“In suburbia,” Van Sickler said, “no one can hear you scream.”
A Ponzi scheme was a confidence game that succeeded only when enough people were willing to put aside common sense. Everyone involved was both being taken and taking someone else. The result was universal credulousness and universal fear. Carriage Pointe was supposed to be a little slice of the American dream, but it felt like the end of days. Van Sickler’s reporting there led him to conclude that the bust wasn’t all the fault of feckless homeowners, and he wrote a hard-edged piece exposing the role of developers and elected officials in creating the disaster.
* * *
Sang-Min Kim, nicknamed Sonny, had come to Tampa from South Korea. He was the owner of Body Design Tattoos, a piercing and tattoo parlor with an Asian theme. At one time or another in the middle years of the decade, Sonny Kim also owned a hundred houses around Tampa, most of them in the bad neighborhoods north of downtown, the same area where Kenny Rushing operated. In fact, Kenny and Sonny were business partners, selling houses to each other. By the time Van Sickler got on Kim’s trail, in the summer of 2008, Sonny had cleared four million dollars’ profit, and more than a third of his houses were in foreclosure.
Van Sickler drove around Belmont Heights and Sulphur Springs, two of the poorest neighborhoods in Tampa, to take a look at Sonny Kim’s properties. There was a decaying two-story stucco house at 4809 North Seventeenth Street, with a blue tarp over the roof, boarded windows, and mattresses piled in the overgrown yard. Kim had received it in 2006 for a hundred dollars with a quitclaim deed witnessed by a convicted drug dealer. Three months later, Kim sold it for three hundred thousand dollars to a buyer named Aracely Llanes, who borrowed the entire amount from Long Beach Mortgage, a subsidiary of Washington Mutual Bank. Van Sickler stood in the yard and looked at the house and thought about that loan. It was incredible. Did anyone from the bank do a drive-by to eyeball the place? Eighteen months later, the house was in foreclosure and the bank was asking thirty-five thousand. Van Sickler went searching for neighbors to find out whether anyone was living in the house, but it was nighttime in a dangerous neighborhood, and people didn’t answer his knock. Finally, a Tampa police car pulled up and a cop got out. “Someone around here doesn’t like you,” he said. A neighbor had called to complain about the tall white guy snooping around.
Van Sickler tried to track down Aracely Llanes. She had an Opa Loca address but no phone number—she was unreachable. Some of Kim’s other buyers were drug dealers, arsonists, the mentally ill. Van Sickler looked at dozens of the houses he’d flipped, and it was always the same: a derelict property, a minimal purchase price, a swift resale for a ridiculously large sum, a no-questions-asked loan, little or no money down, the buyer nowhere to be found, the house never occupied, the loan in default. An expert told Van Sickler that some of the buyers—they were known as “straw buyers”—might not exist, or might be victims of identity theft. Or they might be Sonny Kim’s partners in mortgage fraud. So might the brokers, appraisers, notaries, title agents, and ultimately the bankers who were in on the deals, some of them showing up again and again. Everyone was making money on Sonny Kim’s business, and the business of all the other Sonny Kims out there, while the bad loans seemed to vanish into the air.
Van Sickler kept reporting into September. In the middle of the month, Lehman Brothers went down. Lehman was one of the banks making loans to Sonny Kim’s straw buyers. So were some of the other big players that were suddenly all over the news and facing ruin—Washington Mutual, Wachovia, JPMorgan Chase, Countrywide, Bank of America, Fannie Mae, Freddie Mac. The headlines sent a shudder and a thrill through Van Sickler. It dawned on him that his local story about a tattoo parlor owner (which had already taken too long—his editors were showing a lot of patience) was connected to the story of the biggest financial crisis in decades. Down in Tampa he had the goods—the authority of his own eyes—that better-known reporters covering it from New York and Washington didn’t have. You could trace the Wall Street collapse right back to the house at 4809 North Seventeenth Street, and to the houses in Carriage Pointe and Country Walk.
