355: The Giant Pool of Money

Ira Glass

So Adam, where are we?

Adam Davidson

I recorded this at the Ritz Carlton in Lower Manhattan. It's a black tie dinner. It was just a few weeks ago.

Ira Glass

And you, by the way, are NPR's international business and economics correspondent?

Adam Davidson

That's right. I was there for my job. They're giving out awards for all these financial securities, including the one that nearly brought down the global financial system in the whole sub-prime mortgage crisis.

Adam Davidson

I'm sitting at this dinner with Jim Finkel. He's kind of nervous, because he's up for CDO of the year for the CDO he created, Monterey. Now, the CDO, that's what we're talking about. That's the financial instrument that was central to this global credit crisis we're in.

Ira Glass

And they gave awards for this? These guys are giving each other awards for doing that?

Adam Davidson

Let me just say that they were aware that there's a certain irony, giving awards to the instrument that almost destroyed the world economy. And they did consider canceling this year. But it's been a really tough year. It's been really gloomy for them.

Adam Davidson

Now that same week, a few days earlier, across the river in Brooklyn, I went to a completely different kind of gathering. It was not black tie. It was put on by the Neighborhood Assistance Corporation of America. It was people on the opposite side of the mortgage crisis, people facing foreclosure, trying to figure out how to keep their homes.

I met this one guy, Richard. He's a marine. He's this big guy, over six feet tall. And when he came back from Iraq a few years ago, he bought one of these fancy new mortgages with an adjustable rate. Recently his rate reset. It has gone up by more than $2,000 a month. And he has fallen behind on his payments.

Adam Davidson

Now, it's clear that these two groups are connected, Jim at his black tie dinner and Richard the marine. The sub-prime crisis has connected them.

Ira Glass

Right, and I know that, basically, this is what sent you and one of the producers of our show, Alex Blumberg, on a big reporting mission these past few months. You saw that, that there is this long chain of people that starts with these Wall Street guys and ends with people who stand to lose their houses. And all along that chain there were bankers, and brokers, and investors, and homeowners. And everybody along the chain kind of deluded themselves, thinking they could throw out the old rules of banking.

Adam Davidson

Right, in all the coverage of this, we hadn't heard that much from the people all along the chain. We wanted to know, what were they thinking when they were doing all this? And why did they think it would work? And simply, how did it all work?

Ira Glass

So, this is what we're devoting our program to today. From WBEZ Chicago, it's This American Life, distributed by Public Radio International. I'm Ira Glass. And today's show is a special co-production we're doing with NPR News, your place of employment, Adam.

Adam Davidson

Very proudly so.

Ira Glass

You and Alex Blumberg are going to be explaining step-by-step how this all worked. And we will meet some of the people who created this economic disaster. And so let me turn the show over to the two of you, which is great for me, because I've pretty much lost my voice anyway. And Alex Blumberg will kick things off.

Alex Blumberg

The thing that got me interested in all this was something called a NINA loan. Back when the housing crisis was still a housing bubble, a guy on the phone told me that a NINA loan stands for no income no asset. As in, someone will lend you a bunch of money without first checking to see if you have any income or any assets.

And it was an official loan product, like you could walk into a mortgage broker's office and they would say, well, we can give you a 30 year fixed rate, or we could put you in a NINA. He said there were lots of loans like this, where the bank didn't actually check your income, which I found confusing.

And it turns out even the people who got them found them confusing. For example, a guy I met named Clarence Nathan. He worked three part-time, not very steady jobs, and made a total of $45,000 a year, roughly. He got himself into trouble and needed money. So he took out a loan against his house, a big one.

Alex Blumberg

As it turns out, Clarence's friends, acquaintances and shadowy criminal contacts would have been right not to lend him the money. By the time I talked to him, Clarence hadn't made a payment in almost a year, and his house was in the process of foreclosure.

And stories like this have been in the news for months. And they often feature an innocent homeowner who was duped by a lying, greedy mortgage banker. Or if you're more of a Wall Street Journal editorial page type, an innocent mortgage banker who was duped by lying, greedy homeowner. And no doubt, both categories exist. But Clarence's case is more nuanced, and much more common.

