Planet Money: NPR Reporters Buy Toxic Asset for Report

The Poynter Institute, a journalism think tank in St. Petersburg, FL, posted a piece about two NPR correspondents who bought a toxic asset. Thought some of you might be interested in learning more about it. ACS

Posted by Mallary Jean Tenore at 6:33 AM on Mar. 22, 2010

National Public Radio reporters David Kestenbaum and Chana Joffe-Walt wanted to help the public better understand the financial crisis — an ongoing narrative that they believe gets weighed down by numbers, statistics and seldom-explained financial terms.

So they made an investment as part of a “Planet Money” project. Together, with colleagues Alex Blumberg, Caitlin Kenney and Adam Davidson, they pooled $1,000 of their own money and bought a toxic asset — a sliver of one of the bonds that fueled the housing boom and then lost their value during the bust.

“I feel like we’ve bought our front row seat to the last quarter of the financial crisis,” Kestenbaum said in a phone interview. “We’re going to get to watch this thing die.”

The purchase has meant that Kestenbaum and Joffe-Walt are stakeholders in the story.

In this case, the reporters said, becoming stakeholders was a low-risk way to get an inside perspective on what toxic assets really are. It has also helped them generate story ideas and gain access to information they may not have otherwise had, such as how the investment status of a toxic asset changes over time. Spending their own money, Joffe-Walt said, helped give them greater ownership of the toxic asset and, subsequently, their reporting on it.

Kestenbaum and Joffe-Walt spoke with “Planet Money” Editor Amy Stevens before making the purchase to ensure transparency and minimize any conflict of interest. Stevens said any money they make from the toxic asset will go to charity — likely one that helps educate people on financial issues. If they lose money, they’ll take the loss.

“We certainly didn’t want to share in any financial rewards,” Stevens said by phone. “We also thought that in this case, once you are an owner, it gives you unique insight into what’s inside one of these things.”

To resolve the ethical dilemma, they were also transparent about their decision, letting listeners know that they made the purchase and would not benefit financially from it.

“The key thing was we should not stand to gain personally. We just wanted to make sure that we were ethically scrupulous about that,” Stevens said. “The financial stake in it is really a journalistic tool. It’s a way of taking a look at what’s inside the toxic asset, but it is designed so we don’t have a financial interest in it. And it’s a very nominal amount of money. It’s almost like an experiment; it’s really a way of studying a phenomenon.”

Kelly McBride, Poynter’s ethics group leader, said she thinks NPR made a smart decision in being so open about the purchase.

“I like it when journalists put themselves in the place of the consumer, then describe their experience. It’s similar to using a product or doing a travel story. You have to be very transparent with the audience,” McBride said in an e-mail. “I think it’s the perfect way to explain a complicated process to their audience, since most of us don’t really know what toxic assets are.”

“Planet Money”‘s toxic asset has more than 2,000 mortgages in it. Whenever the foreclosed homes in the bond are taken over and sold for a loss, the bond shrinks, meaning the toxic asset will eventually disappear entirely. Whenever a homeowner in the asset makes a mortgage payment, those who own the asset get part of that money.

So far, Kestenbaum and Joffe-Walt have received $406.88 but have no way of predicting whether they’ll ultimately gain or lose money when their asset disappears.

“There’s some drama in it,” Kestenbaum said. “Every month we get updates on how everybody in the pool is doing. There are a lot of human stories there in terms of who owns it and where they are.”

Joffe-Walt and Kestenbaum hope to hear from some of the others who own part of their toxic asset, which has lost 99 percent of its value throughout the past few years.

Kestenbaum was reminded of this recently when he attended a toxic asset conference (yes, they have those) to further inform his reporting. While there, he asked one of the speakers, Craig Schiffer, for his thoughts on “Planet Money”‘s toxic asset. Kestenbaum reported last Friday on what Schiffer said.

“You bought this personally?” Schiffer asked, a sound of disbelief in his voice. “It’s not a very good portfolio, man.”

The interactive time line that accompanies “Planet Money”‘s coverage shows just how much the value of the toxic asset has depreciated over the past three years.

“Planet Money” added interactive components to the stories, Stevens said, in hopes of giving people an easy way to visualize the financial crisis’ impact on the asset.

