How the 2008 Housing Crisis Burst The American Dream


Episode Transcription

Hey, welcome to things I learned last night, today's topic is the two thousand and eight financial crisis. What a great time. We talk about all this stuff that led up to it. We talk about the history all the way back to the early nineteen hundreds that led us to where we ended up in two thousand and eight. If you're not familiar, just google two thousand and eight. So if you could do as a favor and share this episode unlistened, don't even listen to it yet, just sure. That's the easiest way to help us grow a show. And it's awesome. So here is the episode. Hey, man, man, hey, don't when you do this, it just throws me off my grave, man for the whole episode. I'm gonna be freaking off because of that. What are you okay? I'm not gonna lie. I saw that hat and out out of the corner of myt I thought it was a Vietnam veterer. For those listening as a Korean War veteran, No, it's an odd job at right, Yeah, I mean, I can't wear an other hat if it's on your head. It's an odd job at that's yeah slogan. Have you ever heard of the two thousand and eight housing crisis. Are you really going to try to do this? Yeah, we're going to give it a shot. We're going to give it a good old college trial. This is not financial advice. Also, this is not finding qualified financial advice. Anything I say is qualified by life experience. Okay, anyways, have you ever heard of it? I may have. I may have had my early adulthood impacted by this. Yeah, so this is something that we probably don't need to introduce, but if you missed it, you're one of our younger listeners. The year before you were born, it was something called a housing bubble and it popped. And here's here's the thing. What a lot of Just so you know, before two thousand and eight, we all lived in a bunch of houses that were just big old bubbles. They're big, huge bubbles. And this guy went around with the par of scissors and he just popped them on. They were like, this is a christ eight million homes. He was a busy man and no one could stop No one could stop him. He had this laugh that you could hear him coming, and it was terrifying. Yeah, you just hear him the distance. Yeah. Turns out the only thing that could stop a bad guy with a pair of scissors. Was that it was a complete financial collapse of the whole system. I was gonna say it was the sec I believe. In the seventies, banks started having ideas. And here's the thing. When a bank has an idea, we should say no. It's also a side house for my dad did in a giant bake. Yeah, stole people's homes. Things I learned last night. So okay said, where do we start? Then? Obviously don't start in to us and eight that's where we end. Yeah, we need to start at the very beginning of the story, which is the nineteen thirties, the ghost of Okay, when we came up with the idea. Really, we came up with the idea of home ownership because before then it was pretty rare. I mean, people owned homes, but it wasn't like you built a home. Yeah, you built a home, you found a place, you found an empty plot of land, and you said, I live here. Now, it's pretty incredible. How could I've been reading that the Economic history book? Yeah, and people just don't understand how poor everyone was. It's bonkers in the eighteen hundred, I mean, like for all of history yeah, until like the early nineteen hundreds, and the early nineteen hundreds was the first era where it really genuinely wasn't. Most people were just born into the home your family always had, and it was like, how did this get here? We don't really know, but it's just always been here. Yeah. The people who built that home genuinely, like you know that first episode of Survivor when they build the hut, Yes, that was how that house got there, Like your ancestors got somewhere and they were like, this is where we live now, and then they just built something on it for free. So kind of if you're in Oklahoma, go outside your house right now it was three point sixty and then curse your grandparents because why why here? Yeah, and they didn't really know we're in North Dakota. Yeah, that's why I did to show it in a at a college in North Dakota. And on stage I was like, I just moved to Los Angeles and someone in the second row went, oh, I'm sorry out Wow, that's annoying, and I went, you live here? Have you looked around? Have you you have used again in this place? Yes? Well they are building the tallest building the world. This yeah, I was saying I did that North Dakota. But oh oh yes, yes, they are building the tallest building the world in the Oklahoma. They just got approval because a rich person went to Oklahoma and was like, this will do Yeah, just like your green beards. Uh. Anyways, have you heard of the skyscraper index? Have we talked about this on our show? Have you heard of the skyscraper index? Skyscraper index? We've tied around on the show. Go ahead and briefly explain it. So the skyscraper index is the idea that right before a financial downturn, they either someone proposes and begins the process of building the new toass building the world, and that is either like a national so it's either I'm building the TASS building in my country and then shortly after that begin that process begins that country has a financial downturn, or I'm building the TASS building in the world. Shortly after that there's a financial global financial downturn. And this happened with You can take it all the way back to the Empire State Building. My dates might be a little foggy here. The Empire State Building preceded the Great Depression, and then the world Trade Center predated the seventies. Crash dot Com was there's a handful right before the dot com. Patrona's towers is the one that comes to mind, but there's a handful right before that. And then two thousand and eight was birsh Khalifa, twenty twenty they actually had music. Twenty twenty they had right before twenty twenty there was the Jetta Tower, which was supposed to overtake the Birch Khalifa, but they ran out of funding halfway through. So there's half half of it's built right now. And I don't remember where they were building that actually no that but and so Jackson, Mississippi. So the idea is that if you can come up with enough fun to build the tallest building in the world or the tallest building in your nation, then there is an influx of cash in the market. That's an indicator that we're about to have a crash, is the theory, got it. It's not a it's not a fool proof thing because like it's sure, it's the like correlation does not prove causation, and like it doesn't always happen. Sometimes there's have been tallest buildings in the world that have been built and then there wasn't a crash after it, but it is it does happen a lot. Well, the word where the world Trade centers the tallest buildings, and yeah, when they were built, yeah, they were about They were abuilt the same time as uh Sears Tower, and they both I'm pretty sure they were equal size. I think I think the Oklahoma City building will be the talls in the world. No, the toss in the country. Oh okay, there'll be the toss in the nation US economic