Too Big to Fail2011

Michele Davis:
I hate to do this right now, but I'm going to have to have a press call first thing, and I don't know what I'm going to tell them.

Jim Wilkinson:
Okay, here's how you explain it. Wall Street started bundling home loans together - mortgage-backed securities - and selling slices of those bundles to investors, and they were making big money. So they started pushing the lenders saying, come on, we need more loans.

Henry Paulson:
The lenders had already given loans to borrowers with good credit, so they go bottom feeding, they lower their criteria.

Neel Kashkari:
Before, you needed a credit score of 620 and a down payment of 20%; now they'll settle for 500, no money down.

Jim Wilkinson:
And the buyer, the regular guy on the street assumes that the experts know what they're doing. He's saying to himself, if the bank's willing to loan me money, I must be able to afford it. So he reaches for the American Dream, he buys that house.

Neel Kashkari:
The banks knew securities based on shitbag mortgages were risky...

Henry Paulson:
- you'll work on 'shitbag'...

Neel Kashkari:
- so to control their downside, the banks started buying a kind of insurance. If mortgages default, insurance company pays. Default swap. The banks insure their potential losses to move the risk off their books, so they can invest more, make more money.

Henry Paulson:
And while a lot of companies insured their stuff, one was dumb enough to take on an almost unbelievable amount of risk.

Michele Davis:
AIG.

Jim Wilkinson:
And you'll work on 'dumb.'

Michele Davis:
And when they ask me why they did that?

Jim Wilkinson:
Fees!

Neel Kashkari:
Hundreds of millions in fees.

Henry Paulson:
AIG figures the housing market would just keep going up. But then the unexpected happens.

Jim Wilkinson:
Housing prices go down.

Neel Kashkari:
Poor bastard who bought his dream house? The teaser rate on his mortgage runs out, his payments go up, he defaults.

Henry Paulson:
Mortgage-backed securities tank. AIG has to pay off the swaps. All of them. All over the world. At the same time.

Neel Kashkari:
AIG can't pay. AIG goes under. Every bank they insure books massive losses on the same day. And then they all go under. It all comes down.

Michele Davis:
[horrified] The *whole* financial system? And what do I say when they ask me why it wasn't regulated?

Henry Paulson:
No one wanted to. We were making too much money.