Dear Money

by Martha McPhee

  "Why?" I asked, suddenly serious, meaning, Why am I here?

  He understood. "Luck played for me" was all he said, explanation enough. If he hadn't run into Pretty Radalpieno, where would he be today? "I'll be taking this very seriously," he said. "You'll need to do something about the teaching job. It will be a lot of work, you know. Long hours. We'll be rolling up our sleeves."

  "I understand."

  "Are you sure about this?"

  "I'm scared—if I can be honest."

  "For today, that's all right. But Monday, fear stays at home. Fear and the trader are incompatible. A little fear is all right; it keeps you on your toes. But too much and you're ruined. We'll begin with rolls."

  "You're a star at what you do."

  "How do you know?" he asked. I wasn't sure if it was a challenge or if he wanted to see himself reflected off me.

  "Talking to you. Your passion. It's clear."

  "I love the system. Showing it to you makes it new."

  "The guy with the Pacers," I said, "he has the ability not only to perceive opportunities before others do but to convince a whole group of people that that opportunity is something it wants and needs."

  "You're a storyteller—that's why I wanted you. Most people are driven by consensus, but while they're following that line you're going to be reading, perceiving the larger story, and that's why we're going to win this bet. Then, if you like the business, you'll go deep, to a place where the story will seem irrelevant." He looked through the glass to the trading floor. "There are a whole bunch of guys out there speculating on who this chick is in here with me, asking questions."

  Before I left, Win gave me a quick tour of the floor. What struck me most was how young the traders were. Of course that is a well-known description of them, but their collective youth made them seem impossibly young, and being confronted with it, as familiar as it may be to a person who knows about this world, was at first startling. Kids you wouldn't want to leave in charge of your house were in charge of billions upon billions of dollars. In fact, they were in charge of your house—you just didn't know it.

  No gray hair, kids from everywhere. Indians and Koreans and Chinese and Japanese—they all dressed in uniform: short haircuts, dark suits, light shirts, sleeves rolled up, jackets hanging over the backs of their chairs. They sat at their four-foot desks, eyes intensely focused on the screens before them, each desk space personalized with photographs and decals of sports teams, Yankees and the like, hot-chili sauces. One guy had a signed photograph of Dick Cheney, another one of his newborn. Well over five hundred traders and salespeople and their staff. An all-consuming concentration, each trader driven by the immediate transaction, deals beginning and finishing in less than a minute while holding conversations on the phone and with a nearby salesperson or clerk or another trader.

  It seemed the energy of the market infused the room, the traders, the air vibrating with the low hum of voices, punctuated by an occasional effort of one to be heard above the din. Proximity clearly facilitating transaction. Money, though invisible, was in constant motion, and I found the pulse infectious. They all seemed to find it so—the sheer raw enjoyment of winning ... or striving to win. Today could be the day. They were a collective lot, a whole. If, to Miss Lane, I were another species, then they too were their own species—these, oddly, her own children: well trained, emotionless, eager for yield and blessed with an aptitude for bleeding green. "You'll never find anything like it in any other business," Win said.

  He led me across the floor to a group of traders who worked in the pass-through market, as it is called, a subset of the mortgage universe that handled three trillion of the eight-trillion-dollar market and the safest of the mortgage securities—those backed, or quasi-backed, by the government, known as GSEs, or government-sponsored entities: Fannie, Freddie, Ginnie. Win introduced me to the six in the group, all of them in their twenties, from the top universities, all nimble with numbers, their desks decorated with personal effects. What best described them, as a group, was a perfect rationality and an unambiguous self-interest. Or that is what I recall believing at that moment, before I came to know them, before they became human to me. How does one go back to the moment before, remember those first impressions (often accurate in the end)?

  Who were they on that day? Snake, from Calcutta, wearing a starched white shirt without the sleeves rolled, very trim and tucked and neat for a man named Snake, a smooth and handsome face with long bangs swept to the right of his forehead; Tiger, a white boy with a broad, chummy face and a photograph of a slender girl in a bikini on a beach with palm trees, and next to her picture stood six different brands of exotic bottled water; Sam, more of the same, a kid who would have starred on the college lacrosse team, didn't seem to want to be in his shirt; Josh, an African American who had a small framed postcard on his desk of Winona Ryder, the caption reading FREE WINONA, next to her a lassoed Clint Eastwood; Gus, an earnest Korean, eyes hard on the screen, on doing the job, not too interested in my intrusion; and Maxi, the Chilean who just lost a million because he sold a Model The didn't have and couldn't get, a determined and self-centered-looking individual.