Yeah, yeah, it is the theory. Whether that'll happen or not, I don't know. I mean, it does look like a cool building. I'll go, sure, I'll go visit it. It's gonna be one of those like you can live and do work and play in this building. I mean you could do that in any building, but this is like everything is in that building. But that's what I was saying, is that people don't realize how poor the world was in the eighteen hundreds and early nineteen hundreds. Yeah, because pre eighteen seventy ninety percent of the world lived on poverty wages, which adjusted for inflation, was less than two dollars a day. Yeah, right, and that would be two dollars a day into day's money. Yes, right, is what they were living on back then. So I don't know a nickel and a button, But pre eighteen seventy ninety percent of the world lived like that. I mean all of history before, not just like not just like a few years. All of history there were the rich people that we know of, and then there was everybody else. Yeah, in extreme extreme power. Now that number in twenty twenty four is less than eight percent, So that's how much we flipped that, yeah, which is still like that means there's still there's still stuff to the world. There's still a lot of people who it is eighty is insane amount of growth that has happened in the last one hundred and fifty years. So when we think of like early New York and like you know, like the nineteen tens through twenties and all that stuff, like these these apartment buildings being built for a lot of people, that was their first structure home was a Oh I can rent in an apartment, and that is you know, that's where I live now. Yeah, yeah, and that instead of in my tents and yes, makeshift things that I live in exactly, and most of the people renters, and that's why people flooded to the cities because there was structures that they could live in. Yeah. It was like, holy, how I can live in like a real place for the first time ever and work in a real place. Yes, yeah, there was a lot. It was, It was, it's it was and still is a wild time to be alive. So in that era, mortgages became a thing. There became a thing to do markets because up until well then, you could build a home right and throughout the early late eighteen hundreds, early nineteen hundred, but you had to have the You had to just pay for it in cash upfront couple grand which at that time was a lot of money and less money cost less now cost less to build a home now, but still was expensive and not a lot of people had access to that kind of wealth. So the banks had an idea, local neighborhood banks said well what if we loan. We build a loan they called it the mortgage to offer people the opportunity to build a home that mortgage typically and it was different from every bait because this was like a neighborhood bank thing that was doing this and so, but typically it'd be a five year loan, and you would pay monthly premiums on this loan, and then at the end of the five year term, you would pay the remaining balance. And so if you got a twenty five hundred dollars loan, you're probably paying forty bucks a month, and then at the end of the five year term, whatever's left probably seventeen hundred. You're paying that lump sum payment off at that time, and so still five hundred dollars loan, five years, four a year. I just threw a random number out. I wasn't doing the actual math, but you're paying a premium, so you only a little bits going towards principle like a normal mortgage would happen. I don't know, I didn't do the math. I'm just throwing numbers out for fun. What is not financial. As we get further this episode, you got to realize this. That's why this happened, because there just throwing numbers out for fun, and so at the end of the at the end of the term, you just made the lump sum payment for whatever the balance was on your loan. Obviously, this still excluded the majority of the population from being able to do something like that right because you had the lump sum payment. And so after the war, you know, the war, the American dream happened and everyone wanted to have their own home, and so banks got clever and they created the fifteen and later turned into the thirty year mortgage, where instead of having a lump sum payment do at the end, you through the course of that term would pay off the tire loan. Shout out with the fifteen because mortgages weren't as expensive, homes weren't as expensive at first, and then over time as home values increased and got more expensive, they increased to thirty years. So that way the payment, the monthly payment would be something that the average person could actually afford to make and eventually pay off their loan. Naturally. Here was the thing. Banks were very, very very picky about who they gave mortgages to because they wanted to get their money back. That was the only way this made sense was alone, and they earned money off of the ability of the person to pay for that entire fifteen or thirty years. And so there was now a vehicle for people of pretty much any income level to get a loan like it existed, but in reality, the majority of people didn't have access to a loan because the majority of banks were passing on people right because they didn't trust them to pay back the loan. And so I believe in the seventies banks started having ideas, and here's the thing. When a bank has an idea, we should say no. Hey, if you've been watching for a minute and you like this show, a great way to help out is by becoming a Patreon supporters. Our patrons get a ton of perks for their support. They get ad free episodes a week early, they get a discord with our host and producers. We do monthly hangouts. There's a way to get birthday messages on your birthday. There's a lot of great perks. But more than anything, you just helped make sure that this show continues to happen forever. We never want to stop. We're gonna keep doing this forever. If we have enough patron supporters, we can put our brains in those little vats and like have AI pretend it to us and so we can keep doing it long after we die. But that only happens if you support us on Patreon, So we appreciate your support. Thanks for your help. If you don't want to support, that's totally fine. Thanks for being here. We really appreciate you watching the show and the Ghost of Tiothy deckstay JP Morgan. So, in the seventies, banks started campaigning for deregulation, and it took a while, but in the nineties they started winning these deregulation campaigns and basically banks for a long time had a lot of rules that they had to fall. They still have those rules, but they have been fighting to have looser and looser rules so they can play whatever game they want to play instead of playing the game that you know, doesn't screw over the whole population of people. And so they developed in the seventies a new way to do this. And so instead of a local bank buying or giving you a mortgage, you're paying the mortgage and then they hold it until you're done paying off the mortgage. The local bank would sell you the mortgage and then you would start paying that local bank, and that local bank would immediately