Neel Kashkari: Tell them Lehman exacerbated AIG, the simultaneous payouts of CDOs and credit default swaps put catastrophic pressure on…
Henry Paulson: Go back further.
Neel Kashkari: The global pool of investment capital…
Henry Paulson: She has to do this in English. Start with the homeowners.
Jim Wilkinson : Okay 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 downpayment 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 when a lot of companies insured this 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 figured the housing market would just keep going up, but then the unexpected happens.
Jim Wilkinson: Housing prices go down.
Neel Kashkari: The 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: 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.
Jim Wilkinson: You'll work on "we were making too much money."
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