Alex Blumberg

This imprudent partnership is new. And it's at the heart of the current housing crisis. For most of the history of banking, bankers wouldn't have loaned Clarence their money either. They didn't let people like Clarence near their money, in fact, people with part time employment and unpaid debts in their past.

And then suddenly in the early 2000s, everything changed. Banking turned on its head and went out looking for partnerships with people like Clarence, loaning him half a million dollars without even checking to see if he had a job. What happened? Well to help explain what happened here is my partner for the hour, Adam Davidson, the international business reporter for NPR. Hey, Adam.

Adam Davidson

Hey, Alex.

Alex Blumberg

How's it going?

Adam Davidson

Good.

Alex Blumberg

I got your title right, right?

Adam Davidson

Yes. Well, not exactly.

Alex Blumberg

Oh, what is it?

Adam Davidson

It's international business and economics correspondent, actually.

Alex Blumberg

Oh, sorry. It actually sounds more impressive. OK, so I guess the first thing we have to do is talk about the global pool of money, right?

Adam Davidson

Right, the global pool of money, that's where our story begins. Most people don't think about it, but there's this huge pool of money out there, which is basically all the money the world is saving now-- insurance companies saving for a catastrophe, pension funds saving money for retirement, the Central Bank of England saving for whatever central banks save for, all the world's savings.

Adam Davidson

And by the way, before you finance enthusiasts start writing any letters, we do know that $70 trillion technically refers to that subset of global savings called fixed income securities. Everyone else can just ignore what I just said. Let's put $70 trillion in perspective. Do this. Think about all the money that people spend everywhere in the world, everything you bought in the last year, all of it. Then add everything Bill Gates bought, and all the rice sold in China, and that fleet of planes Boeing just sold to South Korea, all the money spent in every country on Earth in a year. That is less than $70 trillion, less than the global pool of money.

Alex Blumberg

Wow.

Adam Davidson

We're talking about a lot of money.

Alex Blumberg

That is a lot of money.

Adam Davidson

And that money comes along with armies of very nervous men and women watching over the pool of money. Investment managers, they don't want to lose a penny of that. They don't want to lose any of that money, and, even more so, they want to make it grow bigger. But to make it grow, they have to find something to invest in.

So, most of modern history, what they did was they bought really safe and, frankly, really boring investments like treasuries and municipal bonds, boring things. But then, right before our story starts, something changed, something happened to that global pool of money.

Adam Davidson

How does the world get twice as much money to invest? There are lots of things that happen. But the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it.

China, for example, has over a $1 trillion in its central bank. And there are office buildings in Beijing filled with math geniuses, real math geniuses, looking for a place to invest it. And the world was not ready for all this new money. There is twice as much money looking for investments, but there are not twice as many good investments.

So that global army of investment managers was hungrier and twitchier than ever before. They all wanted the same thing, a nice, low-risk investment that paid some return. But then something happened that makes matters worse. At this precise moment, one guy took one of that army's favorite investments and made it a lot less attractive.

Alex Blumberg

This is where we have to talk about Alan Greenspan, right?

Adam Davidson

Yeah, we have to.

Alex Blumberg

All right. But I'm just going to promise people that is the only time you're going to hear Alan Greenspan in this story. So bear with us.

Adam Davidson

All right. Here's one of his speeches that really drove that army of investment managers crazy.

Adam Davidson

You might not believe me, but that little statement, that is central banker's speak for, hey, global pool of money, screw you.

Alex Blumberg

Come on, that's not what he said.

Adam Davidson

It is. I speak central banker. Believe me, that's what he said. What he is technically saying is he's going to keep the fed funds rate-- that's when you hear, the fed interest rate-- at the absurdly low level of 1%.

And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can't help you.

And so the global pool of money-- which does speak central banker. They understood what he was saying-- they looked around for some low-risk high-return investment. And among the many things they put their money into, there was this one thing that they fell in love with. To get it, they called Wall Street, a guy like this.

Adam Davidson

Mike was one link in a chain that connected the global pool of money to its new favorite investment, residential mortgages, the US housing market, and guys like Clarence Nathan. Think how attractive a mortgage loan is to that $70 trillion pool of money.