turn around and say sell that. Hey, bigger banks, you guys want a mortgage, and they would be like, yeah, we love, we love, we sick they were. So the smaller bank is off the hook. Now. Yeah, the smaller bank pays the full price of the mortgage to the bigger bank, and the bigger bank says, if i have enough of these mortgages, then I'm spreading my risk wide enough. The majority of people are going to be able to pay this, and so if one person doesn't, I'll just repossess that and we can resell it and get our money back in there's not as much risk if you're so that was a side house. So my dad did well in a giant bank. Yeah, he stole people's homes. Uh no, no, no, no. When when houses would get repossessed or foreclosed on, Yeah, and they go for auction, okay, the bank pays somebody a couple of grand yeah to clean the house. Yeah. And because like the people who get foreclosed on and they they rip that house, they're rash. Yeah right, yeah, and so it's somebody's job to go in. You don't got to fix anything, it's just just vacuum. Yeah. Yeah. Well I helped with a couple of these, and it is not just vacated because these people pee on the floor. Oh I'm sure, yeah, they I mean they just take all their dog food all over the place. You know, they thrash it. They take red paint and toss it on the walls and do handprints and stuff, and you can leave that. Who cares? You know? Yeah, but but it's also like they haven't taken care of their yard in six years, And so how did I not? I just had like an epiphany. This never I never connected that dot because I've knew that I've heard of this before. Right when we were shopping for a house, there was this house that we loved, this house. It was a beautiful house. The price was so much lower than it was worth, and it was way bigger than well we could afford. But the hardwood floors were covered in blue paint and the ceiling has splashes of blue paint. There was like water damage in the basement on all the walls, like it was like it was thrashed. And we were like, man, this house is great, we love it, but it's it's so much worm to flip it. Yes, yeah, and so we passed on it. And I don't know why we We just were like, man, these people are like did they try to paint this and spill? Like what happened here? Why did we never? Because I knew that interesting, that's funny. And so like there you know the backyard. We would mow the backyard and it's like six feet tall. So it took three days to yeah backyard. Yeah, yeah, So that was one of the side hustles I tell you have I told I've told that Storty of the candy shop that I worked for when I mowed that lawn with candy as much as I want. Yeah, it was that. But I told you why I got the job to Like you didn't want to eat any of the candy these people left fair yeah, yeah, same thing, same thing. So the banks would sell these out to bigger banks, right, and the bigger bank would spread the wrist for and they were okay with that. Well, then the bigger banks were like, wait a second, what if we sold these? They're like what if we also sold them? And so those banks would sell it to another bank, would sell it to another bank, and this would go down and like minimize the risk for they would go because they'd hold it for a little bit, get some premium payments, make a profit, sell it for a little less and it would and eventually your mortgage is getting sold off for pennies on the dollar. Yeah, because which is the same thing with medical debt and any student loans, any debt, it's doing this process. Yeah, there's a lot of people who can trace their student loans back to a company that didn't do the proper paperwork and get their whole loans forgiven. And that's true of any debt, most debt. Most most people buying debt are pretty like good about that because obviously that's they know that they can lose it. But yeah, if you can find the paperwork, is not like, you know, two million dollars worth of debt for forty grand, Yeah, exactly, And then they'll go try to collect the two million, and they know they're I going to collect the full two million, but they are hoping you'll settle at seven hundred thousand. Have we talked about that church on here? Yeah? Yeah, and so, but yeah, that happens. Like like when I bought my house, same week, I got a notice that my mortgage had been sold to a new bank, and I remember calling my dad and being like is this legit? Like should I pay these people? Is this a scam? Like I didn't know? I was like, this is weird, Like it is fast. They don't even sit on it for a second. And so then they were like, hey, how can we make this even less risky for us? And so, uh, that's when they started creating trickier what's the word I should use for this? I guess they're I guess they're just financial tools. But it really they're tricks, trying to set you up that they know you're gonna get foreclosed on because they can make a profit off your loan. But then they can also make a profit on the property. Yes, yes, and so this so they're giving you a loan that they know you can't pay back so they can make a little bit of money on it, and then they know that they're going to get the property in the end. Okay, so that's kind of the direction we're headed. We're not there yet. So they created mortgage backed securities and this again, this again was like a way where they could protect themselves a little more. So. You buy alone from a local bank, are you green? Yeah, you're green. You buy a loan from a local bank. And this is actually they've skipped a step in this graphic. But you buy alan from the local bank. That bank then sells it to a big bank. Who's probably going to sell it to a bigger bank, and that's going to happen a couple times, and then eventually that biggest bank is going to get it. One of the top like seven banks in the world's going to end up with it, and they're going to have a pool of literally hundreds of thousands of mortgages, right, And what they do is they stock them into groups of mortgages and then they they sell these securities to investors on like that do trade funds like mutual funds, and they package them in with the mutual fund and they say, look, here's a bunch of mortgages, and this fund grows by buying into it, you're getting a share of the interest. Yeah, you get to share of the interests as interest payments are made. Got it. And they because there was regulation at play, they had to package them with different quality of loans. So basically they ranked loans and they said, here's a high level of repayment, here's a mid level of repayment, here's a high risk of foreclosure. Basically, and they would package all together so the risk would get spread out, right, and there was a high level that thinks were going to be safe one package was just now they're all bad. Yeah, and so that was a very similar vehicle called CDOs, where your asked it would get bob bay the bank. The bank would send it to an investment bank. It would get put into this group either a senior mezzanine or equity is what they called them. Senior were really good, mezzanine were fine. Equity was very very low quality, and they would sell them off to hedge funds and insurance