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tv   [untitled]  CSPAN  April 4, 2010 11:30pm-12:00am EDT

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who previously had trouble getting it. credit card companies got there first. there was an argument that, all right, credit card companies are charminging some poor guy who can't make ends meet 25% interest on his overdraft, on his unpaid balances. if we can get that same guy -- but that same guy owns a house, and he has equity. if we can get that same guy a home equity loan, we can justify lending him money at a much lower rate because our loan is secured by the house. it is going to be good for everybody because he is going to pay off his 25% per and um credit card debt and owe a 10% home mortgage. >> who is getting scammed at this point? >> in theory, nobody was.
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it could have worked. the problem was the consumers were poorly protected. the minute that the wall street firms were in the business of harvesting middle-class and lower middle-class americans for their home equity value and making loans to them against it, there was a natural risk of abuse. just generally in financial transactions, people are bewildered. when they get a little complicated, they get a lot complicated in people's minds. >> the conservatives point their finger at bill clinton, and the liberals point their finger at george bush, some at barney frank, some at fannie and freddie. do you point your finger at anybody? >> this is really the story i have told, in the private markets without a lot of government help. in this particular case, these
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loans were not being made because the government said you have to make loans to poor people. that wasn't why they were being made. they were being made because the lender was lending the money, packaging them into bonds and selling them off and didn't bear the risk of those loans not being repaid. it was a volume business. they got paid fees for doing the business. the trick was persuading people to take out the loan. now some people didn't take a lot of persuading, but there were lots of cases where the nature of the loan was sort of disguised from the person who was borrowing the money. >> you talked about teaser rates? >> they should be criminal. essentially you you talk someone into taking a loan out that has an artifically low rate for the first couple of rates, so it looks tempting, and then it skyrockets after a couple of years. >> i go in, and here is a rate
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of 7% for the first three years -- >> 2%, and then going to 13%. >> but the impression is left that you can flip this house. >> if they make you that loan, they have turned you into a property speculator. you are dependent on the property going up during the life of the loan. if the value goes down, you are stuck with it. let me stop you right there. the pernicious relationship between high finance and the american borrower is what eisman becomes an expert in. he becomes very cynical about what wall street does. when we get to the 2004 to 2007 period, in that period there were something like $1.6 trillion of subprime loans made, and another $1.2 trillion
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which are called alt-a loans. they were loans that for some reason lacked documentation. the borrower was not required to prove income. those were likely subprime too. you are talking about $3 billion in loans that were dubious. >> eisman is sitting there buying what? >> at first investing in the stock market with this hedge fund. but then seeing this explosion of lending again in this beast he thought he had killed, he said this is going to blow up again and end badly. it's a sinister business. so he starts to try to learn about the bond market, the market that is creating this credit. he and his colleagues, essentially starting from
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almost scratch. they don't know about the ratings agency, don't know what a credit default swap is or anything. they learn you can make those against the loans. he thinks the loans are going to be bad, and so he ends up making a massive bet against the loans. >> let me go back to this paragraph. he didn't know who, or why or how much, but he knew that some giant corporate entity with a triple-a rating was out there selling credit default swaps on subprime mortgage bonds. the language, the triple-a rating. one of my biggest shocks was when i woke up one day that moody's and others were slapping ratings on them, and they knew nothing about them. warren buffet owns a share of moody's. >> he owns the biggest portion of moody's.
