Under the rainbow: capitalism/the subprime mortgage crash

May 9, 2010 § Leave a comment

One Sunday afternoon some years ago, run down with life, I fell asleep watching a football game, the game itself a low-scoring grind in which I had little interest. When I woke the game was over and I was looking instead at two gentleman, not tall at all, both gracious and reassuring, showing me their yacht and cars and palatial home, which dwarfed them, telling me how easily I, too, could have these things. They had to have been the Rice twins, John and Greg, and what I was watching was an infomercial hawking the Cash Flow Generator, a scheme to cash in on the housing boom, though specifics were never mentioned I suppose because that would have dispelled the magic. I was still groggy and in a mood, like all of us then, to be entranced. I thought I had awakened on the other side of the rainbow. I have a very modest income from teaching and live in a rental in Silicon Valley, one of the most expensive places in the country. Obviously I had done something wrong to be in such a position, but watching the twins I felt the problem wasn’t that I didn’t work hard enough or hadn’t made the right decisions in life, but that I was just being obtuse. There were real opportunities out there and all I had to do was make a simple call. For it was the time of our other national pastime, flipping houses, and seeing the twins was one more piece of evidence confirming my suspicion we weren’t in Kansas anymore.

A few years later, we were all looking at the other side of this curve:

The Dow Jones.

In 1927, Walter Lippmann published in The Atlantic “The Causes of Political Indifference Today,” where he paints a picture not unlike the one we saw the decade leading up to the subprime mortgage crisis. Voters then were either apathetic or cynical because the country lacked national leaders and a national policy that might engage—and divide—them. Voters had also wearied of the heat from earlier debates over progressive reform. The issues that did move them were emotional ones—Prohibition, immigration, Fundamentalism—which diverted attention from matters essential to the well being of the nation. If there was any political asset Calvin Coolidge had, it was how to promote complacency and not discuss government at all. As Lippmann says, “it is good politics when you are in power to discourage all manifestations of discontent.”

But the major cause of political indifference according to Lippmann was the nation’s turn to business. There had been prosperity many enjoyed, and the industrial barons made concessions to labor and improved the workplace. They also hired PR firms to promote their cause and sell everyone on the belief that their business was his or her business as well, the nation’s top concern. It wasn’t a hard sell, however, because business was more exciting than politics and more directly connected to individual interests. And anyone could invest in the stock market, thus tap into the thrill of the its boom.

Yet Lippmann nor almost anyone else in 1927 saw the crash coming either. There were structural problems in the economy that few knew—or hadn’t been observing.

In the eighty years since, we have become so saturated with advertising, marketing, and PR that they run through our blood. They have become our dominant form of discourse, and it’s hard to frame an argument in any other. Our opinions are solicited everywhere and we can freely voice them, thanks to the growth of popular journals and the Internet, but there is little critical control over who sets the agenda for discussion or determines the value of the questions and little attention paid to the validity of our responses. When our opinion is sought, it is usually linked to a sale. Most questions we are asked are about what we buy and how much we have to pay. Most answers are directed towards how to keep markets up and running. Our first and often only thought on any proposal is how it will affect the economy; our solutions to common endeavors—education, housing, news reporting, the production of art and literature—tend towards finding ways to tailor these to suit our individual tastes, then putting them in private hands to turn a profit. The study of economics itself has become subordinate to discussions about business. This is how we define our freedom, as business is about the only business we know. In such an environment, it is unlikely a persuasive critic or a strong leader can be heard—or even understood.

I exaggerate, but how much? For the main debate the last years has been not what type of government we should have but whether we need government at all. The issues that have most engaged—and distracted—us are the same or similar emotional ones as in 1927. The hot debate at the time of the subprime crisis was whether or not a national health plan would violate our democratic system, a nice irony since many who lack health insurance no longer receive it from their employers.