agencies, funds, things like that, and investors would buy it and hope that they were going to get a return on the investment. There. This worked for a little while we were selling shares. Yeah, they were selling shares a pool of debt essentially, And so you're like, you weren't selling the debt to the investors, They were just selling a share of the interest. Yes, and so it is like investing in a stock and a whole bunch of debt. And so you got a little piece, a little kickback of that interest payment every month. Sure, and your value slowly goes up. And this was a really honestly like a really smart way to spread out the risk, to make it to where now a lot of people had access to mortgages because the banks didn't have to be so choosy with who they gave you that just you having a mortgage was something that would pad there. Yeah, they knew. The small banks knew that, no matter what, I'm going to be able to sell this mortgage, So I can give you a mortgage and I don't have to worry so much about your ability to repay the full amount. I just have to know you can make some premium payments. And I don't have to know you can make it for thirty years. I just know you have to make it for four months until I sell it. The bigger bank only has to know you're going to be able to make it for I don't know however long. Their profitability ranges a couple of years, and then they just package it with a group and there's the risk as much lower. Well, as the deregulation train started moving and more people started campaigning in the government to allow them to loosen the rules for these mortage companies, they were able to pass legislation that allowed them to start to sell subprime mortgages. And that's when this system started to get really dangerous, right because it became a thing where you have more, you have more subprime loans in a group, then the high quality loans can cover. Yeah. So the majority up until this point, the majority of people who could get mortgages were people who were probably going to be able to pay the back their whole langage. Like there were people who had career jobs that and they had room in their finances, didn't have weren't overburned with debt and stuff like that, right, and so it made logical sense that they were going to pay this back. The subprime mortgage made it to where it didn't really matter if if someone was willing to sign the paper, they could get a mortgage. And so just kind of what car loans are right now, kind of if you, if you could sign the paper, we'll give you the loan. Who cares, Yeah, Because what they know is the person giving you the loan doesn't matter. They're not going to have they're not going to be on the hook for this loan because they're going to give it to someone else. And even the person that they give it to doesn't matter, because they're going to give it to someone else, and then that person they think they've spread the resk risk out wide enough that it doesn't matter if you repay, because we have enough people who are going to repay. We're never going to lose money on this situation. We're always going to return even if you only return us twelve dollars. Right, So, the subprime mortgages started moving, and a lot of well you're in now, early late nineties, early two thousands, a lot of small bankers are saying, Hey, I am a salesperson of mortgages essentially, and I get I get a commission on my sales. And so for them, it almost doesn't matter what comes through the door. I'm going to sign off on it. I'm going to sell them the highest mortgage I can sell them. And so someone comes through the door that can afford a two hundred thousand dollars home, I'd be like, why don't you do five hundred thousand. I can get you a five hundred thousand dollars loan because they get a commission on that no matter what. And so there is definitely some shady and I think there's two things going on here. I think there's sh shady, greedy people who are taking advantage of a system, and there's also probably a lot of bankers like I can think of people Mount Vernon in my hometown who would be like, oh, you're like a proof for much higher you could yeah, and they think that it's a good thing. They think it's like, why would you settle for this when you can afford this, We could get you in a five hundred thousand dollars home, Like why would you not? And a lot of people would come into banks and have a banker tell them stuff like that, and they would trust them. They'd be like, oh, this is a bank. The bank would lie to me about this because people were like, well, the bank to get their money back. They understand. They didn't understand the whole system behind this, because I think a lot of people, especially first time home buyers, think, when I come in and get a mortgage, I'm going to be paying this bank back forever, and so they're not going to give me more than I can actually give them because that hurts them. But that's not how the system worked, and so there was a lot of room for greed and corruption to run his course and misunderstanding to run his course, and that started flying. Meanwhile, another very interesting thing came out in this era called the credit default swap. Have you heard of this. No, basically, it's insurance on these CDOs the debt piles. So essentially, if I am a mutual fund and I'm buying a bucket of all this debt, yes, I could go to AIG and buy insurance and buy insurance on all that debt. So if for some reason, which I don't think it's going to happen, but just in I could pay a monthly premium to this insurance company, and if ninety percent of the people in that debt pool default on their debt and then that just collapses, this insurance company is going to pay me back one hundred percent of the value, and so I'll be safe. And so these insurance companies were allowed to sell this where it's like dipping into their profit a little bit, but it's making it so you guarantee no loss. Yeah, you're not going to lose any money. And so these insurance companies just like banks, which maybe we should talk about this for a second. Do you know how banks work with terms of like the cash they have on hand versus the cash that they have on accounts. Yes, they're only required to hold twenty five percent of the total value of the accounts that they have because the expectation is that you're never going to have you're going to a bank run where everyone's getting one hundred percent of the money out. Yes, yeah, and that's why bank runs kill banks, because everybody tries to withdraw more than the bank has, and the banks like, I'm sorry. And so what they're doing their whole business model is the thousand dollars you have and you put into your savings account, they are taking it and investing it, Yeah, make interest on so that way, when you go with's all your thousand, they give your thousand back, but they've they've made you know, eight hnmes, they've been investing it. Yeah, just like Starbucks. Yes, have we talked about that. I don't know if we've talked about that. The Starbucks when you put money on your Starbucks gift card in your account in your app, it says you have two dollars and fifty cents. So Starbucks