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they are both public corporations. they see themselves now -- they will tell you now, we are just like auto trend magazine for car buyers. we are journalists. we give our views about the relative trustworthyness of these various securities, the relative likelihood they are going to repay. these ratings were taken far too seriously. then meant as a suggestion about the -- not the likelihood that they would default, but the way you should order them in your mind from riskiest to least risky. but their place in the world was, and is, much more serious than that. they are federally sanctioned enterprises that banks have to reserve capital against their assets, and how much they have to reserve against each asset depends on the rating of the asset, and the rating is
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bestowed on that asset by moody's and standard and poor. so their ratings have a huge effect on the ability of the institutions to hold these securities. a triple-a rating is what the federal government has, what the u.s. treasury has. so they slap triple-a ratings on piles of subprime mortgage bonds, and then on derivatives. they placed hundreds of billions of dollars of bonds that didn't just deadline in value, they went to zero. so the ratings in this world end up meaning nothing. >> so if i bought that mortgage, and it moved to pick your place did not >> dusseldorf. a german bank there, who think they are being smart. >> and all along i am starting to not be able to pay at some
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point. three years into it, i go from 2% to 12%. >> my teaser rate is over, and my house price is not going up, and i can't refinance, and i have defaulted. >> and steve eisman is betting that it will all collapse? >> right, betting that it will all clams. >> did they risk very much? you go into the billions of dollars they have invested in these bonds -- let me finish this paragraph. don't give the view that the impression is that it is all so complicated. it doesn't. my mother understood it. >> i had an ah-ha moment here, and i am going to read the rest of it trying to figure all this moment. only a triple-a corporation could assume such a risk, no money down, and no questions asked. bury was right about this, too, but it would be three years
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before he knew it. here is what i'm getting at. the party on the other side of his bet against subprime mortgage bonds was the triple-a rated insurance company, a.i.g. , or rather a unit of a.i.g. called aigfp mortgage products. as i saw that, i thought so the $180 billion to a.i.g. from the federal taxpayer -- >> yes, yes, yes. >> >> subsequently that went to goldman-sachs and the rest of them to bail them out? >> they were bets that were made. >> why did henry pahlsson and ben bernanke, why did the two of them -- >> why did they want to pay off
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the gambling debt? >> yes. they said the whole country would collapse. >> because all the wall street firms were on the other side of those bets. and if a.i.g. didn't pay off the bets, the firms would have experienced the loss. think of it this way. goldman-sachs had lost on its bet to michael berry, but it wasn't just that they thought they were brokering the bet. they paid off michael berry, and they are out of pocket. they want to get paid off by a.i.g., and if they aren't paid off, they have a $13 billion loss. i don't defend this. this is what they are thinking. they are thinking if we don't make the wall street firms whole, the wall street firms are going to collapse. >> some of them did. >> yes. and they would have all collapsed >> who got hurt? >> who got hurt from the collapse? >> yes. >> not the wall street people.
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the rest of the country got hurt. the rest of the country got hurt from what the wall street firms had been doing the previous five years, generating this frenzy of finance where finance shouldn't have happened. >> take lehman brothers. who got hurt? can you give me an example? if i am out here, just an ordinary citizen, if i had stock in lehman brothers did not >> yes, or if you were a lehman brothers bondholder, you got hurt. if you were a lehman brothers employee, you got hurt. and that is about tment >> but you say here that everybody at the table, the big players, walked away with millions. and you cite some of them. >> the c.e.o. of are lehman brothers had made many tens of millions of dollars that he got to keep after the firm collapsed. >> how was howie? >> this was, to me, my revelation.
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first that the financial system had organized itself around this bet. and second was that no matter which side of the bet you were on, you still got rich personally. your institution may have lost sums of money, but you still got rich. the trader at morgan stanley, the wall street trader at the investment bank, he is at the hub of the smartest group of traders. they agitate. they are not satisfied in making just millions of dollars a year. they want to make tens of millions of dollars a year. they start to agitate in the firm for a bigger piece of the action. they want to be given sort of their own hedge fund owned by morgan stanley. so they are given it. it becomes the morgan stanley proprietary trading group. very soon, months after they are set up, they make an enormous bed. it is a complicated bet, but the gist of it is they end up
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owning about 15 billion of triple-a rated c.d.o.'s backed by subprime mortgage bonds. >> wait, wait. c.d.o.'s? >> collateral liesed debt obligations. what is that? the loans create the bonds. the loans go into a trust. the trust is suppliesed in that there are -- there are junior and senior claims on this trust. if you are entitled to get the first dollars that get repaid, you have less risk than the person who gets the last dollars. so you have a lower rate of experience and the higher rated bond. the person who gets the first losses gets a triple b rated bond and a much higher rate of
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interest. what wall street did is they took the triple-b minus rated bonds, piled them all into another trust, sliced that up, and 80% of that is triple-a rated. so what howie hugler bias is essentially a pile of triple-b rated bonds, a $15 billion pile of them. he does this quickly with goldman-sachs and deutsche bank. these bonds go to zero. now he's got some bets against it, so he doesn't lose all $15 billion. but he loses $9.5 billion. it is i think by far the single largest trading loss from a single bet in the history of wall street. he walks away. he is allowed to resign.