Profit is a tremendous incentive for entrepreneurs; competition can keep them honest and move them to be efficient. Capitalism can be an effective system for negotiating supply and demand. Practically, given the size and complexity of the economy, we would be hard put to find another system that works as well. We are also led to believe that the system encourages makers to provide the products we need, thus ensure our contentment. We know better, or should. As Galbraith argued long ago, advertising seduces us into letting corporations tell us what we need while we get to pick the color—and into spending more than we should. As for the discourse of advertising, it has become a kind of shell game where we know our arms are being twisted and that we are being deceived, but we accept that as part of the game. We really don’t believe anything, perhaps even don’t believe we should believe in anything as long as we do our part to keep the system going. Not only do advertisers determine what we get to watch on TV, ads themselves have supplied a major source of our personal narratives. Our individual identities are shaped by brand names. I read a kind of desperation, however, in all the ways advertisers try to reach me now, in what pours out of my mailbox every day and fills more and more space and time on TV, in publications, on the Internet, and even appears in our public schools and the stadiums where our athletes perform. Meanwhile, behind the scenes, corporate lobbying in Congress has become big business itself.

All of this is old news. What hasn’t been studied is the degree of intensification and its incremental effects. I sense we are approaching critical mass. But the business of America is not business, but maintaining the illusion that business is doing well and making us happy.

Or maybe something else.

Still, the system feeds the pipeline and provides jobs and incomes for most of us, though how much we earn, how secure our jobs are, how many of us have meaningful work or work at all, have been sliding downward. But those of us with savings can take part and invest in business more easily than ever, or our investment managers can, and we invest with confidence because corporations and our managers and Wall Street brokers have a stake in protecting themselves as well. And when brokers protect themselves, they protect the economy. At least the system, theoretically, is relatively stable.

Note I haven’t said anything about our general health or that of the environment.

But we’ve had serious cause to question how well the system can protect itself. There have been four major “market corrections” in just twenty years: the crash of 1987, the Russian default and Asian currency crisis of 1999, the Dot-com bust, and most seriously, the subprime mortgage crisis.

With deregulation, stodgy, secure financial firms were released to take greater risks. Most banks are public now, as well as investment houses and the ratings agencies that evaluate investment products, and one problem with our participation is that they have to show us, their shareholders, not that they are making profits but that their profits are increasing and their market share is growing so their stock prices continue to rise, our investments in them increase in value, and we keep buying shares. Those factors have tricked the game in many different ways. In the process we have become addicted to growth.

I like to know what is going on. Just to get my bearings in the world and perhaps prepare myself for the next trauma, I want to trace the crash step by step and see how it happened. It might be a good exercise for us all.

I can’t—and that is the problem.

No one understood what was going on a few years back and we’re still trying to piece it together now. Economic historians are still debating the causes of the crash of ’29 and the subsequent Depression. Lippmann makes a haunting comment in 1927 that should give pause today: “Action has moved faster than thought in these last few years, and practice is ahead of the programmes.” Business acts according to urges and practices, not larger concepts. What he suggests is that by giving ourselves to business we have become a nation that not only can’t think about itself, it can’t even keep up with what it’s doing.

Heraclitus tells us you can never step twice in the same river, but every now and then you have to stick a foot in. This essay is an attempt in trying to keep up, of coming to terms with complexity and the torrents. You run the risk, of course, of getting swept away. Odds are good, however, we won’t recognize the next bubble when it starts. We may not even be looking for one.

We may also need to reexamine our assumptions. Business may not be about profits and money changing hands, or even this illusion. There may be other plots playing out beneath the currents of cash, other themes stirring below the appearance of our well being, other fictions behind the fictions.

A quick review, nonetheless

Stick with this as long as you can, or just skim, but if you get lost—I did—move to the concluding paragraphs of this section and look at the next. I will attempt a brief outline. Most of my information comes from NPR’s “This American Life: The Giant Pool of Money” and Michael Lewis’ The Big Short. If I’m right anywhere, I give them full credit. Where I’m wrong, I can only apologize. What I won’t be able to do is provide full measure of what went where, how, and with what effects, what losses, especially for those of us at the middle of the income scale on down. Disaster, like God, is in the details.