Remember, they're desperate to get any kind of interest return. They want to beat that miserable 1% interest Greenspan is offering them. And here are these homeowners paying 5%, 9% to borrow money from some bank. So what if the global pool could get in on that action?

There are problems. Individual mortgages are too big a hassle for the global pool of money. They don't want to get mixed up with actual people, and their catastrophic health problems, and their divorces, and all the reasons that might stop them from paying their mortgages. So what Mike and his peers on Wall Street did, was to figure out a way to give the global pool of money all the benefits of a mortgage-- basically higher yield-- without all the hassle and risk.

So picture the whole chain. You have Clarence. He gets a mortgage from a broker. The broker sells the mortgage to a small bank. The small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street. Then Mike takes a few thousand mortgages he's bought this way, he puts them in one big pile.

Now he's got thousands of mortgage checks coming to him every month. It's a huge monthly stream of money, which is expected to come in for the next 30 years, the life of a mortgage. And he then sells shares of that monthly income to investors. Those shares are called mortgage-backed securities. And the $70 trillion global pool of money loved them.

Alex Blumberg

The problem was, to make a mortgage-backed security, you needed mortgages. Lots of them. So for Mike Francis to satisfy this demand and take his quite hefty fee from the global pool of money, he needed to buy up as many mortgages as possible.

And to do that, he called a guy one link below him on this mortgage-backed security chain, a guy named Mike Garner, who worked at the largest private mortgage bank in Nevada, called Silver State Mortgage. And to give you a sense of how fast this business was growing, Mike Garner got into the mortgage business straight from his previous job as a bartender.

Alex Blumberg

Mike Garner's job-- the guy in Nevada-- was to buy up individual mortgages, mainly from brokers, bundle 200 or 300 of them together, and then sell them up the chain to Wall Street, to guys like Mike Francis.

Adam Davidson

There's just too many Mikes here.

Alex Blumberg

I know. So many Mikes. There is actually just two Mikes. There's Mike Francis, the guy on Wall Street, and Mike Garner, the guy we're talking about now.

Adam Davidson

He's in Nevada.

Alex Blumberg

He's in Nevada. Right. And in the beginning, he'd only buy mortgages that were pretty standard and pretty safe. Mortgages where people had come up with a down payment and proven that they had a steady income and money in the bank. And they sold so many of these mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified to get one, had gotten one.

But the pool of money had just gotten started. They wanted more mortgage-backed securities. So Wall Street had to find more people to take out mortgages, which meant lending to people who never would have qualified before. And so Mike Garner in Nevada noticed that every month the guidelines were getting a little looser.

Something called a stated income verified asset loan came out, which meant that people didn't have to provide a paycheck stub or W-2 form to get a loan as they had in the past. They could simply state their income, as long as they showed that they had money in the bank.

Alex Blumberg

Actually that pulse thing, also optional, like this case in Ohio, where 23 dead people were approved for mortgages.

Adam Davidson

An interesting fact here. Mike Garner's bank did not care all that much how risky these mortgages were. This was a new era. Banks did not have to hold on to these mortgages for 30 years like they used to. They didn't have to wait and see if they'd be paid back. Banks like Garner's would just own the mortgages for a month or two. And then they sold them on to Wall Street. And then Wall Street would sell them on to the global pool of money.

Alex Blumberg

Which is how we get half million dollar no income no asset loans.

Adam Davidson

--and loans to dead people. So there's this whole other thing going on as well. Housing prices were rising fast. I think we all remember that. Lots of people in the mortgage industry had this faith that housing prices in the US simply never go down.

So from the bank's perspective, even if the worst happens and someone defaults, the bank would then own a house, which is now worth even more than what they gave out in the loan. So all Mike cared about was whether or not his customers, the Wall Street investment banks, would buy those mortgages from him.

And he was under pressure to approve more and more loans. Because other guys in his company-- the actual guys cruising strip malls all across Nevada buying mortgages from brokers-- their commission depended on selling more loans. And occasionally those guys would hear about some loan that some other mortgage company offered that they weren't allowed to offer. And they'd complain to Mike.

