable grunt work.
People like me, unsophisticated in finance or economics, did not need college courses to realize we were throwing away our money on rent.
If I took out a loan, I could deduct the interest payments from my income tax--even I could see this was a government giveaway--and I could eventually, once my mortgage was paid off, sell the house I now owned. (It did not occur to me I could sell the house before the 30 years term of the mortgage was up, but that was true.)
And it was the ability to "pre pay" a mortgage early which posed problems for the lender, who wanted to plan for a steady stream of income from that loan over the years. Lewis never really explains why this is such a problem, but he keeps repeating it, so I guess that's true.
When I decided to buy a house, mortgage rates were 13% , and I objected. My father told me his mortgage rate was 2.9%, on the house he bought in 1956. But this was 1982 and the realtor assured me we'd never see rates below 13% again, in her best professional voice. She knew this.
The rates did fall and by 1983 I applied for a mortgage at some rate I can't recall, maybe 9%. I had to provide reams of paper about my finances. I had $50,000 from a book advance and I had my fledgling private practice of medicine and my wife was working but I was informed by phone the bank was denying my loan. Why?
"Well, your practice is barely generating any profit," the loan officer told me. "Most of your money comes from the book you wrote and you may never be able to get another book published."
I had to agree with her. I would not have given me a loan. I told the realtor (a different realtor from the 13%-is-forever realtor) and she said, "Nonsense. Tell them you want the book."
"The book?"
"They compile a file on you. It's called the book. Tell them you have another bank willing to give you the loan but you want the book with all the stuff you've provided them so you can go to the other bank."
"But I don't have another bank willing to lend me the money."
"Doesn't matter," the realtor said. "Tell them."
I told the bank officer I wanted my book and within four hours she called me back and told me I had the mortgage.
This was my first introduction to business, liar's poker and the wonderful world of banking and finance.
Should have told me something.
As it turned out, my practice picked up, and I was able to find publishers for four more books over the next eight years and I was able to pay my mortgage payment every month. I was a better risk than I had thought.
But I noticed, after a few years, the bill for the mortgage no longer had the letter head of the Chevy Chase Bank, but it had some company I'd never heard of. When I called to ask about it I was told. "Your payment is the same. What do you care?" My mortgage had been sold to someone else. It had become part of mortgage backed bonds or something.
There was one other revealing experience along the way. The day of the closing my wife and I, full of anticipation, arrived at the office of the real estate office in Bethesda. We had the mortgage and we had the guy who had built the house and was selling it and we sat down around the table and the lawyer I had hired. (Realizing I was about to take the biggest financial action of my life--I needed a lawyer. Money was tight but I figured a lawyer was insurance.) The lawyer comes in and says he just noticed the way the loan was written by the bank it was not entirely clear I could "pre pay" my mortgage without penalty, or possibly at all. This would be a big problem if I ever wanted to sell the house before 30 years, or if I wanted to pay more each month to pay it off early.
"How long have you known this?" I asked him.
"I just saw it this morning."
"You've had this document in front of you for three weeks and you just read it this morning?"
"Well, let me call the bank and clarify this now."
He came back a few minutes later and said they bank said they were okay with my pre paying the loan.
"So they'll put that in writing?"
"Well, no."
"Who did you talk to?"
"A loan officer"
For once in my life, I became testy with people I did not know. "Well," I told the lawyer, "I'm not really worried because, as God is my witness, if I go to sell this house and we hear even a murmur from the bank about this, I will simply sue the living shit out of you for malpractice, and I'll be sure and lean heavily on the pain and suffering aspect of it. My only worry is I might have trouble finding you, but I'll check on your whereabouts until I sell this house or pay off the loan."
The lawyer actually gulped.
I tell this story to reflect just how sloppy and inept the real estate industry was, through and through.
Lewis calls the savings and loan bankers the 3-6-3 club: They get their money at 3%, loan it out at 6% and are on the golf course by 3 PM. They made about $90,000 a year, which in 1980 wasn't bad. But the key thing is, they didn't have to know much or to work very hard and they could still drive nice cars and belong to country clubs.