has your two dollars and fifty cents. You put in ten dollars, they gave you ten dollars of credit. Yea. Now they've got an asset and they've got billions of dollars. They've almost just over two billion dollars sitting in the Starbucks accounts, right, yeah, and they can then leverage that for investors where they go listen, I mean, if it all comes down to it, we've got two billion dollars. Yeah. Yeah, and it's an asset to them. Yeah, and so they're able to go get loans. They say, look, we have this, we can give you two billion dollars if we don't pay back this loan, which is insane. And so there's essentially spending your gift card money. It's crazy on other things that Starbucks. You put, you put money in the Starbucks app that you could only spend at Starbucks, and they said, thanks, we're gonna spend this everywhere else. But honestly, like even like this, the concept of gift cards as a whole is that they fully expect you not to drain it down to the last dollar. Yeah, you know, and I fully expect you to buy a five hundred dollars gift card and then you leave thirty two dollars on it, and now they've just made thirty two sit on a forever yeah yeah, and they can and they expire. Yeah, and he's going home. Yeah, we got thirty two bucks. Yeah, yep. And if they do that enough, they've got a lot of dollars. Yeah, that's how That's why every pretty much every fast food restaurant now has an affort with the where you deposit funds because everyone saw Starbucks do that and we can go there. That's smart, that's so smart. So yeah, you learned something. Maybe you learned something there, and every rich people do that just in general, like rich people will have rich people will put the majority of their wealth into market funds and things like that, and they will borrow against it, so they're living off and that's where it's like off of loans, right, and that's where people are like, oh well, billionaires don't actually have a you know, a billion dollars laying around. Yeah. Yeah, but it gives them the ability they can do some really cheeky stuff to which is why they never run out of money because they can be that why it's very it's really hard to mess up being rich. Yeah, if you're once you hit a certain point, it's tough to run out, right because even even if you have if you even if you just have like a million dollars in a fund, like you are making an income off of that, like off of interest on that that you can survive off of pretty much indefinitely unless inflation gets ridiculous. Right, So, anyways, money is a crazy thing our system, and here's how it breaks. And so the insurance they were ensuring all these things, and same thing as those banks, they didn't have to have one hundred percent of the value of what they were ensuring, because everybody expected there's no chance that one hundred percent of these are going to fail, like people are going to foreclose on these homes, and so they only were required to have twenty five percent of what they were insuring on hand. They had ensured I think it was like three point four trillion dollars worth of these credit default or CDOs right in by way of credit default swaps in insane number. And so we kind of have these two things that are bubbling up at the same time that are very, very dangerous. The good thing is we had a system for this to make sure we weren't messing anything up. And they were ranking agencies, and so there are these there are a handful of ranking agencies in on Wall Street that were third party agencies. They were not a part of the banks, They were not a part of Wall Street. They were not part of these insurance companies. And what they would do is they would get these tranches and they would look at this collection of debt the CDO and they would scour the paperwork and they would rate the quality of that whole trunch. And so they would say, based on everybody that's got a mortgage in here, here is our rating of the quality of this. Basically, like the risk rating, triple A was the highest. You get double AA, B, double B and whatever all the way down that line. And so if you're an investor, you're looking for triple A rated debt obligations here because you're like that's safe. That basically means that you're not going to have a lot of people for closing within this. While these agencies were paid by the people selling the CDOs, that was where the money came from. This wasn't a government organization. They were paid by those people. Sure, if they gave them a bad rating, they would go to the other one down the street and get a new rating. And so they had no obligation to do anything other than give a triple A rating to everything that came through their door. And so that's what they did. Okay. And so it seemed like we had a system to save this, but this is no oversight. Didn't do anything, okay. And so there's all these triple A rate of stuff and all these investors are buying this triple A rate of stuff. They think, oh, everything's gonna be great. We're fine. There's no risk involved in any of this because triple A. And they said it is and we trust them. Can't trust them, so they said so, they said so. And then speaking of ratings, it's a great time for you to leave a review if you listen to the podcast app while okay, or we haven't asked them to do it, Yeah, it's been a while. I'm doing it right now. That's what I'm saying. We should ask them to do it. We should. That's a great idea. Why don't we ask them to leave a people ask them to leave a review. It's a great idea. You can do it on any app that you're listening to. Hey, yeah, rate us triple A and the and here's the deal. If you don't rate a triple A bl we'll not gud someone. We're gonna find someone else to do it. Put it in the in the review and if you're on YouTube, put in the comments or subscribe you coward, okay, and that bell icon. Hey, thanks for being here for this episode of thanks A Last Night. If you want to help us grow our show, the easiest way to do that is to share it. Send this link to somebody, be like, Hey, this is a fun podcast I listened to. I would love it if you would listen to it with me, because that's probably how you found the show. Someone you know shared it with you and you were like, this is pretty good, and so it helps us a lot, and it makes it so that we can keep doing this and make episodes until one of us dies Tim but please share it and I will still be here after he's long gone. Here's what's crazy. Yeah, we've been talking a lot about this and and maybe I don't know if this is we here we'll do We'll try it. We'll see what happens, will you and I? You and I have been talking a lot about this. We'll see what happens. We have a plot. Okay, No, do we have a plot. We have a plot? No, here's the thing. Here's what here's an interesting thing. We've noticed. Uh, the internet has changed. Okay, you used to see the stuff of the people you followed. Oh sure, sure, sure, sure, sure sure shirts, And now you see the stuff of the people that the robots think you want to see. Yeah. It's almost like if you click follow, they go okay, you've got it, and then they don't show you that person again, and they're