Alex Blumberg

This is Glen Pizzolorusso, who was an area sales manager at an outfit called WMC Mortgage in upstate New York. And just to repeat, he said $75,000 to a $100,000 a month. That's over a $1 million a year. Glen was just out of college. His job was a lot like Mike Garner's. He's the same link in the chain. And Glen loved his job.

Alex Blumberg

And when Glenn wasn't working, he was doing his next favorite thing, spending, preferably, in the company of-- and this is his term-- B-list celebrities.

Alex Blumberg

Glen had five cars, a $1.5 million vacation house in Connecticut, and a penthouse that he rented in Manhattan. And he made all this money making very large loans to very poor people with bad credit.

Alex Blumberg

But Glen didn't worry about whether these loans were good either. That was someone else's problem. And this way of thinking thrived at every step of this mortgage security chain. A guy like Mike Francis from Morgan Stanley, he told me he bought loans, lots of loans, from Glen's company. And he knew in his gut that they were bad loans, like these NINA loans.

Alex Blumberg

It's easy to ignore your gut fear when you're making a fortune in commissions. But Mike had other help in rationalizing what he was doing, technological help. Mike sat at a desk with six computer screens connected to millions of dollars worth of fancy analytic software designed by brilliant Ivy League graduates hired by his firm. And this software analyzed all the loans in all the pools that Mike bought and then sold. And the software, the data, didn't seem worried at all.

Adam Davidson

Wait, Alex, I want step in here, because this is a very important piece of tape. A big part of this whole story, the whole crisis, is that a lot of really smart people, people who knew better, fooled themselves with this data. It was the triumph of data over common sense. Can you play that tape again?

Alex Blumberg

Yeah, sure. Here you go.

Adam Davidson

As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that the foreclosure rate is generally below 2%. So they figured absolute worst-case scenario, the foreclosure rate might go to 8% or 10% or even 12%. But the problem with that is that there were all these new kinds of mortgages given out to people who never would have gotten them before. So the historical data was irrelevant. Some mortgage pools today are expected to go beyond 50% foreclosure rates.

Alex Blumberg

To be fair, they knew there were risks. But investors have a system to assesses those risks. They have the special companies, credit rating agencies, Moody's, Standard & Poor's, Fitch. Their job, their main job, is to assess risk for Wall Street and the global pool of money.

They rate every kind of bond according to its risk. AAA is the safest. Then there is AA, A, all the way down to B and below. And that's all most investors look at that, that letter grade. They trust the credit rating agencies. And these agencies blessed most of these mortgage-backed securities, gave them AAA ratings, which means they were considered as safe as a US government bond.

This was the magic of the whole system. You could take a pool of thousands of risky mortgages and create a security that was called, money good, as safe as any investment out there. At least that's what people thought. We now know that those agencies relied on the wrong data, that same historic data that had nothing to do with these new kinds of mortgages.

Adam Davidson

And then, things got even worse. The thing that took this problem and turned it into a crisis was something else that was new, something called a collateralized debt obligation, a CDO. And that brings us back to the guy we met at the awards dinner in the beginning, Jim Finkel.

Adam Davidson

Jim Finkel runs this CDO shop, Dynamic Credit. It takes up three modified apartments on the Upper East Side of Manhattan. The trading room is like a factory floor for CDOs. It's where they make the things. This is what it sounds like. [SILENCE]

Maybe factory is the wrong term. But this is where he makes CDOs. But what is a CDO? He shows us on a computer screen.

Adam Davidson

To start with, every CDO has its own name. Finkel loves his country house in the Berkshires, so he always names CDOs after towns in western Mass, like Monterey.

Alex Blumberg

Let's translate some of that. A mortgage-backed security, you remember, is a pool of thousands of different mortgages. These are all put together and divided into different slices. Jim used the word tranche. Tranche is just French for slice. Some of these slices are risky and some are not. OK, a CDO is a pool of these tranches, a pool of pools.

And Jim and most companies like his weren't buying the top rated tranches, the safest ones, the AAAs. They were buying the lower rated stuff, the high risk stuff. Jim's company bought tranches that came from Glen Pizzolorusso's company, the guy who hung out at nightclubs with B-list celebrities, the guy who said he was selling mortgages to people who didn't have a pot to piss in.