It turns out while the guys in the mortgage bond department at Salomon Brothers were pushing their lobbyists to get the government to rescind the federal law guaranteeing the right to penalty free prepayment of mortgages, I was already protected by federal law, something the lawyer did not appreciate.
It also turned out the guys at Salomon Brothers figured out a way to save the thrift institution banks from Paul Volker's high interest rates--they bundled mortgages as if they were any other commodity into mortgage backed bonds.
People were highly motivated to pay their mortgages and these people were carefully examined by the local lenders, and you had their houses as collateral, so mortgages were the safest bet out there. At least that was the gospel.
Moody's and Standard and Poor's said these bonds were AAA. They bought the gospel. Of course, at that point nobody at Moody's had seen "The Big Short" because the movie hadn't been made, and nobody at Moody's had bother to investigate to discover mortgages were now being held by pole dancers in Florida who owned five mortgages, none of which they could afford to pay, but they owned these because the mortgage brokers told them they could always sell them, flip the mortgages, make a killing and get out.
(To my mind, if anyone deserved to be sent to jail it was the guys at the rating agencies.)
And the guys on Wall Street were making millions upon millions in this scheme and by the mid 1980's the mortgage bond department at Salomon Brothers was making more money than all the other institutions and departments on Wall Street combined.
So my mortgage, the different letterheads on the mortgage payment slips, which changed yearly, was just part of a monster so huge and so invisible, I could never have known. Had I read the Wall Street Journal daily, I would not have known. Had I read everything publicly available about how these financial creations had been made, I still would not have known. Had I listened faithfully to "Squawk Box" or "Bloomberg News" I would not have known.
I would have had to wait for the movie, "The Big Short."
The whole system was an intricate symphony of government agencies manipulating the cost of money (the Fed), of government agencies (Ginnie Mae, Fannie Mae and Freddie Mack) which were trying to respond to the Congressional urging to increase home ownership, even if that meant giving mortgages to pole dancers who might fail to pay them off and of Congress itself, which did some good protecting constituents against the banking and financial raptors, who wanted to take away the right to prepayment and then there were the backstage machinations of brokers on Wall Street, who were making millions by playing games.
Work a day people like me hardly cared.
Let those unappetizing frat boys from Princeton, Harvard, Stanford and Penn make their millions sitting in their offices at Salomon Brothers by looking at graphs and making phone calls. I could hardly imagine a worse circle of Hell than having to spend 12 hours a day staring at graphs and tables on a computer, typing on a keyboard and pressing a telephone between my shoulder and ear. They could have it.
As depicted by Lewis, these traders were pretty grotesque. They reveled in their "goofs"--grade school antics which involved cutting ties off each other and pulling everything out of a suitcase and replacing it with wet toilet paper so their colleague arrived in a city, opened his suitcase to change for the big meeting to find only toilet paper. They were just a million laughs. They had the sense of entitlement because they had gone to the right schools and they had been selected from thousands of applicants.
They were narcissistic, entitled, self absorbed, sloppy, uncaring, produced nothing of value to anyone but themselves and their co conspirators, sucked the innards of the nation dry, leaving only the husk behind, and then they flew the coop looking for another body to infest.
They were doing me no harm. I had my mortgage.
Until, of course, it all came crashing down in 2008.
That got the attention of guys like me, and the work-a-day slobs out in Ohio and Michigan, Wisconsin and Pennsylvania. And they blamed anyone who was in power.
And that begat Donald Trump.
 |
| Michael Lewis |
Of course, I could not help but think where I was in the story lines Michael Lewis outlines. Reading along, I could see I was simply one twig borne along by a swift and tumultuous flood. Big things happened which affected my life in ways I was unaware of. My own ideas, philosophy were shaped in ways I was barely aware of. My own behavior helped shaped larger events, although, again I was not aware of how. All this is put into perspective by Lewis.
