My Front Row Seat to the Mortgage Boom and Bust, Part II
Building the plane in the air
This is part II of my story about the best seat in the house to watch the subprime crisis unfold from 2004 - 2007. But man was it a hot seat.
Check out Part I HERE, and look out for the dramatic conclusion next week!
It's hard to capture just how crazy the residential mortgage market was in 2005 and 2006.
And I had a front row seat.
Business was booming, which meant that our credit line was swelling with questionable mortgages Wall Street couldn't buy fast enough.
A few months into 2005 word came down that we were getting an office upgrade, and oh did we ever.
Over a weekend we packed up our Banker Boxes and schlepped our Blackberries and computer towers (remember when computers were towers???) to a shiny new trading desk at Rockefeller Center.
If you know that iconic Atlas Sculpture on 5th Avenue, our windows were right above it. Amazing vibe, even before Alec and Tina moved in next door.
I have to stop here to describe a bit about the characters and dynamic of the trading desk on which I sat.
As the lowly warehouse guys (later to be deemed the "Warehouse Hippies" because I hired two buddies from California), we were relegated to the corner of the desk, furthest from, but with a great view of the action.
Immediately across from my desk - 3 feet from me - sat the bond salesmen.
These were the heroes, the primadonnas, the top of the totem pole. These guys had "it" oozing out their veins.
They were also ruthless drunks and philanderers.
I remember one day the king of the bond guys walked into the office with his wife and kids. And I was like Wait, this guy has a wife and kids? Holy ....
Bond salesmen had a simple schedule back then:
- 1/3 the day at the desk hitting the phones harder than you've ever seen phones hit
- 1/3 the day at 4-figure lunches talking about anything other than mortgage bonds
- 1/3 the day at Scores or similar
Yes, they were all men.
Our firm did have a few powerful women, strong and charismatic, having slogged through a testosterone-dominated, raunchy world to positions of authority.
And you did not cross them.
These were take-no-prisoners women who took shit as well as they gave it.
Next on the desk you had correspondent sales, mostly aspiring to sell bonds, but loans would have to do.
They mostly spent their time with mortgage banker clients screaming at them because loans were being rejected, not bought fast enough or they needed more and cheaper credit.
One hop over were the structuring and trading guys, statistic savants who spoke a secret language of tranches and spreads that only they and the bond guys understood.
Well, them and the ratings agencies.
I eavesdropped as our head trader wooed S&P, Moody's and Fitch, playing them against each other to rate our deals. Because each deal needed to be blessed by two of the three, it was yet another race to the bottom.
Last came the analysts - square-jawed, well-paid excel monkeys who spent the dark Manhattan winters prepping for a summer at the Shore.
And presiding over the entire circus was the big boss, a godfather of structured mortgage finance who to this day is the sharpest, craftiest, most charismatic person I have ever worked with.
He also never met a scruple he couldn't part with to get a deal done.
And his name was on the door.
His turret was smack in the center of traders, with a secondary soundproof glass office that had a view of the entire desk.
When you went into his office for a meeting, which rarely was to compliment you for a job well done, the spectacle was on display for all your co-workers to see.
The other half of the office, hidden behind high cubical walls and private office doors was the back office. Transactions, accounting, legal and wayyyyy in the back, compliance.
Buried back there was my future wife, but I didn't know it at the time.
So back to my story.
Like all lenders back then, we were competing on not just rate, but on flexibility.
Could we bump the line a few extra mil, could we take lower FICOs, higher LTVs, etc.
As a warehouse lender we didn't set the actual loan guidelines, but our protection was a solid take out (ie buyer) for each loan we funded. So we had to constantly monitor the loan programs offered by the Street.
Talk about a race to the bottom.
Meanwhile, instructions from the big boss were to lend out as much money as possible, as quickly as possible.
It was like that up and down the chain: There was seemingly limitless cash poured into the top of the funnel from bond buyers, and that money had to go somewhere.
It was the ultimate Carpe Diem world.
My part of the story gets interesting for the normal reason work gets interesting: People.
My direct boss, the guy who hired me out of "retirement," was a lanky 30-something structured credit whizz, 6-6, with a long itchy nose.
We'll call him Jim.
Jim could talk trading with the traders, bonds with the structuring guys and ran circles around our attorneys coming up with innovative ways to shield risk and push loans off balance sheet.
But he couldn't care less about operations. Sure, he knew controls were important but didn't bother to do anything about it.
So I had carte blanche to set up, run and keep tabs on the ops.
The team was rounded out by Korean guy who had been with the firm since Day 1. Balding with aggressive dandruff and an easy laugh, he was a bit of a punching bag that no one wanted in their group. He did however, excel at showing up to a meeting, saying one or two insightful things to make it seem like he was really dialed in.
We'll call him Keith.
When the big boss hired Jim to run the warehouse group, Keith got dumped onto the team and that was that.
Jim was sharp enough to know that Keith was a liability, but office politics being what they were, he couldn't do anything about it.
I guess nice guys like Keith are just harder to fire than keep around.
My job was simple:
Build a process to underwrite and fund hundreds of loans a day, delivered in the morning for afternoon funding, each with separate wire instructions.
All by hand, no automation available, thank you very much my friends at Wachovia Bank.
Then make sure the physical loan documents arrive and get logged in at an office park in suburban Maryland, then shipped off to one a dozen loan buyers mostly domiciled in Orange County. FedEx and UPS were also making a killing off this nonsense.
Month ends were particularly chaotic, since loan funding volume doubled or tripled on a single day.
Let's just say I got to know the kind ladies in the wire room really well, begging for an extra few minutes to release the last of my wires.
And for all this I was supremely unqualified.
My previous role working under Jim was more or less data entry for funding wires. I mean I was good at it, but man was it a steep learning curve at the new gig.
So I rolled up my sleeves and figured it out.
And for a while, I humbly submit that I did an incredible job.
John was engaged, Keith played his role and clients were signing up.
But we were drowning in loan volume.
I called in backup in the form a friend who turned down and offer to Business School to drag his girlfriend to New York. He later became my business partner and co-GP on almost 50 real estate deals in the Bay Area.
Our borrowing base kept rising and despite being the kind of guy who was never satisfied, the big boss didn't give us too much grief.
And then things started to slip off the rails.
Juggling client credit limits with our own funding capacity got dicey as originators were just cranking.
We started discussions to double our credit line from $250MM to $500MM, but that took time.
Meanwhile, loans that no one wanted to buy were getting stale on the line, pushing towards their 90-day limit, at which point our overleveraged, cash-poor originators were supposed to buy them back.
Or, as was more common, trick another warehouse lender to making our risk theirs.
What needed to happen were hard conversations at a high level, while I put my head down and funded loans.
And just when I needed Jim to help me navigate these tricky situations, he disappeared into the vortex of negotiations with the Germans.
Which was in some ways understandable, but I was floundering. I needed help.
But more than anything, I needed to ask for help, and I just didn't have the balls to do it.
Stay tuned for Part III, in which the Germans come through, I have to choose between Jim and yours truly, and Bear Stearns pumps the craziest loan product ever invented.