Adam Davidson

There is another term the industry uses. This is not a joke. They call these lower rated tranches, toxic waste. They are so high risk, they're toxic.

Alex Blumberg

So basically Adam, a CDO is sort of a financial alchemy, right? Jim takes this toxic stuff, these low-rated high-risk tranches, puts them all together, re-tranches them, and presto. He has a CDO whose top tranche is rated AAA, rock solid, good as money. If this seems too good to be true to you, you're in good company. Guys like billionaire investor Warren Buffett said the very logic was ridiculous. But back in 2005, 2006, the global pool of money, they couldn't get enough of these things. And the CDO industry was facing the same pressures everyone else was at every other step of this chain, to loosen their standards, to make CDOs out of lower and lower rated tranches. This is Jim's partner, Tonko Gast.

Ira Glass

Coming up, how $5 million can get you into $100 million worth of trouble. In a minute, from Chicago Public Radio and Public Radio International when our program continues.

[MUSIC - "HARD TIMES" THE SEX-O-RAMA SOUNDTRACK]

Ira Glass

Well, it's This American Life. I'm Ira Glass. And although I feel fine, I have lost my voice this week. Today's show, a special co-production with NPR News, a step-by-step look at what exactly happened during the sub-prime mortgage crisis. One of our producers, Alex Blumberg, co-reported this story with NPR reporter Adam Davidson. The story continues.

Alex Blumberg

From 2003 to 2006, the housing market was in a classic speculative bubble. Home loans were easy to get. So more and more people were buying houses. The increased demand for houses caused the prices to increase. And the rising prices created even more demand, as people started to look at homes as investments, investments that never went down in value. And in 2003, 2004, 2005 they didn't.

You could buy a house with no money down, turn around and sell it a year later for-- in some areas-- double what you paid. People who had never invested in real estate before started buying multiple properties as investments. There were even shows on TV about how to do it. Here's a promo.

Alex Blumberg

This is A&E's Flip This House. Discovery had the cleverly titled, Flip That House. There were other ones-- Property Ladder, Designed to Sell. Bravo came late to the game, debuting their show, Flipping Out, in November of 2007, well after the bubble had already popped.

Alex Blumberg

The problem was that even though housing prices were going through the roof, people weren't making any more money. From 2000 to 2007 the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became.

No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn't possibly afford, no matter what the mortgage machine tried, the people just couldn't swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times.

And mortgage lenders started to notice something they had almost never seen before. People would close on a house, sign all the papers, and then default on their very first payment. No loss of a job, no medical emergency, they were under water before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.

Strangely, the first people in the mortgage-backed security chain who noticed were the ones near the top, the people on Wall Street like Mike Francis. He can remember almost to the day.

Alex Blumberg

The problem was that once property values started going down, it set off a reverse chain reaction, the opposite of what had been happening in the bubble. As more people defaulted, more houses came on the market. With no buyers, prices went even further down. And as prices declined, Mike Francis cleared up a mystery. Remember, even though he didn't trust these NINA loans, the bonds he turned them into, they performed well. Well, there was a reason.

Alex Blumberg

The way it worked was that a small bank, like Silver State Mortgage where Mike Garner worked, would borrow money from a big bank, say Citibank or Washington Mutual. Silver State would use this borrowed money to buy up a bunch of loans and then pay back the big bank once it sold the loans to Wall Street. Now these smaller banks were highly leveraged, in most cases 20:1. Meaning in Silver State's case, even though it had, say, only $5 million of its own dollars, it could borrow 20 times that, $100 million, to buy loans with. So in late 2006, Mike is busily at it-- borrowing, buying, selling, paying back, and borrowing again-- when the emails started coming.

Alex Blumberg

For Mike and his company that meant that they'd borrowed tens of millions of dollars to buy loans that now they couldn't sell. And since they had very little of their own money-- just like the home buyers whose mortgages they purchased-- they had no choice but to default on their loan. Silver State Mortgage's nearly 600 employees were out of work quite suddenly.

Adam Davidson

This brings us back to Richard, the marine we met at the very top of the show. He, like more than 4 million Americans at this point, is fighting to keep his home. He's giving me a tour. And I wanted to talk to him about, what now? What happens next, now that the housing bubble has turned into a crisis?

