Once upon a time there were some banks in New York City.They were big banks with billion dollar buildings and multi-million dollar traders. These banks had some really smart bankers. These guys could rattle off PE ratios in their sleep. Coming from the highest-tier MBA programs in the country, these bankers knew a thing or two about high finance. They also met some good friends in places like Boston, Los Angeles, and even Washington, DC.
Now, these super-smart bankers could do amazing things. They merged companies on a whim. They made up new-fangled derivatives with the click of a mouse. They were also very creative. You know, the kind of kids the kindergarten teacher used to praise by saying “Wow Johnny! That’s a beautiful picture – you’re so creative!”
And create they did.
They took junk mortgages from other banks and tied them together with a pretty red bow, just for looks. They named some of these new presents CDOs. In case you’re wondering, CDOs are kind of like real CDs. Except, real CDs are backed by the FDIC and the full faith and credit of American taxpayers. CDOs are backed by some guy named Billy who bought a $500,000 house when he was out of work. But to the creative-types on Wall Street, it’s the same thing.
So these really smart guys started trading their presents with each other. One guy said, “Johnny, I’ll give you a hundred-thou for that beautiful box with a red bow.” And Johnny said, “You got yourself a deal!” And everything went along great for a long time.
But then something happened.
One day, the bank called Billy. You remember him, right? Two years ago Billy told his mortgage broker, “I don’t have a job.” But the mortgage broker said, “That doesn’t matter anymore – we have ‘creative financing’. You can buy a half-million dollar house without any money. Just sign right here.” Billy was overjoyed and exclaimed, “Ain’t America great!”
But Billy couldn’t pay for his house like the mortgage broker said. And a year later, the bank didn’t care about Billy’s patriotism. In fact, they just wanted their 6 months of back payments. Billy stopped returning their calls. So the bank called the sheriff. The sheriff stopped by the house and took away Billy’s house keys. Now Billy is living in his van.
So what about all those CDOs? Well, despite their energetic imaginations, those really smart bankers decided CDOs weren’t the same thing as CDs. With the bank’s $500,000 house sitting on the market, Banker Johnny has all those beautiful packages with pretty red bows sitting on his balance sheet. Billy stopped sending Johnny his payments a long time ago. Johnny’s in a tough spot.
What’s a banker to do?
Remember what I said about those bankers? When they went to school, they met some really important people in Washington. Plus, bankers are really smart. Whenever they have some extra money, they give it to their good friends at the Capitol. You see, if you want a job in Congress, it takes a lot of money. And Johnny likes to help out all his friends.
So Johnny and his banker buddies gave their friends in Congress a call. They told them, “We’ve got a bunch of pretty boxes with beautiful red ribbons over here. We don’t need them anymore and nobody wants to buy them. We figure, Christmas is around the corner, and maybe you guys could use them at the office. What do say?…Oh and, who do we make out our checks to for next month’s donation?” So Congress decided they needed to help out their banker friends.
In the meantime, Johnny’s old boss tells Congress he’s got an idea. His name is Hank Paulson. Hank used to work at the same bank with Johnny, but now Hank has an important job in Washington. So Hank tells Congress to give Johnny and his friends $700 billion, you know, for old-time’s sake.
But here’s where it gets interesting.
Congress thinks $700 billion is a lot of money. They wonder where they’re going to get all that money. You see, they’ve been spending money like drunken sailors, and they don’t have $700 billion lying around. So they tell Hank and his banker friends they’re going to think about it.
Now Hank is a smart guy. Remember, he used to be a banker too. Hank really wanted his banker friends to sell their pretty packages with red bows. You see, if Hank can’t get that money, then Johnny may have to sell his 4th house in Vail. And Hank didn’t want that to happen to his old pal.
So Hank calls everybody together for a meeting. Everyone was there – from Obama to McCain to really important members of Congress. Hank even invited the President to come along too.
Things were really tense. At one point, Hank got down on one knee before the Speaker of the House begging her to help out the bankers. He said, “You see Madame Speaker, we just gotta have that $700 billion. My buddy Johnny needs the help. We’ll put it to good use, honest.”
So Congress talked about it. Their leaders thought everybody was agreed but they were wrong. They said “No” to Hank and the stock market plunged. This made Congress scared, so they thought and talked some more. They decided to help out their banker friends, but changed a few things to make the most of the opportunity. Instead of just saying ‘yes’, they decided to pad their districts, so everyone at home felt like they were getting something out of the deal. And that’s what they did. They gave money to NASCAR, wool research, wooden arrows, and more, and then signed the $700 billion check.
Was it a happy ending?
Hank was overjoyed. You see, Hank was leaving town in a few months and he wanted to be remembered for something. The bankers were happy too. They got their $700 billion and Johnny kept his vacation home in Colorado. More importantly, everyone in Congress was happy. They got to keep jobs and their friends on Wall Street, which always helps around election time.
But whatever happened to Billy? Sorry to say, Billy is still living in his van. But now, instead of just a foreclosure on his record, Billy also owes his portion of $700 billion that Congress gave to all their banker friends. So Billy didn’t make out too well.
But Johnny lived happily ever after.