The Alchemists: Three Central Bankers and a World on Fire
for places to park cash, too.
    In 2005, Ben Bernanke, then a Federal Reserve governor, called all of this extra cash the “ global savings glut .” Because there was so much of it, there were more people looking for safe, secure places to put money than there were safe, secure places to put it. Capitalism is a powerful force for creating that which is in demand—even something as intangible and elusive as a safe investment. To try to meet the demand for reliable places to park cash—and to make a great deal of money for itself along the way—the finance industry more or less conjured them out of thin air.
    Any one mortgage can be quite risky as an investment. The borrower might lose his or her job and be unable to repay it, or prices in the home’s neighborhood might go down instead of up. But if you put a whole bunch of mortgages together into a single pool that people can buy or sell in financial markets, you get rid of some of that risk. And to turn all those risky mortgages into an ultrasafe investment, you can create tiers: Instead of just one bundled-mortgage bond, there can be several.
    At the bottom is a security for people who want to take on some risk and get a greater return. The first time somebody doesn’t pay back his or her mortgage, those investors lose money—that’s the price they pay for getting a higher return on their investment. At the top is a security for more cautious investors, people who don’t give up a dime until the losses hit, say, 40 percent of what was loaned out. Those investors get paid a much lower return for their investment. But they also have almost no risk of losing their money. After all, what are the odds that so many people will be unable to repay their mortgages? Or that housing prices will have fallen so far that 40 percent of what was loaned out is lost? Low, indeed—or at least it seemed so.
    As if by magic, the financial industry transformed all those risky loans to individual borrowers into that which global investors most coveted—a supersafe investment the firms that rate the safety of bonds would call AAA. The basic idea had been around since the 1980s, but it took off in a previously unseen way in the 2000s. In the United States alone , $901 billion of these privately issued mortgage-backed securities were issued in 2005, up from $36 billion a decade earlier.
    And the trick wasn’t just applied to mortgages; the big financial firms did the same thing with almost any type of loan you could imagine: credit cards, student loans, corporate loans. In the United States, there were $8.1 trillion worth of such securities in existence in 2005, up from $2.6 trillion in 2000. When that number peaked, in 2007, it had reached almost $11 trillion. Each one of those eleven trillion dollars was simultaneously an asset to one party (perhaps a German bank, or South Korea’s government investment fund, or a wealthy Indian) and a debt of someone else (perhaps a family in Florida who bought the three-bedroom house with a pool that they’d long dreamed of using borrowed money, or a family in Kansas who paid for a trip to Disneyland with their credit card, or a real estate developer in New York who bought an office tower at an unprecedentedly high price).
    The idea that one man’s debt is another’s savings is nothing new. Banks have been the intermediary in that exchange for centuries. But in the old days, a banker could look a borrower up and down, study his financial standing, and make the loan knowing that if the borrower didn’t repay, it was the banker’s problem. In this new era, the people with direct contact with borrowers were separated from the lenders by a chasm. The mortgage brokers who proliferated in storefronts all over the country were mere suppliers for the Wall Street bundlers. The brokers knew that some of these were terrible loans, but the big Wall Street firms had such a hunger for the fees they could earn by assembling packages and creating new securities

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