The NPR show is rather basic and Lewis only covers one part of the larger picture, but as to checking other sources I had to punt. There are thousands of blog posts, statements from institutions, and articles that can be consulted, all going in different directions. Books will probably keep coming out in the next decade. By then, however, we probably will have lost interest.

Again, I only want to get my feet wet, perhaps gain some part of a moral victory. No promises. As for authority, I have none, but listen to the authorities before and after the crash, the cable TV analysts, government officials, and economics professors at top schools who made six figure fees for their opinion, all who told us what follows was beneficial and sound. After the crash, they could only resort to the mysteries of the vast global economy and other unfathomables by way of answers.

Here goes:

At the top, global savings, an enormous demand. Fixed-income investments in the world increased 2000 to 2006 from $36 to $70 trillion, a near astronomical sum. Investment managers wanted to put the money somewhere safe that would protect its value, and there weren’t good places to do so, which should have been our first clue. U.S. Treasury bonds, for example, were paying next to nothing.

At the bottom, the U.S. housing boom, a possible supply for investments.

Between the two, banks and other lending agencies along with Wall Street, the creators of loans and investments, to bring supply and demand together.

Behind all this, what everyone ignored, that wages in the U.S. had stagnated and earning power fallen while consumer debt had risen as our spending habits caught up with us.

Underlying what follows, the belief up until the end that housing prices would never fall, although Lewis reports the findings of a math whiz one trader hired who predicted a crash if housing prices didn’t rise fast enough. Here is where I show my naïveté, though I like to think it’s common sense. There have to be contingency plans. Anything can fall. And the speculation and investments based on rising home prices helped inflate them even more. But nothing in my education prepared me for what I discovered, and if I report factually, rest assured I remain incredulous throughout.

Assumed by the banks and Wall Street, maybe unconsciously and patriotically, that the U.S. would never let them go under if any ran into problems.

Don’t look, however, for the SEC, our government watchdog, anywhere in the picture.

Banks and mortgage firms, geared to make home loans, were looking for fresh customers. One way was to increase loans made to those with lower incomes. The firms also competed with each other, thus had to make their loans attractive. To attract borrowers, they relaxed their standards and found ways to make loans deceptively appealing. Teaser loans (ARMs—Adjustable Rate Mortgages) were offered, with low rates the first few years but which increased greatly and uncertainly thereafter, often with little likelihood the borrowers could pay them off. They also stopped looking at their borrowers’ assets and incomes but rather took their word. Yet they could afford to do that because if a borrower defaulted the bank would repossess a property that, because of rising home prices, had increased in value. They also lent freely because they could pass the risks, through Wall Street, to investors here and around the world.


Subprime mortgage bonds

Home owners paying off loans provided a steady stream of money, a potential source of investment. Investment houses devised a way to pool the loans and package them into bonds. They divided the pool into layers—“tranches”—according to their quality. The highest tranche had more reliable loans, or so they said, was less risky, had AAA ratings, and paid lower returns; the lower tranches were more risky and lower rated, but paid higher returns. Whoever bought the bonds now assumed risk themselves for the loans—and obligation if they borrowed money to pay for them. If the borrowers of the underlying loans defaulted in great numbers, bond owners took a hit. But a AAA rating is a sign that an investment is as close to a sure thing as we can get, and investors ate them up, or the higher tranches, thus providing incentive to keep the subprime loans coming. There is a kind of sense here as the bonds spread risk around, allowing losses to be absorbed—as long as the bonds were accurately rated, as long as housing prices rose, as long as enough borrowers kept making payments.



But still the demand for investment in the housing market was great, and Wall Street came up with a new instrument, the Collateralized Debt Obligation. They took the loans in the lowest tranches of the mortgage bonds, those with the lowest ratings, and pooled these into a CDO and sliced them up into more tranches, with the highest tranches receiving—AAA ratings! Loans in a bond originally designated as risky now had the appearance of rock solid investments. Lewis doesn’t explain the rationale behind the high ratings I suspect because there wasn’t one, other than the investment houses could pass them off as such and everyone wanted to believe in them and what secured them, the rising housing market. At any rate the firms rushed to created CDOs and investors ate them up as well.