If he defaults on his mortgage, nobody wins. He doesn't want to leave his house. The investors who own his mortgage, the last thing they want is to own a house in east Flatbush in a declining market with no buyers. So you think it would be easy for both sides to come together and modify Richard's mortgage, figure out something he can afford. You'd be wrong.

Adam Davidson

The offices of NACA, the Neighborhood Assistance Corporation of America in Newark, New Jersey are short on frills. Kerry Campbell, who's helping Richard today, is a counselor here. The goal today is to figure out how big a mortgage payment Richard can actually afford to pay. So Kerry needs to know everything Richard spends money on. They go through his medical bills, his clothing budget. Kerry gently nudges Richard to be realistic, like when he asks Richard how much he spends on gifts for his family.

Adam Davidson

Not to say the original broker didn't have a process. It just had nothing to do with reality. Kerry shows Richard the loan documents filled out when he bought the house by his original broker.

Adam Davidson

Another thing the papers reveal, how much that creative broker made, $18,500. As Kerry says, that's 18,000 reasons to falsify Richards mortgage documents and to put him in a house he can't afford.

Richard actually qualified for a Veterans Administration Loan at a really good rate. And he had money to put down. But the broker convinced him to take a mortgage that turned out to be much worse, but did have a much higher commission.

Mortgage brokers were walking around east Flatbush knocking on doors, telling just about anybody, hey, we can get you a house. If you have a house, we can get you a big home equity line of credit. This happened in poor neighborhoods all over the country.

And while the FBI and other law enforcement folks say they don't have the exact numbers, it's clear that fraud, like that fraud on Richard's application, was ubiquitous.

At the end of Richard's budget process, the math they come up with is fairly stark. Richard makes more money now. He got a new and better job. So he makes an average, before taxes, of $8,000 a month. Which means after taxes he brings home exactly enough to pay his mortgage and nothing else. All of his living expenses he says, are paid with money he gets from his mom, who is on public assistance, his girlfriend, and his brother.

Kerry runs the software, which says that if Richard is going to stay in his house, he needs a much cheaper mortgage. The interest, which is currently at around 10%, would have to be lowered a lot, to 3%.

Kerry wants to propose this to whoever owns the loan, but this brings him to this peculiar problem mortgage owners face now. They have no idea who that is. Richard's loan has been bought, and sold, and resold, and put into one of those pools owned by investors, maybe an investor like Jim Finkel.

Alex Blumberg

So, now we're back in Jim Finkel's office. He is surrounded by very expensive computers, but he's typing on a cheap calculator. And he's trying to figure out for us how many individual mortgages, how many homes like Richard's, does he and his company own a part of. The calculator method soon fails him, and he turns to one of his number crunchers, a guy named Alex.

Alex Blumberg

Alex gets on the phone with Steve, the IT guy.

Alex Blumberg

This one CDO factory, this one office, owns a share of 16 million homes. And each of these homes has lots of other owners, people in other CDO offices around the world-- there are lots of them-- and other investors. You start to see what a crazy web of confusing interconnections this whole process is. Now until this moment, we had a theory that the homeowners and the people on the other end, the people at the top of the chain--

Adam Davidson

The investors--

Alex Blumberg

The investors like Jim Finkel--

Adam Davidson

That they had no idea about each other.

Alex Blumberg

Right, but we actually learned that they know quite a lot about each other. They just see each other through a computer screen.

Adam Davidson

We find that out when we go downstairs to see Steve Pennington, the IT guy. Steve's actual title is head of financial engineering. He's created his own software program that actually looks at every one of the 16 million loans Dynamic owns part of. It's a spreadsheet. Each line is one loan. And it has all sorts of information like how much the house sold for, what the interest rate is. He points to one field, which is the most baffling one. It's just a cell on a spreadsheet. And it just has 12 letters and numbers in a row. Every letter represents a month.

Alex Blumberg

This is where the partnership of borrowers like Clarence Nathan and investors liked Jim Finkel has ended up. Tonko Gast estimates that most of the AAA rated mortgage-backed CDOs that the industry created since 2006 are now worth less than half their value. Some are worth close to 0.

