Ghosts of Manhattan: A Novel(28)

“I wrote a custom software program that takes into account our position and the risk of the mortgage securities but also the overall context of the market around us, basically what other companies will do. It’s the difference between roulette and poker. If you play roulette and put a million dollars on red, it doesn’t change anything around you. They still spin the wheel and it doesn’t have anything to do with your bet. But if you play poker and take a card, then bet a million bucks, every player around you reacts. They fold, call, or raise and build a strategy based on your action. A lot of models that look at Bear treat it like roulette, but it’s really poker. If we make a big move, it will set off a chain of reactions.”

Freddie looks down at his watch.

“Everything okay?”

“Yeah, we have a few minutes. The other thing is we’re desperate for trading volume. On the mortgage lending side, Fannie Mae and Freddie Mac are pushing out a ton of loans, to anyone. And the government is promoting it. The borrowers are obvious repayment risks, but nobody cares. As long as there is a commission today in making the loan, nobody cares that it will default in a year. Or less.”

“We have a few minutes until what, Freddie?”

He looks a little embarrassed as he puts down his apple and resets his focus. “I had a few drinks last night.” I didn’t know Freddie drank at all. “I started talking about some of this stuff. More than I should have probably.”

“Who were you with?”

“She’s a friend from college.”

“A girlfriend?” I have an attaboy look for Freddie and I hope he doesn’t feel I’m making fun of him.

“No, we just took some classes together in undergrad and she’s a nice person.” He takes another bite of the apple. “It’s just that she’s in a unique position now.”

“What do you mean? Who is she?”

“Look, before she gets here, I have a favor to ask.”

I’m annoyed at the stalling, so I just lean back in my chair.

“I have a meeting set with Dale Brown to present my report. I’m getting pressure to soften it, but I’m not going to. This is the big meeting with the president and I’m hoping you might come with me.” He looks at me like a geeky high school kid asking a girl to the prom.

“What do you want me there for? I don’t know anything about your report.”

He shrugs and looks a little sad. “I just think it would help. To have you there.” He looks down at his Pepsi and seems to catch a glimpse of how pathetic this appears and he pulls himself together and declares, “You wouldn’t have to do anything in the meeting, Nick. You’re one of the few people at Bear that’s always been kind to me. It would just be a real help.” I have a flash of Piggy and Ralph and for a moment I think Freddie isn’t a colleague from Bear but an angel who’s been sent down to test whether I’m a bully or a hero.

I was bullied for a couple months when I got to boarding school and it’s still close to the surface for me. I was so sad when I first got there after leaving my parents in the station that I must have looked like a natural target, that I expected to get picked on. When it happened, I didn’t know how to help myself and I felt that any outreach for help would get pounced on and make it worse.

After a while, you change how you act. You stay alone with your thoughts and create a separate world, all around you but just in your mind, so you can get by. And then you make one friend. That’s all you need. One generous, unafraid person to show kindness. You have your friend and get a little happier and after a while you realize you aren’t a target anymore.

Once you’ve been through it, it never leaves you. It puts something inside you that lets you feel things that others can’t, the way only dogs can hear a certain pitch of sound. Maybe I can help Freddie out the way I found a friend to help me, so I decide to lend a hand.

“Okay.” I already regret it. This isn’t about a schoolyard shoving match or a couple kids who want to trap Freddie in a gym locker. I should have just said I’ll think about it and then found a polite way to bow out, but now I’ve said okay and I’m stuck with it. Why the hell would I want to sit in a meeting with the president and associate myself with a report that is going to piss him off?

“Thank you, Nick. Really.” He seems so relieved I almost feel better about it. “Have you heard of a three-strike loan?”

“No.”

“It’s happening out there now. Let me try to explain it. Let’s say we take a thousand mortgages. Could be yours, my mom’s, or any mortgage. We take a thousand and bundle them into one security and sell it. We need to make representations about the security, so we test it by taking a sample. Let’s say we test fifty mortgages for the sample and ten come back as bad. These ten mortgages will default. That’s twenty percent of our sample, so you should say that we predict that twenty percent of the security is bad.”

I nod.

“That’s not what people are doing. If twenty percent is bad, that’s two hundred bad ones out of the thousand. What people are doing is to take out just the ten bad ones from the sample and then say that the whole rest of the security is good, even though the statistics say that there should be one hundred and ninety more bad ones. It’s statistical fraud!”

“This is happening?”