All the way up, from risky loans to the CDOs, count on hefty fees and commissions to oil the machine, larger, huge in fact, the closer you got to Wall Street, whose bonuses were huge.

And from the bottom up, count on fudging and corruption and misinformation. Loans were made without any sense or concern of a borrower’s ability to pay off. Add speculators not worried about defaulting because they planned on flipping houses quickly anyway. The investment firms based their products on questionable data, for example, on default rates in the past. But also pause a moment and consider what wasn’t factored in—and here is where I most want to see the numbers—low income borrowers who might have managed a more reasonable purchase, a home at a more reasonable price, with a more reasonable loan. This number, I understand, is substantial, perhaps overwhelmingly so.

The ratings firms, primarily Standard & Poor’s and Moody’s, had incentive to give high ratings because they were paid well to do so and because, since they had to compete against each other, they wanted to get the business and show their shareholders growth. The investment houses competed against each other as well, and thus were caught in the same game. Also they were just making so much money from their fees, enough incentive in itself. They found artificial ways to support their claims of low risk. They could gather, for example, loans made to recent immigrants with very low incomes but who had high credit ratings simply because they had never taken out a loan. Also the ratings agencies just didn’t understand what they were being asked to evaluate. It was too hard to see what was at the bottom—the mass of individual loans—as the new instruments were too complicated, too dense, the loans themselves too far away for inspection. But Wall Street firms were heavily exposed to these instruments, one way or another, and believed in them themselves, or their CEOs believed in what their bond traders were doing, even though they didn’t understand them either.



There were a few who were skeptical of the subprime investments, who wanted to bet against them. They were also the ones who actually inspected the individual loans being made, which didn’t look good at all. For them, Wall Street created the Credit Default Swap. A CDS is a kind of insurance policy—for property the investor doesn’t own. Someone else owns the investment, in this case a mortgage bond. Whoever buys a CDS agrees to pay a set yearly fee. If the investment fails, they receive the amount lost on the investment. If it doesn’t, they only lose their fees. As Lewis puts it, a CDS is like an insurance policy you buy on a burning house—again that you do not own. (Add exclamation marks if you wish. Not even in my wildest dreams could I have imagined such a thing to be possible.) Goldman Sachs was one of the houses who created CDSs and was happy to do so because they found someone on the other end to take the bet, AIG, who had heavy exposure to subprime securities that they thought were solid. It was, to AIG, an easy way to pick up some extra bucks.


Synthetic CDOs

Later in the game another instrument was created, the synthetic CDO. A synthetic CDO is a bond comprised of CDSs, layered and rated like the others. Let me get the words in: a synthetic Collateral Debt Obligation is a bond that is made of Credit Default Swaps. Synthetic most intrigues me—as if CDO isn’t artificial enough. The term implodes on itself in its oblique attempts at a concept. Try to make some kind of mental picture from those words—I can’t, and I confess here is where I get dizzy. But I think a synthetic CDO was a way to bet against the betters, while at the same time investing in favor of the subprime market, on which many were still bullish and for which demand was still high. Yet there is no raw material in this construction: no new loans were made to create this bond. It is created of layers of bets against bets, liability sliced and repackaged and passed around.


Here is where everything has to be put together but where everyone gets lost. First, some numbers. Some $300 billion worth of CDOs were created in only three years, of which, Lewis tells us, $240 billion would have had AAA ratings. $108 billion worth of synthetic CDOs were issued in about the same amount of time. Trillions from around the world went into the subprime market investments. Lewis puts the losses, when all was said and done, at a trillion. These are enormous amounts of money. Someone will have to write a detailed analysis about what all this money could have meant if put into something substantial. Add the fact that investment houses, again, not only produced these instruments but also invested heavily in them themselves because they thought they were sound. Add the hefty fees they kept on making whatever they did, which encouraged them to make and sell more subprime investments of whatever sort. Then add a falling housing market. Then add mounting debt. Homeowners started defaulting in much greater numbers than anyone predicted. But also lenders were leveraged out themselves. Mortgage companies, for example, borrowed heavily from banks to make their loans. As for the investment houses, Bear Stearns’s leverage had increased to 40:1, Merrill Lynch’s to 32:1, Morgan Stanley and Citigroup’s to 33:1. Then add subprime traders finally catching on and worrying and trying to find ways to prop the market or get out or bet against it, bubble crisis behavior. Then add general panic among all investors.