  When Win introduced me, he offered no explanation of who I was or why I was there. They smiled, collectively, kindly. I tried to remember where I'd been at their age. How had they understood to come here? What was the inspiration or the motivation? Money, of course, but how did they understand that so young? I imagined them flying to Paris to have their shirts pressed. It seemed even that would take more know-how than their age allowed. Up close, they lost their edge. They seemed like boys on a team of some sort—like swimmers competing individually yet for the greater good of the team. You could sense it in the focus of their eyes.

  "A pleasure," Snake said.

  "Good moves today," Win responded.

  "Almighty," Snake answered.

  "You impressed Radalpieno. He's making jokes about moving you to head subprime."

  "The Wild West," Snake said. "I'll take a pass for now."

  "Bold," Win answered.

  Snake was the handsomest, with his dark skin and light brown eyes and thick lashes. I imagined his parents were immigrants, unsure what to make of this American kid they had created. He offered me his hand, and the others followed. They were working their screens and phones and e-mails while also absorbing me.

  Then we drifted away. I smiled farewell over my shoulder as Win escorted me to the elevator, swiping his card once to get us out of the room and again to call for the elevator.

  "They're already making bets on you," he said, wrinkling his lips in that all-knowing way. He knew what they were doing even when he wasn't watching them, standing behind their chairs. He made them. He understood them.

  "And who will win?" I asked.

  "Snake. He's got the instinct. He's telling the boys what my plan is for you. He's telling them that you're raw material that I intend to shape, and he's betting I'll succeed. He's got the willingness to perceive, and that is the key to this trade. That and mastering your emotions."

  "How much is he betting?"

  "He's going high with this one. I'd say he has four grand riding on you. I'd say he's calling their ideas too, telling them each what he believes they think. He's going to make money all the way around. There will be side bets, derivatives of your success, the over-under, on time, you last. The boy's well trained."

  "What do the others think?"

  "Maxi thinks you're a girlfriend. He believes in the easiest explanation because he's too busy thinking about racehorses to be bothered. His family owns a few stars in Chile. And it's his desk you'll be filling when the time comes. The others are somewhere in the middle; they want to see a bit more before they commit. But theirs will always be a choice of who is the best person to believe in rather than believing in their own instincts. They'll make good, if slow, choices. But Snake is the star."

  The elevator doors opened and I was gone, ushered back into the familiar world.

&n
bsp; Outside, the snow still fell, accumulating, abundant, aswirl in strong gusts. "They're forecasting a blizzard," I heard someone say, rushing past me toward the curb with another well-dressed friend, arm out to hail a cab. I looked up. The sky was low and thick with the flakes, a pointillist's point of view. The force of the snow picked up speed, a wonderful New York storm. I imagined Radalpieno above, fists clenched, the architect of it all.

  Twelve

  REAL ESTATE WAS in the air, like tech stocks in the late 1990s, like all stocks in the late 1920s when even the shoeshine boys offered tips, famously forecasting the end. By January 2004 everyone—cab drivers, policemen patrolling neighborhoods, short-order cooks, bicycle messengers, children playing make-believe, mothers, fathers—on the street, at cocktail parties, at school during morning drop-off—everyone had discovered the golden-egg-laying goose called real estate.

  It had, in its very name, a kind of commanding authority that was solid, unsexy, and it rang true: it was real. "I had a dream last night," one mother said to another, quieting the packed elevator ascending to the classrooms at the girls' school, a captive audience. "We were in your new house in Palm Beach, walking from one magnificent room to the next." Theodor bent to me and whispered into my renter's ear, "Real estate porn." We were not immune; we wanted a house; I wanted a house. I wanted to be part of the conversation.