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he is allowed to keep all of his deferred exentation, millions of dollars, and he is rich and goes away. the amazing thing to me, another reason i got reengaminged with the subject -- nobody knows who he is. his name is not mentioned. he is just allowed to move on. 20 years ago, when a trader lost a lot of money, he was shamed. everybody knew his name. that this had happened and been regarded as a private matter in a public corporation was an incredible thing to me. so i went and talked to all the people involved and wrote the story. >> did you talk to howie hubler? >> not allowed to say. >> you got to some of these guys, and other books have gotten to them, but you never see them on television. you envision that they are at a country club up in connecticut
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somewhere, still having vast millions of dollars, never paid a price, and people all across the united states are suffering because they lost. >> you put your finger on it. >> they lost their house. the last statistic i heard is that one-fourth of all mortgages in this country are water. >> yes. >> is that going to pop up? >> we are lfing through a really traumatic period, and it is not over. we are at the beginning, not the end. there are real structural problems. i'm not an economic forecaster, but everything i read suggests we are going to be living with unusually high levels of unemployment, a lot of pain from over indebtedness. a quarter of the country is on food stamps. it is not a great depression. we are not reprising exactly what happened in the 1930's,
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but it is a vegas of that. >> your characters, steve, eism ann r ann, and greg and others. you haven't talked about greg yet. >> he is the one wall street trader that is on the right side of the barrier. he is a subprime trader at deploy bank. he is betting against subprime mortgages. this is where it gets very strange. here is this trader, a senior trader in a big wall street firm. it's a german bank, but still a big wall street firm. his firm is creating the subprime bonds and the c.d.o.'s, and he says it is all going bad and i am going to make a big bet. he speppeds 18 months with his own firm. he tells them you are crazy and stupid. he is running around of trying to talk the people out of buying the stuff his firm is
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selling. he is an annoying character to a lot of people in his own firm. but he is the other principal short-seller in this. >> how much of this is made up just so these people that worked at these firms could take the money, whether credit default swalms, c.d.o.'s, this language that the average person can't figure out? >> the jargon and just generally the complexity is probably not self-consciously invented to hide what is going on, but that is the effect. and people are happy to have that effect on wall street. it's a very interesting thing, that complexity is a form of on security. if you make it complicated enough, you just dissuade the public from taking too much of an interest. the only social purpose i had
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in writing the book, i was mainly interested in what a great story it was, i thought if i explain this to people, they are going to be out raged, and they really need to know. you need that there is a financial reform bill coming out, and people need to know. >> let me ask you something. are you aware of all the negative reviews you have gotten? in the amazon.com group? >> yes. they are upset. >> i got some of them. as a matter of fact, the negatives out weigh everybody else's. >> they can't by it. >> let me ask you, did you know this was going to happen? >> with the kindalls? >> yes. >> i didn't even think about it because i didn't realize there was that big of a market for the thing. >> what is that? >> that is the amazon z book.
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it is a device that allows you to download electronically books. you can pay $9.99 instead of paying $15 for the hard back. the publisher decides when to release the e-book version. the publishers have been delaying the ee version because they make more money on the hard book. i haven't figured out what is going on in the publishing house. i make as much money either way. doesn't matter to me. i think they are worried about amazon's market player. i think they are worried -- amazon keeps the price -- the right to put the price on it. amazon has been known to abuse the market. >> in the new deal, prices have gone up. but at $9.99, and if you get
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$15 at a store, more than the $9.99 goes back to the publisher. so they do better. >> people who own kim balances are furious because they can't download it. i am having a hard time understanding where god gave them the right to have an e-book. >> on the day we are talking, there are 101 reviews of your book, and 56 of them gave you one star. let me give you. unbelievable. in 2007 michael louis is writing articles praising derivatives in banking. he dismissed skept innings.