like, okay, yeah, you'll google them if you want to see them. You'll remember their name. Yeah, you'll remember them, and you'll just look them up if you want to see them. Following means nothing anymore, which just bunkers. Yeah, and so I don't know where I'm going with this other than other than, uh, it's a weird thing that's happening. So I hit that Okay, Yeah, I don't know how to land that plan. I think where we were going on is that it is it is difficult to because of the flood of content creators and people who want to build platforms. Yeah, they have no interest in building Like like I used to have people in my comments sections that I was like, oh yeah, I've seen these people's comments over and over and like they're engaging in my posts. And you know, there's still some people that are like oh yeah, they're still here. But like, I mean, I don't even know if some of these people are seeing my posts anymore. And so what that's what we're trying to do different with our Patreon is that's why we're doing group hangouts once a month. That's why we're doing this Q and a kind of stuff. Like we're responding to the discord because we do want that you know, old fashioned internet community. You know, that's that we're trying to build a call. No, that wasn't what we were Sorry, it's not a cult, not a cult. It's a podcast, not a cult. Not a cult. Tell your mom, it's not a call. Tell your mom, Tell your mom. No, mom, it's not a cult. It's a podcast. Okay, And gatorades should be figured. Why is this so thin? Okay? So, uh, here's where we're at. Mortgages are too easy, too easy to get. Mortgages are put into this giant pile of debt that are supposed to be safe. Because it's such a big pile. The problem is the rate they groups that are raiding them are not rating them well. Sure, banks start to realize we can get away with whatever we want to get away with. And because we can ensure these we can put whatever we want in these groups. So they stop separating them by the scale of them. They start saying, what if we just throw all all the bad ones into this group, And so they have a really high risk of all feeling but it doesn't matter. We can insure it. And so they put a really bad one together, get a triple A rating on it, ensure it doesn't matter what happens. They sell it. They know they're going to get their money back because they're selling it to investors. They sell all the shares out of it worst case scenario, if it doesn't work, we're going to get our insurance payment from the insurance company because we've got it. And also and also the houses. Yeah, and so it becomes a system where they're like, we can't lose in this scenario. They also pay out, and also we make money on the houses that we get. They're also betting that because they are the biggest banks in the world and there's so much of the world economy runs through them that will get bailed out, that if something comes to the worst possible scenario, they will get bailed out in the bad scenario. So because they realize all this, they like, we can do whatever the heck we want. So they start doing that, watch them moth. Sorry, the economy starts to take our legs are so white. I think I got to quit wearing white shoes. And you know what it is, it's the white table, the white shoes. Look at these things. It's also that you don't tan if you go to go tanning. I've been out of my back porch and I've just been you know, yeah, I've seen your back porch. So there's not a lot of sun access. I can like, you gotta you gotta create a situation where the sun can actually reach you. So white in this room, just go get just start tanning. No, you could be bed guy. You could be a tan bed guy. Tanning bed guy. Yeah, yeah, you like you like hot tips. That's the hot tubs and tanning beds go together. Okay, speaking of tanning beds, we've talked about this before. The video rental place in my town that had Stopbuster, it was called Nope, it's called video. They had tanning beds and video rental. Did they have the tanning beds in a separate room or are they just in the middle. It was a separate room, Like, excuse me, those little glasses that they wear. Did they have screens in them? Did they have screens in those in the tanning beds? No, you were't supposed to lay in there for that long. How long are you supposed to lay there? Less than people did. I didn't know how long are you supposed to lay I assumed you were in there for hours. No, Google how long to lay intent? Now it's going to tell you like zero minutes. Don't do it. This is bad, But like, what is it like five minutes? It's five to twelve minutes. You gradually increased to twelve minutes. You started out five grads, they increased it. That what Yeah, it's kind of like cold plunging. That's insane. I thought it was hours. That's why I never did it. I was like, gosh, that sounds like I don't have but four hours to go tanning. Oh my gosh, this makes so much sense. Brent does this, and I've always just been like, what are you finding all his time? Dude? Hands? Yeah, but only like I don't think occasionally he does it right before summer is okay, it's just thousands of people. He knows. I guess I could do like, I guess I could do like the tanning lotion and go like sit outside. Yeah yeah, just sit in your self tanner. I could do the self tanner stuff. The problem. The problem is the problem, I think. I genuinely think the problem is your yard doesn't have a lot of sun like direct soun front yard does. I'll go out there, That's what I'm saying, Go lay in the driveway, gold laying the driveway with how busy that is? I live in Los Angeles. Honestly, they'll go like that makes sense. People won't even bat and high. They won't even turn. They won't even they won't even there's average. It's the coyotes will notice, you know, you know what I'm saying, because they're they're like that's hot, and they're like they're they're fat out there. They're oh yeah, they're well fed. They can't make it through a howl. They run out of breath. It's all like your sentence earlier, What the he is that why you couldn't make it through a little porker? Yeah? Too much? Oh man? Okay, So they these so nothing matters, nothing matters whatever they want together. They love stuff together. And here's here's the sad thing. They're like, we're not. We're not gonna lose money either way. Here's a sad thing. So somebody's gonna lose money, but not us. So the people who are buying these are putting these into funds, and these funds are mutual funds ets four oh one k's pension, right, which is like people's retirements. Yes, and all the majority of the like consumer who's investing into these products is not in there making the decision on what this portfolio includes. They are just paying into a four oh one K or into a pension, and they're expecting one day they retire they get it all back, while someone who's managing that fund is getting all this stuff. And even the person managing doesn't realize what they're getting because the bank's lying to everybody. Sure, the system was very, very sketchy. Uh. And then the economy starts to take a downturn. Housing prices, housing values start to dip just a little