  It was good to own. But we didn't have that kind of money. By New York standards, we were poor. We had nothing. Anywhere else we would have been rich. Even so, we were advised to "buy something." So we looked at a studio, a bunker-like dwelling that smelled of cat pee in the hall, had a view onto an air shaft and a hot plate for a stove, an apartment that could be purchased for a price that was best shouted at the top of one's lungs. Anything better than the price of that studio would mean shouldering a debt that started at a million dollars. To Theodor this seemed outside the bounds of sanity, but others were willing. Lily Starr was in the paper for buying a million-dollar house in Amagan-sett: "New Starr of Literary World Builds Nest Among Long Island's Elite."

  Harlem was hot. Queens was hot. Staten Island was hot. Just about anywhere was hot, actually, and everyone had an opinion. The cobbler on the corner was telling a customer about a house he was buying in Crown Heights. I remember a long taxi ride with a driver who wore a cell phone earpiece and spoke to clients about real estate deals in East New York. The airwaves sang of the abiding enterprise: home improvement shows, house-hunting shows, gut-renovation shows, flip-the-house shows. Up, up, up. In rural towns, homes replaced farmland, McMansions shooting up like mushrooms all across this great land.

  Mortgages were easier to get than flu shots. They came in every color, every configuration: thirty-year fixed; fifteen-year fixed; jumbo; conforming; two-, three-, four-, five-year teaser rates; ARMs; balloons; no-interest; interest-only; no-doc loans; no-down-payment loans. No closing costs. No middlemen. No points. No processing fees. No credit report necessary. Were you breathing? You could get a mortgage, it seemed. Real estate was the ticket. Mansions were being built on apartment building rooftops on West End Avenue. Multifamily brownstones, SROs, schoolhouses, fire stations, churches, an old cancer hospital—everything was being turned into a home. Those who had primary homes now had second homes. Those with second homes now had third homes. And there were those who bought, not because they wanted the home, but because they knew someone else would—a whole new breed of speculators. Homeowners comprised 68.6 percent of the American population, the highest percentage ever. In 2004 the real estate market weighed in at $8 trillion, and three years later it would rise to an astonishing $11 trillion. This ascent would never change. The population was growing, and land was a finite resource. It was as simple as that. "It all boils down to real estate," a mother who was reading her daughter the Old Testament (a child's version) said to me in jest, but with the insight of conviction. "The entire story is about real estate. You know, the Promised Land, getting it, keeping it, getting it back, etc., etc."

  Remember the Hovs of Maine? Remember their conventional mortgage, how we followed it up to the end of the 1970s when everything changed? Now comes the sequel, an important part of this autobiography, for without it my story would not have happened. Real estate allowed two exceedingly talented financial wizards, a little bored with the monotony of always getting it right, to pluck an artist from the streets of despair and place her in the center of the beautiful, wild storm that was the mortgage securities market. A swirling storm, a wonderful whipping blizzard—the kind that settles over the city like magic.

  A family like the Hovs, buying their first home in the 1980s, went to the local savings and loan and took out their $100,000 mortgage, a thirty-year fixed, at 12.5 percent. (Remember those days?) But this time the mortgage did not stay with the bank. Instead it was sold off to a Wall Street investment bank, where it was pooled with other mortgages to form an investment vehicle so large that it would be attractive to the corporate, long-term investor—a pension fund, an insurance company, a foreign government even. The homeowners' monthly payments, interest and principal, became a revenue stream to pay the investors. Selling the mortgages gave the banks more liquidity, and this in turn was used to make more loans, and so the cycle grew.

  What would happen, my new mentors would patiently explain, giving me the most basic sort of example, is that they'd take the $100,000 and divide it by ten, each investor then having $10,000 (this example, a microcosm of the pool). That would be the bond, with a thirty-year amortization and the interest at 12 percent (37bps), most going to Fannie/Freddie for the guarantee and 12.5bps going to the servicing company as payment for sending out the monthly bills. But creating bonds out of mortgages wasn't quite so simple. The neat little bundles of debt changed as homeowners paid off a portion of the principal along with the interest, which meant that interest payments to investors diminished over time. And homeowners sometimes did unpredictable things: they sometimes defaulted or, more likely, prepaid the debt, if by chance they got a windfall or if interest rates went down significantly or if they needed to sell their house. This left the investor with sudden capital that couldn't be easily reinvested for returns that were as attractive. Known as pass-through securities, mortgage-backed bonds had been around for quite some time but did not hold wide appeal because of these inherent problems. But this had rapidly changed.