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>> they are upset because of the kindall version. >> this guy is star fox 2020. >> this is what i did do. i write a column for bloomberg news, and i wrote a column making fun of the people at davos three years ago. every year they go to davos for this economic summit, and every year they say the sky is falling. they say the same thing every year. so i poked fun at the self-important people at davos coming together to explain how awful things were going to be and going back to their roles of central bank governors and not doing anything.
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there was a line in there. they were all saying derivatives is the background scary thing. nobody was talking about why, just the derivatives. i just said in theory, derivatives are meant to redistribute the risk in an intelligent way, and nobody has explained to me why that isn't being done. now it is true that the nay sayers were right, but they didn't know why they were right. the book i've written i'm sor of agnostic about. i don't claim i saw anything company. i wasn't paying attention. i was writing a book about baseball and football. but the people who are persuasive to me as the dying no, sir tigerses of this event were the people who actually put their money where their mouth was. people who blow air all the
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time i don't pay attention to. you never really know what they think or what they will tell the next interviewer. none of those people in davos made a lot of money betting against the subprime mortgage market. if they really understood it, that is what they would have done. >> do you know janet tavacoli? >> kind of. >> i wonder what you did to her to make her mad. >> i can explain it. >> she said this. >> i have gotten a little too much attention for my own good. this is the backlash of people who feel like they have not
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gotten enough attention get upset. when people interview about what i did on wall street, i can't control how they describe me. generally in the public's mind a trader is anybody who works on the trading floor. i wrote a whole book about how insignificant i was at solomon. i have not puffed myself up as a bond trader. that particular person was indeed in my training class, and i think was upset that i didn't write about her because she thinks she saw the crisis coming. i have had some of that, people getting upset that they weren't the characters in my book. that is weird to me. >> we are about out of time. do you remember the moment that you decided to call it the big short, and what does it mean? >> yes. it was a little bit of a devious moment. i wrote a little magazine article for portfolio magazine, now deceased a year and a half
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ago when i met steve eisman, and eisman was the centerpiece of the article. this title popped into my head. i said this is going to be a big story. so i ripped it off the magazine and kept it in my back pocket. they called the piece the end or something like that. that is when the title popped into my head. what was the other question? >> what does it mean? >> to short or bet that the surprise falling. this was the single greatest opportunity to bet on prices falling in the history of mankind. >> all these guys are sitting there hoping or wishing or betting that the whole thing is going to collapse, and they won big? >> there are very mixed feelings about it. one of them goes to the s.e.c. and tries to get them to take action. all of them are screaming to high heaven that this is
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insane. they were torn up about it. eisman said when it all works out, you feel like noah. >> how much did he make? >> i don't know, $50 million or $100 million. for their inanniversaries, $700 million. >> greg litton, do you know how much he made? >> i was told he was paid a bonus of about $50 million at the end of 2007. so they got rich. aeisman was sincere, you fell like noah. yeah, you built the arc and you are going to survive, but at the moment the flood starts and you are on the arc, it is not a happy moment. it is a torn-up moment. >> we are out of time. why do do you this? you have 60 minutes and number one on the list. why are you running all over the country? >> because they tell me to.
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it is in my publishing contract. i have to give them a few weeks. i have to sign something that says i will do it. >> thank you. >> thank you. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> for a d.v.d. copy of this program, call 1-877-662-7726. for free transcripts or to give us your comments about this program, visit us at this adds. >> next week on "q & a," we will feature the gregory brothers an auto tune, the news. the musical group yuse computer technology to set political
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speech to music. that is next week on "q & a" at 8:00 p.m. eastern and pacific on c-span. >> next, former british prime minister tony blair speaks to labor party members. then a look at senate history with former senate historian, richard baker, and then after that, a forum on u.s. relations with russia. >> tomorrow on "washington journal," clark connect urban, former homeland security department inspector general talks about airline security and the no-fly list. donna edwards talks about democratic efforts to target vulnerable seats. and william mimnix, president of the american association of homes for the aging

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