Liar's Poker

by Michael Lewis

The resentment the mortgage department felt towards those in power increased when it became known in early 1980 that those outside the department wanted it shut down. The mortgage department wasn’t making money. The other mortgage units on Wall Street – Merrill Lynch, First Boston, Goldman Sachs – were stillborn. They closed almost before they had opened. The prevailing wisdom was that mortgages were not for Wall Street. The business was reeling from what appeared to have been the knockout punch. Paul Volcker had made his historic speech on 6 October 1979. Short-term interest rates had skyrocketed. For a thrift manager to make a thirty-year home loan, he had to accept a rate of interest of 10 per cent. Meanwhile, to get the money, he was paying 12 per cent. He ceased, therefore, to make new loans, which suited the purpose of the Federal Reserve which was trying to slow the economy. New housing starts dropped to post-war lows. Before Volcker’s speech, Steve Joseph’s mortgage finance department had created roughly 2 billion dollars in mortgage securities. It was a laughably small amount – less than two-tenths of one per cent of outstanding American home mortgages. But it was a start. After Volcker’s speech the deals stopped. For Ranieri and Co. to create bonds, the thrifts had to want to make loans. They didn’t. The industry that held most of America’s home mortgages on its books was collapsing. In 1980 there were four thousand and two Savings and Loans in America. Over the ...