bit. Uh. And then people start having a difficult time paying back their mortgages. Some people begin to foreclose, and it kicks off this chain reaction where more and more people began for closing as soon as they had monthly payments. They couldn't meet. Yeah, people, a lot of people had mortgages that were more than what they could afford, sure, and so yeah, they started foreclosing on the homes. Kicked off this chain reaction where these now we had CDOs that are full of high risk loans, and those loans came due and those people started foreclosing, and so then these CDOs failed. They called the insurance agents agencies to pay the insurance insurance, and that's also we also were investing in those. Yeah, they were like, we didn't have enough. It was greater than that value of cash that they had on hand for that right, and so they weren't able to pay that back. And so simultaneously you saw a situation where because a bunch of people were foreclosing at once, these CDOs were crushing, The insurance was crushing, and then everybody who was invested in all these funds that were part of these things, both the insurance and this started crushing. And then the values of those of those companies on the stock market started crushing. And pretty much when when it was how long was the crash, Well, it was two thousand and eight was the crash. We kind of started seeing like signs of these things happening in two thousand and six where the the mortgages people started foreclosing on mortgages and it lasted until technically speaking, they would say like two thousand and nine was the end of the crash, but you had like kind of that like pularizing moment in two thousand and eight where it was like, oh, we're this is over. And by over, I mean like the economy we're all dead. And so what time of the year was it is what I'm saying, let me see when like the crash happens. I don't know if there was like we where it was like, okay, now we've reached kind of the Yeah. I don't know if we had like a Black Monday moment like the seventies had Black Monday, where it was like a one moment all of a sudden, Like I think this was kind of a gradual thing. It hit a fever pitch. I don't know when that fever pitch was. I know it was in two thousand and eight when it like finally popped. I don't know exactly when in two thousand and eight, sure, but by the end of it, eight point eight million people and this this had such a big effect. It was outside of just the US, it was a global thing. But eight point million people lost their jobs. There was seven point four trillion dollars in stock market wealth that was lost, and nineteen point two trillion dollars in household wealth was lost as a result of that crisis. And then under the conservatorship that the government took over some of these banks cost tact payers in the US one hundred and ninety billion dollars and then through the FED would then do kind of a buyback program and a lot of these bad stocks and bonds essentially that total one trillion dollars to clean up this mess. And it was all essentially due to a lack of regulation and allowing the banks to do whatever they want and them kind of finding a way to not have any risk in this game, and so they could they were able to grow to a level where even if they didn't have a lot of risk in the situation, they were fine. And then they found all these different tools to help mitigate a lot of the risk in that situation. And for the most part, for a long time until the House of cards fell, they made a lot of money doing this, and they got incredibly wealthy doing this, and the majority of the people who made these decisions are still out there running these banks. Is a handful of these banks did actually collapse. Lehman Brothers was the big one. They were the largest collapse of any organization in American history, but in a couple of other agencies collapsed and went out of business as a result of Circuit City. Circuit City was the big one, long lived Circuit City, But by and large, most of these organizations are still out there. The FED came in and they outlawed a lot of these financial tools that were being used in this, But in twenty fifteen people started these banks, started campaigning to bring a lot of them back, and since twenty fifteen they've been winning a lot of these campaigns, and a lot of these financial tools exist again. The pretty much only thing in here that is not allowed still as subprime mortgages. You have to be able, like you have to be able to prove that you can pay back the mortgage if you're going to get it. But pretty much everything else within this whole system, CDOs, mortgage backed securities, credit default swaps, all of them are legal again and they're doing it and they're doing it with everything. This is always a housing crisis or housing thing. It was primarily housing thing at the time. Now it's all the debt that could exist is being lumped into stuff like this, and uh, we're we're building the tallest building in America right now. So think of that what you will. Yeah, the housing crisis was a we will see you on the construction site and then we all have to be building this building, building that building because it's the only thing we could do. Yeah, the only job that exists. They're going to franchise that and they're going to build one in every metro, same exact building, them next to each other. Oh yeah, and they're just going to keep Yeah, it's a whole city of just one of the if thirty of these, forty of them, why you imagine if McDonald's was the tallest building in any city, but it was just a and you're like you drive through and it's like, hey, that used to be a McDonald's, like we do with pizza Hut, Like that used to be a nineties pizza hut. You can tell that they used to. You can see the way. Why did they make them that big? I don't know there's not floors. It's just a big break. It was a one floor building. It was giant ceilings, shoes hundred foot ceilings. Can you actual change the light bulb in that room? Can you imagine the light from the top reaching down to where you are. That's not how that would work. The light bulb is just like a big chandelier and there's one six ward in the middle. There's a little chain. Yeah, you have you just watching? You should move? That's Gonnah? You a all right? Well, don't you just feel hopeful about the world? You know, Oh, they're gonna do it again and whatever. Speaking of two thousand and eight, we have an episode about the two thousand and eight Florida Gators, which is a little less serious and impacted people, pretty serious, pretty bad ways. People went to jail for this, but not the other thing. Yeah, so you can check out that episode. If you've already seen that episode, you're like, I've seen the entire catalog of episodes jarone. I've watched it and I've listened to it, like I've heard them all. You haven't heard next week's because it's on Patreon right now. So join us on Patreon. You get access to our discord, we can hang out and make inside jokes. We do monthly hangouts. And also you can see next week's episode right now, so we'll see you next week. For things I learned last night,

