Fallout: The Financial Crisis

Wall Street’s new toxic asset blend

Kai Ryssdal Jul 13, 2009
Fallout: The Financial Crisis

Wall Street’s new toxic asset blend

Kai Ryssdal Jul 13, 2009


KAI RYSSDAL: What we’re expecting to hear about Goldman Sachs and its multibillion-dollar profit tomorrow does bring with it a certain sense of deja vu. And the conversation I’m about to have with Bob Moon will do nothing at all to make you feel better about how Wall Street is still doing business. Still bundling up bad loans and selling them off. Shades of mortgage-backed securities all over gain.

Hey, Bob.

BOB MOON: Hey, Kai.

RYSSDAL: So here we are, a year-and-a-half, two years into this financial crisis and the banks are revisiting some of these devices that got us here in the first place.

MOON: Yeah, we’ve been working for several days now, Kai, trying to get to the bottom of a story that really raised some eyebrows among financial commentators when it started leaking out last week. Supposedly, Morgan Stanley is preparing to offer a new kind of investment, but it sounds uncomfortably familiar to a lot of people. They say it’s a lot like the kind of complicated, messy deals that have gotten us into this mess. We’ve now gotten our hands on the terms of this deal, Kai, right here. This is a document from Morgan Stanley’s sales department. I’m not sure why it says these terms are incorporated under the laws of the Cayman Islands. . . .

RYSSDAL: Oh, man. What could possibly go wrong? All right, now that I feel much better about it, what’s inside this thing?

MOON: Well, this is something called a credit loan obligation, or CLO. They’ve taken a bunch of loans made by businesses — just like those mortgaged-backed securities that we’ve talked so much about. This bundle of loans is supposed to provide a solid, steady payout over time. Now these loans were once rated AAA. The best quality investment that money can buy. But not too long ago this bundle got downgraded by in investment rating agency. So, Morgan Stanley is repackaging these loans, and it thinks it can pull it off and come up with a AAA rating once again.

RYSSDAL: This is the “Help me understand” part. How can something be AAA, get downgraded, and now be repackaged to AAA again?

MOON: A-hah. Well, I brought my blender in.

RYSSDAL: I’m sorry, what?

MOON: I brought my blender in to demonstrate how this happens. We’ve got a big bowl of strawberries here, and you’ll notice that most of them are nice and fresh. OK? The stuff on the bottom is, shall we say, a little mushy. As far as I can tell there’s no mold, though, so let’s just throw in some of these strawberries here. And, uh, we’ll get the blender going. Make a little smoothy here. OK, here we go . . . [sound of blender] . . . Hey, looks pretty good, huh?

RYSSDAL: It looks good, yes.

MOON: Now, we want to let this set a little bit before we drink it so the bad stuff can sink to the bottom. Because, we’re going to skim the good stuff off the top and that ought to be Grade A.

RYSSDAL: You’re analogy then is that the bad strawberries are the gunky loans, and the AAA stuff is good and by blending it we make the whole thing AAA.

MOON: That’s right.

RYSSDAL: I can’t drink that, though — I can’t buy the whole bond without getting sick.

MOON: Well, that’s where the critics come in. I spoke with Robert Kuttner, he’s an economist and editor of American Prospect. And he says as long as there’s no reform, bankers are going to keep trying to feed us this stuff. They’re going to try to find ways to reintroduce toxic stuff back into the system.

ROBERT KUTTNER: I mean, when you think about the effrontery of playing the same game and you, through some alchemy, sprinkle holy water on it and it turns into a AAA security, and you find somebody who’s foolish enough to buy it, that’s the first thing they ought to reform.

RYSSDAL: Two words, Bob — ratings agencies. Aren’t they supposed to protect us?

MOON: Well, I spoke to Moody’s today. They say they haven’t rated this particular deal. But, apparently, Morgan Stanley plans to go to Moody’s and seek a rating. Now, keep in mind, that would mean Morgan would be paying Moody’s for the rating. And the critics say that’s the problem here. There’s a conflict of interest. The Obama administration hasn’t yet addressed that question. It’s apparently a little too complex to come up with a quick answer, so it’s on the back burner for now.

RYSSDAL: And you called Morgan Stanley, huh?

MOON: I did. We sought comment last week, and again today. They told us they were working on it, but they never got back to us.

RYSSDAL: All right, quickly, before I let you go . . . How is it, as I said at the top, that a year-and-a-half into this, we are still talking about these kinds of deals?

MOON: Two schools of thought here. The bankers and investors who say we need securitization — this process of bundling loans and selling them on — because that produces new pools of cash that provides more credit for everybody. But critics say it’s a relatively new innovation, we didn’t need it before, why do we need all this complex stuff now. Get rid of it.

RYSSDAL: More coming, I’m sure. . . . Bob Moon, he’s our senior business correspondent. He does strawberry daiquiris and high finance. Thank you, Bob.

MOON: Thanks, Kai.

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