Ghosts of Manhattan: A Novel(72)

“Okay.”

“Then guys like the ones you work for get involved. They take all these loans and bundle them into a security and claim the diversity of a thousand loans or so makes the overall security of a higher quality. Nobody actually looks at the individual loans within the security, but if you do, you see the security is going to be a mess. Normal default rates are two to three percent. If ten percent of the loans were to default, the security would blow up. If anyone actually does the analysis, they’ll see these are geared for forty percent default rates.”

I nod. It’s incredible an entire industry could be in on something this extreme. I can imagine individuals doing crazy stuff, but not institutions all at once.

“The worst is yet to come. So far you have lenders making bad loans because they’re greedy and shortsighted. Then you have banks packaging bad loans together and reselling them because they’re greedy and stupid. Finally you get credit default swaps. These are so complicated, it took a while for me to understand, but they’re basically like insurance and allow two things. First, people who have positions in these mortgage securities that tie up their need for collateral will buy insurance for cheap on the securities so they free up collateral for more leverage. The second thing is more interesting. It allows people to make a bet against the mortgage market. Right now, for about a hundred grand, I can buy insurance on a one-hundred-million-dollar security. If it fails—when it fails—for a hundred-grand bet, I get paid a hundred million.”

I kind of know this but hadn’t thought it all the way through.

“There are a bunch of hedge funds catching on to this already. And the guy at Deutsche Bank too. Part of the reason this can happen is the guys at Moody’s and S&P are asleep. They should be rating these securities as high-risk, but they’re putting A ratings on them. These may be the worst idiots of all.”

“What am I supposed to do with this?”

“Nothing for now. There are a few people who know all this, but mostly people who refuse to believe it.”

“Like Dale.”

He nods. “One thing more. You’re sitting on a time bomb. Most of the bad loans started the first half of 2005. These loans typically had a two-year teaser rate on the interest. At the end of two years, the real and much higher interest payments kick in. I’d say around May 2007 the bomb goes off. Things won’t be the same around here after that. You should be prepared.”

“What are you going to do?”

“I’d like to invest in one of the hedge funds betting against Bear, but I don’t care enough about making money to get involved and risk what might happen if I do. I could talk to a journalist, but I won’t for the same reason. I’m going to swallow it and walk away just like they want me to.”

Somewhere, someone at Bear has sized Freddie up and knows he’s not a fighter. They know he studies risk for a living and never takes any. They didn’t care if he discovered his phones were tapped. All the better. That and a compromising photograph from an anonymous source would send him under a rock. “I’m sorry, Freddie.” He looks battle-weary but not broken. “Is there anything I can do for you?”

“I just need someone to know. It doesn’t matter if it’s only one person. I just needed someone to know the things I’ve told you.”

Thanks a lot. “Okay, Freddie.”

I walk back to the office realizing that I shouldn’t be surprised that an industry made up of sleazy people would act sleazy on an institutional level.

I get back to my desk feeling exhausted before the day has even begun. Jerry is in my personal space before I can sit.

“Nick, Jesus. I have the story of the week for you. Maybe the year.”

Jerry never has good stories. I don’t know if it’s in his retelling or if he just isn’t clever enough to recognize the truly good ones. He grabs the back of a chair with one hand and rolls it around in a wide arc toward me in the motion of a rodeo cowboy getting a lasso started, and he plops into the chair flush-faced. All his movements and expressions are happening in double time. “What have you got?”

“You know Oliver Bennett? Investment banker?” Something odd happens in my stomach. The muscles of my midsection grip down tight on whatever it is, trying to control it, like hands clenching a slippery snake.

“Yeah, sure. I know who he is.” I feel confident that whatever is happening to my expression Jerry will interpret as my effort to recall the name Oliver Bennett and put a face with the name.

“My wife’s best friend and her husband live next door to Bennett and his wife. Somewhere on Fifth Avenue. And this gal and Bennett’s wife have become pretty good friends. They’ve shared a wall for a bunch of years.”

“Yup.” I try to sound impatient for the story to end but am hanging on each word.

“So late last night my wife’s talking with her friend because the friend had just spent a few hours with Bennett’s wife, who was beside herself.”

The snake is squirming fiercely in my clenched fists. I know vomiting would help me feel better. “At some point this story starts to get interesting?”

“Believe me.” He leans forward as though someone put a strip steak in front of him. “Bennett’s wife gets home last night and there’s a voicemail from Bennett calling from his cell phone. He says all the normal stuff—honey I miss you, I love you, be home late tonight, don’t wait up. Then he says bye and hangs up the phone, only the moron doesn’t hang up his cell phone. The line’s still connected and he has no idea.”