I’m the kind of guy who likes to see diagrams with many boxes representing buildings where various people work and a cartoon man walking from one box to another carrying a dollar bill, arrows pointing the way. The resulting picture, however, would look like a Jackson Pollock.

Now stand back and watch everything simplify itself into a crash.

Yet there were those high up who blamed the crisis on the people at the bottom, low income borrowers encouraged to take out loans they couldn’t pay. The major problem was what was put on top of those loans. Lewis quotes Steve Eisman, a hedge fund trader who bet against the market:

They [Wall Street firms] weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford. They were creating [investment securities] out of whole cloth. One hundred times over! That’s why the losses in the financial system are so much greater than just the subprime loans.

One hundred times over is probably an exaggeration, but I don’t know how much.

We’ve been sifting through the rubble, however, and so much is fairly clear. First, major banks and Wall Street firms didn’t protect themselves. Most took heavy losses, and several have been eviscerated and sold off. Second, they took the economy with them, worldwide. The stock market plummeted as the panic spread, and banks, whose balance sheets took a hit, froze credit, making it hard now for us and for our businesses to borrow and invest in ourselves so we can climb out of the pit. The other effects on the rest of us will be harder to measure, however. There isn’t a daily curve published that shows our individual well being other than unemployment, which doubled in a few years.

We still have an economy, of course, with producers and workers and stores and buyers. I’m guessing, but I suspect we’ll find what we have been ignoring, that, as in the ‘20s, our economy just wasn’t that strong and the stock market activity was a feverish activity that masked the real problems. But everything that existed before the crash remains in place, money that needs to be invested—and Wall Street, with its creative instruments and the machinery to make hefty fees. It’s hard not to wonder how soon the next “correction” will come and how severe it will be.

Still in the throes of the crash, Wall Street perhaps found another opportunity. People who have life insurance policies and need cash, for example the ill or elderly, can sell them (“life settlements”). According to The New York Times, in the fall of 2009 investment firms were looking for ways to bundle these into bonds, just as they did subprime mortgages. Investors in these bonds receive payments when the policy owners die, and the sooner they die, the greater the payoff. There was $26 trillion worth of life insurance policies in effect in the U.S. at the time. Phones in one investment house, according to the Times article, were “ringing off the hook.”

Some observations, in tranches

Complexity can’t be appreciated unless you are exposed to it to some extent, which is really all I tried to accomplish above, and I have only provided a rough sketch of major factors. Lewis, of course, does a much better job and I recommend his book. But in essence the situation isn’t much more complicated than this: huge investments were made on top of really bad loans. How did that happen and what does it mean?

I can’t see the big picture, I don’t know what I’m talking about, someone will object. No argument. Then again I haven’t seen an authoritative account yet that puts everything in place or finds reason in these bonds and loans, and doubt it will ever come. If it does, I hope we can understand it. If we can’t, we might want to ask why.

In the meantime I would like to add a few thoughts and will layer them in tranches, according to their risks and payoffs and intrigue, the safest at the top. There are still more stories, I’m sure, that can be told, layers beneath the layers.


1. We’re not in Bedford Falls anymore, either

In the movie It’s a Wonderful Life, George Bailey (James Stewart) runs a bank in small-town Bedford Falls where one of his missions is to finance affordable housing for low income residents. Perhaps Bailey is the rare idealist, but his plan works, at least in the movie: people get homes and live better lives, the bank runs a profitable business, and the town itself prospers as a whole. The point I want to illustrate, though, is that the system is small and self-contained, one where there is human contact and feedback, a situation that was typical for many institutions around the 1940s and is not unlike the one I grew up in myself. Bankers have close connections to their borrowers, thus can make individual judgments as to who might be worth a risk or not. Also they can see the results of their efforts as borrowers pay off loans and houses are built in the community. There are checks to keep them honest and efficient: if they make bad loans, the bank suffers and the bankers fall in public esteem.

