One Key Element of the Mortgage Meltdown...a Toxic Asset

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clipped from www.npr.org We Bought A Toxic Asset; You Can Watch It Die Chana Joffe-Walt and David Kestenbaum March 12, 2010 Listen to the Story Toxic assets — home mortgages packaged into complicated bonds that no one wanted to touch when the housing bubble collapsed — are starting to trade again. Planet Money wanted to figure out how this chapter of financial history will end. So we decided to buy a toxic asset of our own.

How We Found Our Toxic Asset

There's no store where you can buy toxic assets; you have to know a guy. We know Wit Solberg, a former Wall Street trader.

Solberg left Wall Street to set up his own shop, Mission Peak Capital, in Kansas City, Mo. He and a dozen guys sit at desks with their tools: monitors, potato chips, Snapple, chewing tobacco. Pretty much all day long, Solberg looks at those monitors and evaluates toxic assets.

"The big black Angus cow that everybody wants? We're not buying that cow because it's too expensive," he says. "We want the cow that's got a wounded leg, but she might produce a few more calves for us — and [she's] cheap."

Solberg starts searching for a bond we might want to buy. And that searching looks a lot like checking your e-mail. Brokers keep sending him announcements about which toxic assets are for sale today. One says: "Cheaper!" Another says: "Super senior steal!"

Around lunchtime, Solberg finds a bond he likes for us. It's called an Option One Mortgage Loan Trust, or OOMLT (pronounced om-let). Solberg thinks we should offer to buy the bond for "half a cent" on the dollar. That means that, for every $1,000 of the bond's original value, we'll offer $5.

But it turns out the guy who's selling the bond wants 17 or 18 cents on the dollar — more than 30 times what we bid. Solberg says these kind of huge spreads are pretty common in the toxic asset business. People just radically disagree about what things are worth.

We spend two days with Solberg looking for the right toxic asset. One, full of what appear to be California McMansions, seems promising. Solberg prints out a 604-page prospectus that reads like a historical record of the entire financial crisis. It's all in there — vaporized companies, people struggling to pay their mortgages, and some horribly complicated logic describing which bond holders get paid, in which order, under which conditions. But that bond falls through, too.

Finally, we find a beautiful, totally toxic asset at what Solberg thinks is a good price: $36,000. Back in the bubble, somebody paid $2.7 million for this thing. We buy a piece from Solberg for $1,000. It's going to be our encyclopedia of the financial crisis.

What Our Toxic Asset Looks Like

Our toxic asset has 2,000 mortgages, many of them in hard-hit states like California, Arizona and Florida. A lot of the people in our bond are really struggling. Almost half are behind on their mortgage payments, and 15 percent of the homes are already in foreclosure.

At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely.

Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. If it goes to Thanksgiving, we could double our money.

By the way, we bought the asset with our own money. Any proceeds will go to charity. If we lose money, we take the loss.