In 1979 Paul Volker of the Federal Reserve decided to raise interest rates, and in doing so, he crushed the markets for mortgages. Mortgages were given by local banks "thrift" institutions aka "Savings and Loans. These local lenders scrutinized the likelihood the people seeking mortgage loans would repay them by examining the details of their income, their other debts and their credit history. It was a meticulous process and one which required considerable grunt work.
People like me, unsophisticated in finance or economics, did not need college courses to realize we were throwing away our money on rent.
If I took out a loan, I could deduct the interest payments from my income tax--even I could see this was a government giveaway--and I could eventually, once my mortgage was paid off, sell the house I now owned. (It did not occur to me I could sell the house before the 30 years term of the mortgage was up, but that was true.)
And it was the ability to "pre pay" a mortgage early which posed problems for the lender, who wanted to plan for a steady stream of income from that loan over the years. Lewis never really explains why this is such a problem, but he keeps repeating it, so I guess that's true.
When I decided to buy a house, mortgage rates were 13% , and I objected. My father told me his mortgage rate was 2.9%, on the house he bought in 1956. But this was 1982 and the realtor assured me we'd never see rates below 13% again, in her best professional voice. She knew this.
The rates did fall and by 1983 I applied for a mortgage at some rate I can't recall, maybe 9%. I had to provide reams of paper about my finances. I had $50,000 from a book advance and I had my fledgling private practice of medicine and my wife was working but I was informed by phone the bank was denying my loan. Why?
"Well, your practice is barely generating any profit," the loan officer told me. "Most of your money comes from the book you wrote and you may never be able to get another book published."
I had to agree with her. I would not have given me a loan. I told the realtor (a different realtor from the 13%-is-forever realtor) and she said, "Nonsense. Tell them you want the book."
"The book?"
"They compile a file on you. It's called the book. Tell them you have another bank willing to give you the loan but you want the book with all the stuff you've provided them so you can go to the other bank."
"But I don't have another bank willing to lend me the money."
"Doesn't matter," the realtor said. "Tell them."
I told the bank officer I wanted my book and within four hours she called me back and told me I had the mortgage.
This was my first introduction to business, liar's poker and the wonderful world of banking and finance.
Should have told me something.
As it turned out, my practice picked up, and I was able to find publishers for four more books over the next eight years and I was able to pay my mortgage payment every month. I was a better risk than I had thought.
But I noticed, after a few years, the bill for the mortgage no longer had the letter head of the Chevy Chase Bank, but it had some company I'd never heard of. When I called to ask about it I was told. "Your payment is the same. What do you care?" My mortgage had been sold to someone else. It had become part of mortgage backed bonds or something.
There was one other revealing experience along the way. The day of the closing my wife and I, full of anticipation, arrived at the office of the real estate office in Bethesda. We had the mortgage and we had the guy who had built the house and was selling it and we sat down around the table and the lawyer I had hired. (Realizing I was about to take the biggest financial action of my life--I needed a lawyer. Money was tight but I figured a lawyer was insurance.) The lawyer comes in and says he just noticed the way the loan was written by the bank it was not entirely clear I could "pre pay" my mortgage without penalty, or possibly at all. This would be a big problem if I ever wanted to sell the house before 30 years, or if I wanted to pay more each month to pay it off early.
"How long have you known this?" I asked him.
"I just saw it this morning."
"You've had this document in front of you for three weeks and you just read it this morning?"
"Well, let me call the bank and clarify this now."
He came back a few minutes later and said they bank said they were okay with my pre paying the loan.
"So they'll put that in writing?"
"Well, no."
"Who did you talk to?"
"A loan officer"
For once in my life, I became testy with people I did not know. "Well," I told the lawyer, "I'm not really worried because, as God is my witness, if I go to sell this house and we hear even a murmur from the bank about this, I will simply sue the living shit out of you for malpractice, and I'll be sure and lean heavily on the pain and suffering aspect of it. My only worry is I might have trouble finding you, but I'll check on your whereabouts until I sell this house or pay off the loan."