The banks had thrown money at fraudulent borrowers to overpay for crappy houses because the risk was immediately passed on to someone else. There was a new term in finance, at least one that Van Sickler had never heard before: “mortgage-backed securities”—bundles of loans that were sold by the lenders to Wall Street, where they were packaged as bonds and sold again to investors for huge profits. The term inspired dread, like the name of a new virus. Now Van Sickler understood: here were the mortgages backing the securities. Here were the defaulted loans that were threatening to bring down the global financial system.
The conventional wisdom among journalists was that everybody was responsible for the financial crisis. “Greed just got out of control. We don’t know why, we just got really greedy, and everybody wanted a house they couldn’t afford,” Van Sickler said. “I think that’s lazy journalism. That’s a talking point for politicians who want to look the other way. We’re not all to blame for this.” He hated the kind of reporting that tried for a false balance and refused to draw clear conclusions even when they were staring the reporter in the face. His own work had led him not to “everybody,” but to certain institutions—government agencies, real estate businesses, and especially banks. Sonny Kim was just a front man. “It was systemic. Banks were approving these loans without human eyes looking at them, because the appetite was so huge. They couldn’t make these mortgages fast enough.”
Van Sickler’s story filled the front page just after Thanksgiving. Within a week the FBI got on the case, and soon after that Sonny Kim was cooperating, wearing a wire. Van Sickler waited for the feds to make their way up the food chain to the guys at the top.
SILICON VALLEY
Peter Thiel and his friend Reid Hoffman had been arguing about the nature of society ever since Stanford. Over Christmas in 1994 they had spent a few days on the California coast brainstorming about how to start an Internet business. Hoffman had Thiel read a new sci-fi novel called Snow Crash, by Neal Stephenson—a dystopia in which large parts of America have been privatized into sovereign enclaves run by powerful entrepreneurs and mafias, a kind of fictional precursor to The Sovereign Individual. The novel’s characters escape the violence and social breakdown around them into virtual reality through a successor to the Internet called the Metaverse, where they represent themselves through avatars. Snow Crash gave Hoffman an entrepreneurial idea, and he soon left his job at Apple to start a dating website called socialnet.com, perhaps the first social network on the Web. It didn’t succeed for various reasons—people turned out not to want to interact through avatars, they wanted to be themselves—but Hoffman continued to refine the idea, and after the sale of PayPal to eBay in 2002, he took his proceeds and launched a social network for businesspeople called LinkedIn. It was through LinkedIn that Hoffman met Sean Parker, and it was through Hoffman and Parker that Thiel met Mark Zuckerberg.
In the spring of 2004, Thiel and Hoffman were trying to talk their hyperkinetic twenty-four-year-old friend Parker out of suing Sequoia Capital, the investors in his online address book company, Plaxo. Owing to his libertine ways, Parker had been driven out of his own company, just as he’d been driven out of Napster, the music sharing site, a few years earlier. Thiel told him that rather than entangling himself in a lawsuit, he should start a new company. Three months later, Parker came back to Thiel with the news that he’d just become president of Thefacebook, a college social network with four employees, and that the Harvard sophomore who had founded it needed money because the number of students clamoring to get on was increasing and would soon overwhelm the computers. Hoffman, who had been tracking Thefacebook and Mark Zuckerberg all year, recused himself from becoming the lead investor because it might be seen as a conflict of interest with LinkedIn. The natural choice was Thiel.
Thiel liked to say that, on principle, a hard-core libertarian shouldn’t put his mone
y in social networking. If there was no such thing as society, only individuals, how could there be any return on the investment? Ayn Rand wouldn’t have invested in Thefacebook. But Thiel, placing rational selfishness ahead of ideological purity in a way that wasn’t completely inconsistent with the principles of Objectivism, had been interested in social networks for a while. This one looked like it might succeed where others, such as Friendster, had failed. The consumer Internet was still in its postcrash doldrums, and for once there were more good ideas around than investors chasing them. Thefacebook was already on about twenty campuses, operating under a benign version of the Brezhnev Doctrine: once a college was targeted for a takeover, pretty much the entire student population was captured in a matter of days, and the process became irreversible. With such an intense user base, it seemed that Thefacebook could go reasonably far. Hoffman had talked to the engineers and they had seemed quite good. So in midsummer 2004, Thiel agreed to meet Zuckerberg at Clarium Capital’s offices in the heart of San Francisco’s financial district, on the forty-third floor of 555 California Street, a granite skyscraper that had been the headquarters of Bank of America until it moved to Charlotte in 1998.