Today banks are huge nationwide concerns where there is little closeness or feedback. They are distant from the communities they serve, answering instead to shareholders across the U.S. and around the world. Overall numbers matter more than sound particular decisions; customers are raw material seen en masse. Because the banks are large, they standardize their procedures and divide their tasks among tiers of specialized workers who may not communicate well with each other and don’t see an overall scheme. Because of their size, the banks are in a position to impact the health of the whole economy, but because of their involvement in global finance, they are also in a position where it is hard to predict results. It is an environment that can cloud individual judgment and easily go off track. Add the temptations of a speculative housing boom, along with competition from other national banks and smaller lending agencies wanting to cash in as well, more than needed, then consider how these encourage banks to juggle the master plan.

Now pass the loans off to Wall Street firms, who pass it off to investors while making huge fees in the process, and the system of checks and balances breaks down completely. For Wall Street, the loans were nothing more than numbers they could work. They were thousands of miles from the housing binges in Florida and California. They also had incentive to disguise what they were doing by creating those bizarre instruments—and fudge them. According to Lewis, “The less transparent the market and the more complicated the securities, the more money the trading desks at big Wall Street firms can make. . . .” They do so because no one really knows what they are buying. They only see the AAA ratings.

Yet once more, much of Wall Street believed in the subprime market and invested in it themselves. The complexity of their behavior, Lewis notes, “was now leading the bond trader to deceive himself.” They believed in the housing boom, but because they were so distant from it they couldn’t see its underlying weakness. Instead of homes and borrowers, all they could see were the numbers, lots of numbers, difficult to evaluate in themselves. Put differently, they had strong incentive, at least in the present, to believe in the market, as this belief led to immediate rewards. Wish fulfillment can pay off in the short term.

But it’s too easy to dismiss the traders, and I’m sure you had to be inside the game to see how it was played. These guys weren’t idiots. Wall Street hires top graduates from the top schools, and they work long and stressful hours for which they pay a price. Because of their distance, they had to have procedures, which were not simple. Yet there comes a point when procedures take over. Much of our society has given itself to size and complexity—I would argue even in education—to large, complex, impersonal institutions with their own specialization of labor and their own procedures and assumptions and special language, which remove them from their intended purpose and the people they are supposed to serve. They have become procedural machines whose main function is to keep themselves going. They may also be counter-productive, even self-destructive.

The investment houses also had expensive computers and hired technical specialists to help them out. One quantitative analyst, David Li, came up with a mathematical model, the Gaussian copula, that was highly influential in pricing CDOs. You can find it at Wikipedia. It is a very impressive—and imposing—formula, whose use also turned out to be flawed. Li himself claims it wasn’t understood and was misapplied by the firms. Still, faith was put in the technicians and their wizardry because the traders didn’t have anything more substantial or relevant. Then again, maybe relevance was not their concern.

If Wall Street firms are removed from us, so are we removed from them and their inner workings. The only time we see them up close is when they fall and make front page headlines. Yet much popular opinion in favor of free enterprise and against regulation of Wall Street clings to a simplistic picture of the economy, much like that expressed in Bedford Falls. We think we are protecting a system that is fair and effective, when in reality it is anything but. We are defending a system we do not understand, over which we have no control, and which doesn’t have our best interests in mind. When we champion Joe the Plumber, we’re protecting Jack the Investment Banker. In the process we are avoiding the real world of finance and setting ourselves up.

One effect of the crash was that it led to more mergers, to fewer, larger institutions. Wachovia was absorbed by Wells Fargo, Merrill Lynch by Bank of America. Someone might argue efficiency and diversity as factors, but I suspect the primary motive was corporate ego and that the main practical cause was that they had the desire and power to make them, then simply found the opportunity with little to hold them back.

