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My Manhattan Project


“You put chicken into the grinder”—he laughed with that infectious Wall Street black humor—“and out comes sirloin.”

I wanted a piece of that. But first, I kept a promise to my wife—that if she recovered, we would backpack around the world.

Returning to New York a year later, I had an interview at Shearson Lehman’s mortgage-research department. Again, I sought advice from Professor Gesiak. I drove to his apartment in Greenpoint and confessed to him that I had never studied finance, and I had only taken one course in computers. Over the kitchen table, while his wife minded the toddlers, he gave me a quick tutorial on the “present value of future cash flows.” It was only freshman calculus, after all.

Out the back window, clotheslines on pulleys ran across the courtyard to adjoining apartments, like a scene from The Honeymooners. Once I demonstrated that I understood how to discount a cash flow, Leszek brought out the hard stuff. Over glasses of vodka chased by raw garlic and butter on rye, he recounted how he had black-marketed goods in communist Poland. Halfway through the bottle, he claimed that the Polish zloty had been on the vodka standard—that is, the conversion ratio of zlotys to dollars on the black market was always the same as the price, in zlotys, of a half-liter of vodka.

Heading back to Manhattan that night, I smashed my car on the ramp up to the BQE. But the good news was that I got the job. I was in the mortgage-packaging business.

At Lehman, I began a thirteen-year effort to streamline the process of securitizing home mortgages, as well as other forms of debt. That was 1988, around the time of the savings-and-loan crisis. Remember that one? Lenders had gone nuts with, what else, real estate, and as they went bust, the government was stepping into the breach. Mortgage securitization was the answer. Retail lenders could make the loan, take a fee, then sell the mortgage to an investment bank. The bank, after bundling thousands of the mortgages together, could, through a little software magic, issue bonds based on that bundle of loans. Now, an investor does not want a single person’s mortgage, much the same as you may not want to underwrite your sibling’s purchase of an overpriced McMansion. But when 1,000 similar loans are combined, and the U.S. government, through Freddie Mac and Fannie Mae, absorbs the default risk, you now have a nifty little AAA-rated piece of paper paying one or two points above Treasury bills. And if the value of the loans is in excess of the limit set by the government agencies, your savvy friends on Wall Street can create a class of subordinated bonds that will absorb all the defaults in the deal. With friends like these …

While I slaved away at the sausage grinder, CMOs took off—$6 billion were issued in 1983, and by 1988, the annual output had jumped to $94 billion. This was the era described in Liar’s Poker. Wall Street guys felt cool and funny; people who were getting ripped off were dumb and ugly and deserved it. I got a $50,000 bonus check, a 50 percent dollop on top of my salary. Peanuts to the traders, but a bloody fortune to me, for the easiest work I’d ever done. I could afford to rent a nicer place in Greenwich Village, go out to jazz clubs, bike in France. But even then, I was wondering why I was making more than anyone in my family, maybe as much as all my siblings combined. Hey, I had higher SAT scores. I could do all the arithmetic in my head. I was very good at programming a computer. And that computer, with my software, touched billions of dollars of the firm’s money. Every week. That justified it. When you’re close to the money, you get the first cut. Oyster farmers eat lots of oysters, don’t they?

I never would have thought, in my most extreme paranoid fantasies, that my software, and the others like it, would have enabled Wall Street to decimate the investments of everyone in my family. Not even the most jaded observer saw that coming. I can’t deny that it allowed a privileged few to exploit the unsuspecting many. But catastrophe, depression, busted banks, forced auctions of entire tracts of houses? The fact that my software, over which I would labor for a decade, facilitated these events is numbing. Is capitalism inherently corrupt? I don’t think the free flow of goods in and of itself is the culprit. No, it’s the complexity masked by thousands of unseen whirring widgets that beguiles people into a sense of power, a feeling of dominion over the future.


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