The lawyer actually gulped.
I tell this story to reflect just how sloppy and inept the real estate industry was, through and through.
Lewis calls the savings and loan bankers the 3-6-3 club: They get their money at 3%, loan it out at 6% and are on the golf course by 3 PM. They made about $90,000 a year, which in 1980 wasn't bad. But the key thing is, they didn't have to know much or to work very hard and they could still drive nice cars and belong to country clubs.
It turns out while the guys in the mortgage bond department at Salomon Brothers were pushing their lobbyists to get the government to rescind the federal law guaranteeing the right to penalty free prepayment of mortgages, I was already protected by federal law, something the lawyer did not appreciate.
 |
| Salomon Brothers stock |
It also turned out the guys at Salomon Brothers figured out a way to save the thrift institution banks from Paul Volker's high interest rates--they bundled mortgages as if they were any other commodity into mortgage backed bonds.
People were highly motivated to pay their mortgages and these people were carefully examined by the local lenders, and you had their houses as collateral, so mortgages were the safest bet out there. At least that was the gospel.
Moody's and Standard and Poor's said these bonds were AAA. They bought the gospel. Of course, at that point nobody at Moody's had seen "The Big Short" because the movie hadn't been made, and nobody at Moody's had bother to investigate to discover mortgages were now being held by pole dancers in Florida who owned five mortgages, none of which they could afford to pay, but they owned these because the mortgage brokers told them they could always sell them, flip the mortgages, make a killing and get out.
(To my mind, if anyone deserved to be sent to jail it was the guys at the rating agencies.)
And the guys on Wall Street were making millions upon millions in this scheme and by the mid 1980's the mortgage bond department at Salomon Brothers was making more money than all the other institutions and departments on Wall Street combined.
So my mortgage, the different letterheads on the mortgage payment slips, which changed yearly, was just part of a monster so huge and so invisible, I could never have known. Had I read the Wall Street Journal daily, I would not have known. Had I read everything publicly available about how these financial creations had been made, I still would not have known. Had I listened faithfully to "Squawk Box" or "Bloomberg News" I would not have known.
I would have had to wait for the movie, "The Big Short."
The whole system was an intricate symphony of government agencies manipulating the cost of money (the Fed), of government agencies (Ginnie Mae, Fannie Mae and Freddie Mack) which were trying to respond to the Congressional urging to increase home ownership, even if that meant giving mortgages to pole dancers who might fail to pay them off and of Congress itself, which did some good protecting constituents against the banking and financial raptors, who wanted to take away the right to prepayment and then there were the backstage machinations of brokers on Wall Street, who were making millions by playing games.
Work a day people like me hardly cared.
Let those unappetizing frat boys from Princeton, Harvard, Stanford and Penn make their millions sitting in their offices at Salomon Brothers by looking at graphs and making phone calls. I could hardly imagine a worse circle of Hell than having to spend 12 hours a day staring at graphs and tables on a computer, typing on a keyboard and pressing a telephone between my shoulder and ear. They could have it.
As depicted by Lewis, these traders were pretty grotesque. They reveled in their "goofs"--grade school antics which involved cutting ties off each other and pulling everything out of a suitcase and replacing it with wet toilet paper so their colleague arrived in a city, opened his suitcase to change for the big meeting to find only toilet paper. They were just a million laughs. They had the sense of entitlement because they had gone to the right schools and they had been selected from thousands of applicants.
They were narcissistic, entitled, self absorbed, sloppy, uncaring, produced nothing of value to anyone but themselves and their co conspirators, sucked the innards of the nation dry, leaving only the husk behind, and then they flew the coop looking for another body to infest.
They were doing me no harm. I had my mortgage.
Until, of course, it all came crashing down in 2008.
That got the attention of guys like me, and the work-a-day slobs out in Ohio and Michigan, Wisconsin and Pennsylvania. And they blamed anyone who was in power.
And that begat Donald Trump.
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