The early 2000s were a time of prosperity and optimism in America. Homeownership was considered an essential part of the American dream. Banks were handing out mortgages left and right, often to people who couldn’t afford them. Housing prices were soaring. It seemed like the good times would never end. But then the housing bubble burst, triggering a global financial crisis with devastating consequences.

Mortgage-Backed Securities

It all started innocently enough in the 1970s when banks developed the idea of mortgage-backed securities. Local banks would give out mortgages and then immediately sell them to bigger banks, who would package them together into securities. By spreading the risk out among many mortgages, the bigger banks protected themselves if some loans defaulted.

This allowed more people to qualify for mortgages, fueling a surge in home buying. In the 1990s, banks started lobbying for looser regulations on lending. They wanted to offer subprime mortgages to riskier borrowers whose income was too low to repay the loans. Lending standards were lowered, down payments got smaller, and teaser rates lured people in with low initial payments that later ballooned.

Collateralized Debt Obligations (CDOs)

Banks then sold these risky subprime mortgages and bundled them into complex financial instruments called collateralized debt obligations (CDOs). Credit agencies, paid by the banks, gave many of these CDOs their highest AAA ratings, making them seem like safe investments when they were actually ticking time bombs.

Credit Default Swaps

Banks took out insurance on the CDOs in the form of credit default swaps, so even if the loans failed, they’d get paid. With little risk to themselves, banks kept approving shaky mortgages. They knew they could offload the risk while making big profits on fees and interest.

When housing prices peaked and started declining in 2006, borrowers with subprime mortgages found themselves owing more than their homes were worth. Defaults and foreclosures spiked as ARM rates reset higher and the teaser periods ended. This caused a chain reaction of CDOs failing, insurance companies like AIG going under, and investors losing billions.

The Crash

In 2008, the overheated housing market finally crashed, triggering a global financial meltdown. Eight million Americans lost their jobs. Nearly 5 million homes went into foreclosure between 2007-2011. Retirement accounts were decimated. The stock market plunged. Two trillion dollars in household wealth evaporated almost overnight.

Some experts had warned this could happen. But lax regulation, greed, predatory lending practices, and outright fraud fueled the bubble. When it popped, the shrapnel took down companies across all industries in the U.S. and overseas. It was the worst economic disaster since the Great Depression.

The big banks and insurance companies received billion-dollar bailouts from the government, paid for by taxpayers. Yet most of the executives kept their jobs and bonuses. It took years for the economy and housing market to start recovering. The effects of the Great Recession would linger for a long time.

Lessons Learned?

The housing bubble and subsequent crash revealed fundamental weaknesses and moral hazards in the banking and financial system. Have we learned enough to prevent history from repeating itself? Or are we laying the foundation for the next big bust? Only time will tell.

Things I Learned Last Night is an educational comedy podcast where best friends Jaron Myers and Tim Stone talk about random topics and have fun all along the way. If you like learning and laughing a lot while you do, you’ll love TILLN. Watch or listen to this episode right now!




Subprime Mortgage Crisis – Wikipedia

Related Episodes

The Sand Cartel


Bronze Age Collapse

Tell Us What You Think of This Content!

Don’t forget to share it with your friends!

Share This Episode

More Episodes
« | »