But remember, to all the investment managers in the global pool of money who bought them AAA meant safe as government bonds. AAA was called a cash equivalent, money in the bank.

It's as if the global pool of money put trillions of dollars in a savings account, came back one year later, and found out that half the money was gone. Or put another way, it's as if the global pool of money thought it was putting trillions of dollars in a savings account, but really half of it was going into a furnace. The money is gone, burned up, never to come back. And that has led to a new term you've been hearing.

Adam Davidson

Yeah, maybe you've noticed that the press and others don't call it a sub-prime housing crisis as much. They're now calling it a credit crisis. The global pool of money still has no idea how much money they lost, how much went into the furnace. And because of that, they've totally changed their thinking.

They used to be obsessed just with getting some kind of profit, any higher interest rate return. Now the global pool of money has the exact opposite obsession. It wants no risk whatsoever. It just wants safety. Suddenly, those US government treasury bonds-- still near the historic lows of 1% and 2%-- are beautifully attractive because they're safe. They will never blow up like sub-prime CDOs did.

The global pool of money is avoiding anything with even the slightest hint of risk. And that affects everybody, no matter who you are. It's harder to borrow money to buy a house, or build a factory, or bring your country boldly into the 21st century.

Take Iceland. A year ago, it was easy for them to borrow billions. Now they're seen as too risky. Their central bank has to pay more than 15% interest to get anyone to loan them money. They could do better putting their national debt on a credit card. Hungary, Kazakhstan, Turkey, they are all in similar situations.

You might have heard about problems in student lending. Companies that needed credit to survive are shutting down. The US expects more than 1.1 million bankruptcies this year, twice the 2006 number.

This freezing of credit all around the world is something new. The world has never seen anything on this scale. When the crisis hit last August, central bankers and finance economists couldn't figure out just how bad things might get. There is this question people would ask, will things get like the 1930s or the 1970s?

There's a real fear that just like in the '30s, hundreds of banks would collapse. There would be massive unemployment. There was talk of a new, Great Depression.

Alex Blumberg

That talk seems to have faded. And there's more talk that the next few years will feel like the 1970s. There are lots of technical differences between this crisis and Jimmy Carter's malaise. But for the average person it could feel the same. It's not an out-and-out depression. Everything's just kind of crappy. And not just in housing and banking, but for the economy as a whole. It's barely growing. There aren't a lot of new businesses, new jobs, unemployment keeps creeping up. We're just sort of stuck in neutral for a while. Anyone under, say, 45 probably doesn't remember that 1970s malaise too well. Anyone under 30 has barely known a US economy that wasn't growing. Now, there's a decent chance we'll all get to see what life felt like in the '70s, which isn't great. It's pretty bad, actually, unless you're comparing it to the 1930s.

Ira Glass

Alex Blumberg and Adam Davidson. Alex, my voice is so bad, I think maybe you should read the credits. Why don't you do it?

Alex Blumberg

All right, Ira. I hope you feel better. I'm going to bring Adam in here to help me to, since I've never done this before.

Adam Davidson

Thanks today to Ellen Weiss at NPR who made this collaboration happen this week between the news division at NPR, where I work, All Things Considered, and This American Life.

Alex Blumberg

Where I work. Thanks also to Mary Ann Casavant, Anna Chai, Kevin Byers, the fantastic housing blog, Calculated Risk, Alexis Grenell, Stephanie Cohen Glass, Sanjeev Handa, Charlie Ledley, James Scurlock, Chris Turpin, Elaine Glick, Mark [? Adelson, ?] Dan Naygrow.

This American Life is distributed by Public Radio International.

[FUNDING CREDITS]

WBEZ management oversight--

Adam Davidson

No, I want to do this one.

Alex Blumberg

OK, here you go.

Adam Davidson

WBEZ management oversight for our program by Ira's boss Mr. Torey Malatia. He and Ira go out at night sometimes together. It's pretty chill. Torey describes it like this--

Alex Blumberg

I'm not Ira Glass.

Adam Davidson

I'm not either.

Alex Blumberg

But we will be back next week with more stories of This American Life.

Announcer

PRI. Public Radio International.