As for the complexity of the instruments, there may have been other motives. Complexity hid from the traders who they were and what they were really doing, what they really wanted, from themselves and from us. What and who are questions worth some thought. I have another theory, however. It is because they were so complicated, because they stretched belief so far that, in fact, we believed them. We bore easily. Maybe only the incredible given the appearance of credible is worth our attention now.

Or maybe belief is beside the point.


2. Social utility?

Goldman Sachs, in hearings after the crash, was taken to task for generating products that had no social utility. Such criticism strikes me as being utterly ingenuous. Goldman Sachs was hardly alone in creating those investments. More, there was nothing in the whole game nationwide, from the appraisals of the houses, also fudged, to the ways loans were made, to the creative work of Wall Street, that suggested utility was a determining factor. It was a system driven by big money, made fast. Social utility did not guide our financial behavior; rather financial behavior shaped and controlled it. A bust also strikes me as an odd time to be talking about social utility, horribly after the fact.

President Clinton did push housing for people with low incomes decades ago, but the changes were made within the existing framework. Fannie Mae and Freddie Mac not only had to work with questionable lending practices, such as the ARMs, but also had to contend with the inflated housing market and its collapse. Their directors may have succumbed as well to the same temptations. It’s hard not to believe, if affordable housing were a genuine goal, that it couldn’t have been done some other way that wouldn’t have been, in fact, not only socially beneficial but also profitable. Instead, look at all the money, private and public, that has been squandered in fat fees and lost in the crash, and at all our tax money that has gone to the federal bailouts.

Perhaps I have not been paying attention, but I don’t recall social utility being a guiding principle in many of our political discussions the past decades. Rather we have been talking about business and ways to preserve it, as it is, not to reform it to serve our needs. The term is not in our political discourse, nor are its principles defined and defended in our elections.

Then again, I don’t think social utility is what we’re really after.


3. Dead Souls

Apparition de Tchitchikov, Marc Chagall, from his etchings on Dead Souls.

In Nikolai Gogol’s novel, Dead Souls, set in early 19th century Russia, Chichikov, a middling gentleman without scruples, takes off into the world to buy from landowners titles to deceased serfs (“dead souls”). Even though he has to pay taxes on his acquisitions, it is a way for him to increase his status, where he succeeds. More importantly, he can use his ownership of deal souls as proof of his importance to obtain a loan from the government, and thus increase his wealth—on top of his debt.

The parallels to the subprime crisis, I hope, are obvious, but dwell a moment on the image of trillions of dollars hovering senselessly, cruelly over so many low income borrowers wanting their shot at the American dream. Gogol paints a picture of a system that is exploitative and corrupt, of a culture on the brink of moral and social collapse. We have a long, rich tradition here ourselves, and Gogol’s story should disturb us.

But it doesn’t.


4. Greed is good

In the movie Wall Street, Gordon Gekko (Michael Douglas) thrills investors at a stockholder meeting—and all of us in our seats watching the film—with his epiphany that “greed is good.” Profit and risk taking work hand in hand and can lead to a dynamic environment where there is real creative change. But Gekko was a corporate raider, back in the late ’80s when mergers and acquisitions was the game, who bought up companies so he could gut them and sell them off. Making money, lots of it, was his goal, not building anything of social utility. He belongs to a rich tradition in this country, going back to the days of the Gilded Age and the holding companies of the 1920s.

Let’s face it. What we all want most is to get rich quick, no matter how we do it. We really hate Horatio Alger’s Ragged Dick for his obsequious behavior, who didn’t go that far anyway. Maybe we can do it by flipping houses. If not, we still want to preserve a system that might allow us to do it somewhere else. And if we can’t get rich ourselves, we can at least experience it vicariously through our ruthless, glorious idols.

But money can’t be the goal, rather what it brings, a self-aggrandizement where we can think fabulously of ourselves and not be bothered with the details. In Tom Wolfe’s novel The Bonfire of the Vanities, investment bankers see themselves as Masters of the Universe; in Michael Lewis’ real life study of Salomon Brothers, Liar’s Poker, they aspire to be “big swinging dicks.” Both were books Wall Street loved reading without seeing any irony. Lewis talks about how college graduates sent him emails, asking him how they could get in on the game.