Parker did most of the talking for Thefacebook, but Thiel gathered a strong impression of Zuckerberg. He was only twenty, wearing a T-shirt, jeans, and rubber flip-flops, and already stubborn about what he wanted, with an intense focus, a coder’s introversion, obtuse to the point of Asperger’s about other people (something of a paradox in the founder of a social network). He matter-of-factly described Thefacebook’s dramatic growth while making no effort to impress Thiel, and Thiel took that as a mark of seriousness. By the end of the meeting—which stretched on for most of the afternoon—Thiel had made up his mind to become an angel investor in Thefacebook. He would lend the company half a million dollars—“seed money”—which would convert into a 10.2 percent stake and a seat on its five-man board.
As the meeting concluded, Thiel told Zuckerberg, “Just don’t fuck it up.”
Years later, after Zuckerberg did not fuck it up, and the number of people using Facebook passed half a billion, and the value of Thiel’s stake rose above $1.5 billion, and the story of its early days was made into a Hollywood movie that portrayed Zuckerberg and Parker in a less than flattering light, freaking out both of them, Thiel went to see The Social Network at a movie theater in San Francisco with a small group of friends. The meeting between his character and Zuckerberg’s took thirty-four seconds of screen time, and although he came off well, relatively speaking, he also felt that his character looked too old, too much like an investment banker type—Thiel normally wore T-shirts at work, not button-down blue shirts. Later still, after Facebook went public in May 2012 and its stock price immediately began to fall, Thiel sold off most of his remaining shares, for a cash total of over a billion dollars from his original five hundred thousand.
The same year as his meeting with Zuckerberg, 2004, Thiel cofounded a company called Palantir Technologies (the name came from a crystal-ball-like stone in his beloved Lord of the Rings), which took software that had been used at PayPal to combat fraud by Russian gangsters and developed it for complex data analysis, finding subtle patterns in torrents of information to make it easier for government agencies to track down terrorists, fraudsters, and other criminals. Some of the seed money came from the CIA’s venture fund, but in its early stages, Palantir depended heavily on Thiel’s thirty-million-dollar investment. He became chairman of the board, and after Facebook got too big for its offices at 156 University Avenue in downtown Palo Alto, Palantir moved in—right across the street from where PayPal had its start. Eventually, Palantir would be valued at $2.5 billion. Thiel was on his way to becoming one of the world’s most successful technology investors.
Clarium Capital was doing every bit as well. Thiel’s was a global macro fund—it depended on analysis of world markets and government actions at the highest level. In 2003, its first full year, with $250 million under management, it returned 65 percent on investments. Thiel’s strategy was to take the big-picture view of long-term trends and place bets that went against conventional wisdom: long on Japanese government bonds when others were selling; long on energy, because he was convinced that peak oil was real and global supplies were running out; long on U.S. treasuries, because he foresaw an anemic economy following the Bush recession of 2001. Year by year, Clarium enjoyed meteoric growth, topping out around seven billion dollars by the summer of 2008, a seven-hundred-fold increase in six years. The financial press began to talk about Thiel as an investing genius of a contrarian. To him, that only meant he thought for himself. Most people outsourced their thinking and deferred to the majority, the herd. There weren’t enough Robinson Crusoes in the world.
Clarium moved to the fourth floor of a brick-and-glass building at the edge of Presidio Park, with splendid views of the Golden Gate Bridge and the Pacific. From his corner office Thiel could see Alcatraz and the Marin hills. The building was on the grounds of the San Francisco headquarters of Lucasfilm, the first floor decorated with statuary, from Thiel’s favorite movie, of Darth Vader and Yoda. Clarium’s sitting area was divided by bookcases of dark hardwood containing leatherbound editions of Madame de Sévigné, Dickens, Darwin, and George Eliot, along with books on structured finance and quantitative research. At the center stood a table with a chessboard that awaited players.