  The investment structure that I was swiftly learning about is the foundation of the proliferation of the American dream of homeownership. It became the cornerstone of a new generation of property barons (large and minuscule) and was fueled by an ethos first inscribed in our nation's birth document as the right to life, liberty and "the means of acquiring, possessing and protecting property." "Property" was changed by others to mean "happiness," and no one has looked back since. Owning property meant owning one's tangible share of happiness. And now, some 230 years later, a few roads converged to bestow this right on the American man and woman unequivocally and without bias—such a solid part of who we are as a people that foreigners (governments and businesses) wagered hefty sums on the lucrative American MBS market.

  This information I absorbed from Frank J. Fabozzi's Handbook of Mortgage-Backed Securities (the bible of the market) and countless other books I read over the next few weeks, in order to understand the history and the finer points of how the system worked.

  I developed my understanding of the contribution that Radalpieno, along with others, had made to the MBS market with the creation of the collateralized mortgage obligation, a product that addressed the underlying prepayment risks and thus structured the bonds in a more attractive fashion. The CMO divided the pools of mortgages into two-, five-, and ten-year bonds that would appeal to a broader sweep of investors with various maturity requirements and—a significant factor in the explosion of MBS trading in the late 1980s—by more closely defining those return dates.

  In other words, the CMO made it possible to reduce the wildcards for the investor so he'd have a more certain s
ense of when he'd get his principal back. The so-called tranches pay back principal according to a schedule, with the first tranche taking on the highest level of risk by absorbing the first prepayments. The second tranche absorbs the subsequent losses in case the equity tranche goes under. The third tranche, the least risky, absorbs whatever is left over. This form of CMO came to be known as "sequential pay" or "plain vanilla."

  With the restructuring of the mortgage pools came an explosion of other mortgage-backed security products—PACs and TACs and Z bonds and IOs and POs and floating-rate bonds and stripped MBS bonds and countless other derivative products that only the creators truly understood and that politicians had allowed to become deregulated—a proliferation that rivaled any boom but that quietly grew during the 1990s to a mega-scale. Also growing were ways to hedge. Insurance products were created, swap options and calls and puts and the like. With the secondary market, the shadow market, set up and ready to go, with the variety of possibilities for dicing and slicing the bonds (companies in France and in Texas, for example, owning the same mortgages) and for hedging them, the demand and need for mortgages from the primary market (that is, originating mortgages) multiplied exponentially. There was such a demand for mortgages that the primary market couldn't furnish them to the secondary market fast enough. And so with time, mortgage products in all colors, sizes and shapes were created and offered to home buyers. The secondary market soared. And the benefit: those 12.5 percent mortgage rates tumbled.

  At first, there were good reasons for the fancy mortgage products, for the teaser loans and the adjustable-rate mortgages, as they were designed to help wealthy people like bankers and lawyers, whose money came in lump sums at bonus time, to buy a house before the bonus arrived. Will Chapman, for example, bought Maine with one of these exotic loans. He put 0 percent down and got an initial teaser rate. He was betting that he'd sell his book to a publisher for a bundle and then be able to refinance the house in a way that created more certainty for the monthly payments. The advance from the book sale was not money he needed to live on. He had budgeted domestic expenses from money he'd made in the refinancing of his apartment and from a mass of accumulated savings from his days as a banker. Since his book was so long, he made a calculated judgment (with the advice of his agent, Sig Blankman—yes, she did become his agent) to divide the book in two. This, therefore, would bring him two hefty advances rather than one. If all else failed, he'd go back to the Street to fill his coffers. He'd been very good at what he did, and well liked. If they wouldn't have him back on the Street, he could sell Tribeca and move to Harlem and he'd be all right. (I loved the way these guys spoke, as though they were buying the whole state, the whole neighborhood: Maine, Tribeca, Harlem.)