Gekko, like the traders in those books, like the subprime traders of a few years back, managed to achieve wealth and image without being bogged down by the mundane problems of capital outlays and workers and customers, with the tedium of supply and demand. Rather, they found a way to put these aside, to escape them, and build wealth on top of nothing.

America is about personal transcendence, not utility, and that is what we must protect at all costs.


5. Fatal Attraction

But greed doesn’t explain the traders’ fall, or maybe it does in another way. We are fascinated by and locked into narratives of desire and self-destruction. Disaster thrills us and we want to live on its edge. Maybe Daniel Gallagher (Michael Douglas again), a Manhattan attorney, doesn’t know what he is getting into when he has what he thinks is a casual affair with Alex Forrest (Glen Close), but we did, and we lapped up every obsessive detail, every thrust by Alex of her kitchen knife. Fatal Attraction was a smash hit. If we can’t be led to the precipice and pushed over by sex, we can do so by the next best thing, sex’s substitute, money. Uncontrolled markets take us to the crest of our desires.

And over.


6. Postmodern dazzle

“All this optimism, all this booming and soaring. Things happen like bang. This and that simultaneous. I put out my hand and what do I feel? I know there’s a thousand things you analyze every ten minutes. Patterns, ratios, indexes, whole maps of information. I love information. This is our sweetness and light. It’s a fuckall wonder. And we have meaning in the world. People eat and sleep in the shadow of what we do. But at the same time, what?”

Eric Packer, a master of the universe, the New York fund manager in Don DeLillo’s Cosmopolis, sits in his stretch limo, stares at all the computers and TV screens before him that tap into his world and ours, and is moved to higher contemplation.

Step back a moment and gaze in awe yourself at the creative energy that went into the subprime investments, at their complexity, at the sheer size of what they built. “A synthetic Collateral Debt Obligation is a bond that is made of Credit Default Swaps”—the thing is just stunning. What a gem of pure invention. It holds the power and mystery of some kind of rune.

We have lost all frames of reference or learned we never had them. Change and dislocation and urges, individual and tribal, are all we really know. Where does that leave us? What will keep us going? How will we continue to divert ourselves? How did we ever achieve the means to create such a massive bubble out of nothing? Can we do it again? Can we make another one even larger?

No small part of me wants to devote the rest of my life tracking the subprime boom down to its smallest details, tracing all their connections and misdirections, then reassembling them into that vast crystalline cathedral glimpsed fleetingly years ago. If I can step back far enough, I will try to look at the whole edifice yet be dazed and blinded by all the reflections caught within from the light of an afternoon sun. I will walk around the perimeter and be moved to wonder myself at its construction, at all the flying buttresses as tall as skyscrapers that buttress each other or do not support anything, at all the walls that never join at right angles. Then I will enter and wander for decades within the labyrinth of its many corridors, and I will try to trace a floor plan that will reveal not a cross or a star but a symbol too complex to be a symbol, that represents only itself, or everything, or nothing.

But I also want to save my last hour to watch its thunderous, glittering crash.





A transcript and audio replay of “This American Life: The Giant Pool of Money” can be found at NPR’s website here.

Michael Lewis, The Big Short (Norton, 2010). Lewis also edited the anthology Panic (Norton, 2009), a collection of articles about the other crashes in recent times.

Jenny Anderson, “Wall Street Pursues Profit in Bundles of Life Insurance,” New York Times (September 5, 2009)

A more detailed account of the CDO meltdown can be found here:

“The Story of the CDO Market Meltdown: An Empirical Analysis”

Anna Katherine Barnett-Hart

Note Ms. Barnett-Hart’s conclusion:

While the collateralized debt obligation will not be the cause of another financial maelstrom, it is likely that the same combination of market imperfections, misaligned incentives, and human excesses that spawned this financial monster will not disappear.

The Wall Street Journal discusses the thesis and author here



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