There was a hundred-dollar penalty for arriving late at the weekly 10:30 a.m. trading meeting. One Tuesday morning the subject was Japan. Eleven men in blue, white, or striped shirts without ties sat around a long conference table. Thiel presided from the end.
“The secret of Japan is that nothing ever happens,” he said. “If I were Japanese I’d be fed up with years of stagnation, but I’m not Japanese, so who knows?”
Thiel’s top trader, Kevin Harrington, a former Stanford Ph.D. candidate in physics, weighed in. “The old people in Japan are satisfied. Their assets have been going up. It’s like the boomer class in the United States that thinks everything’s going to be fine.”
“Do you think we should be short?” another trader asked.
“It’s been a mistake to be short Japan for the past twenty years,” Thiel said. “I don’t have a strong view on it. But if something goes wrong it could keep going. The political question is: Is Japan an authoritarian country, or is it a country where there’s no government at all? I don’t think it’s a democracy—you can set that aside. Is it the Japan of the seventies, an authoritarian corporate state where you can force people to save a lot of money? Or is it like California and the United States, where the deep secret is there’s nobody at the steering wheel at all? People pretend to be in control, but the deep secret is there’s no one.”
For half an hour the meeting turned into a seminar on Japanese history and culture. Finally, Thiel asked, “What are people optimistic about?”
“Enhanced oil recovery in the United States and Canada,” a young trader said.
A trader named Patrick Wolff, who was participating by speakerphone, said, “I will betray my libertarianism, but the state’s monopoly on energy is rapidly eroding.”
“Next week,” Thiel said, “it would be useful for people to think about what they are optimistic and hopeful about.”
As at PayPal, Thiel hired people who were like him. Clarium developed the reputation of a Thiel cult, staffed by young libertarian brains who were in awe of their boss, emulating his work habits, chess playing, and aversion to sports. Because Thiel saw a housing bubble, he was adamant that his employees not own their homes. He rented a ten-thousand-square-foot white wedding cake of a mansion in the Marina, a short drive from Clarium, with a terrace view of the illuminated dome and arches of the Palace of Fine Arts.
He began to live the life of a Silicon Valley billionaire. He employed a staff of two blond, black-clad female assistants, a white-coated butler, and a cook, who prepared a daily health drink of celery, beets, kale, and ginger. At his private dinner parties,
guests were given a menu printed with a choice of entrees. He flew everywhere on private jets. One year he took his closest friends on a surfing trip to Nicaragua, another year on a river rafting trip to Zimbabwe, security guards in tow. Thiel was emotionally opaque, in an amiable way, but he showed a taste for decadent display while keeping his personal indulgence to a minimum, like Gatsby making phantom appearances at his own parties. He bought a Ferrari 360 Spider for fun and speed (his everyday car was a Mercedes SL500), paid for driving lessons at the Las Vegas Motor Speedway, and started a magazine called American Thunder, dedicated to stock car racing and the “NASCAR lifestyle” of hunting, fishing, and country music. (Despite being carried in two-thirds of Wal-Mart stores and featuring Dale Earnhardt, Jr., on its first cover, American Thunder folded after four issues.) He bought a San Francisco restaurant-nightclub called Frisson, where he hosted Facebook’s million-users party. He threw other parties—fundraisers, book or company launches—at his mansion, for fifty or a hundred guests, and at the most outré the male servers sometimes went shirtless or wore nothing but aprons. He contributed millions of dollars to conservative causes and candidates. After the housing bubble burst, he bought the San Francisco mansion for $6.5 million, then an oceanfront spread on Maui for $27 million, and he rented a loft above Union Square in Manhattan. His houses were decorated in impeccably contemporary fashion for no one in particular.
The Unwinding Page 24