“The concept of a toxic asset is very, very abstract,” she said. “By doing everything from a podcast to an animated Web video to a radio story to a blog post, we feel like we are reaching a broad audience and helping bring to life something that would otherwise be very dense.”

One of the challenges Joffe-Walt and Kestenbaum have faced is figuring out how to explain a dense subject in a limited amount of time.

The original version of their story for “Morning Edition” was 12 minutes. They had to get it down to about 7:40. “That’s not much time to explain what a bond is and have a whole story with characters in it,” Kestenbaum said. “A radio story is like a poem. There’s not a wasted word in it.”

Joffe-Walt said she pictured telling the story to her mom, aka the average listener. Would her mom, she’d ask herself, understand what she and Kestenbaum were saying?

Their animated video helps break it all down, in a simple sort of way. Instead of referring to the bond by its technical term — “Harborview Mortgage Loan Trust 2005-10” — Joffe-Walt and Kestenbaum call it a “pesky little creature,” a blue-haired “pet” that they hope you’ll help name. (I voted for “Toxie.”)

Their pet, they explain in the video, is sick because people are falling behind on their mortgage payments. They encourage listeners to follow their pet’s journey and make a prediction about how long she’ll last.

Kestenbaum and Joffe-Walt said they hope their ongoing reporting on the toxic asset will help inform listeners’ predictions.

“I think generally we’ve been trying to do every story in a way that doesn’t dumb down the actual details, that’s accurate and understandable and, whenever possible, human,” Jofee-Walt said. “If we can get people to understand what a toxic asset or a bond is, it’ll be a major success.”

“Planet Money”‘s Toxic Asset Coverage

We Bought a Toxic Asset, You Can Watch it Die,” by Chana Joffe-Walt and David Kestenbaum

Toxic Assets Market Awaits Rebound” by David Kestenbaum

Toxic Assets: What You Need to Know” by Jacob Goldstein

Podcast: “We Bought a Toxic Asset!

Interactive time line: “Tracking Our Toxic Asset

Animated video: “Meet Our Toxic Asset

Vote: “Name Our Toxic Asset!”

NPR Interview with Author Lewis Reveals Profits in Bad Loans.

Bear in mind now, that underneath this all are subprime mortgage loans and pool of subprime mortgage loans in which only eight percent have to go bad for the whole CDO to be worth zero.

NPR Interveiw with Lewis Author

Submitted by Ron Ryan, Esq. (Tucson) with the following comment:

The story broke on 60 minutes last week and on NPR Tuesday about people getting filthy rich from buying multiple CDS, which was a large cause of the economy almost sending the world into Apocalypse.  While so far they got that part right, they are selling it like there were just some smart people that noticed that the the pools were doomed to “fail,” meaning there would be a moment when the trigger defining failure would surely hit (8% default rate), what they are missing is that this was pre-planned as part of a grand scheme.

Editor’s Note: I agree with Ron. These people were obviously not stupid. They walked away with trillions. The task of homeowners, litigators, forensic analysts, and experts is to explain the counter-intuitive nature of this scheme — to engineer as large a pool of cash or cash equivalents in exchange for zero value; that means by definition creating inherently defective loan products and selling them to unsophisticated homeowners who were not in a position to know the difference.

In economics it is called asymmetric access to information. On the other end, the investors were led to purchase inherently defective bonds thinking they were backed by mortgage loans, which collectively created a low-risk pool.

Only the middle-men knew the truth. So only the middlemen purchased credit default swaps betting against the very loans they created and against the securities they sold. And only the middlemen presented claims that were satisfied by the Federal bailout under the false representation that THEY were holding toxic assets when in fact it was the the homeowners and investors that were holding toxic assets.



Editor’s Note: Allan is right about his frustration with a government that is so slow on the draw. Yet if history teaches us anything it is that government, especially our govenment, tends tomove very slowly except for “emergency” situations, when most of the actions are flawed.

It would be a good idea to contact the SEC, ask for their form and give them as much information a you can. Remember, every homeowner involved with a securitized mortgage was a “CDO Player.” Hearing from you will balance the scales a little. The SEC will soon take notice that homeowners were sold  security the same way that pension funds were sold securities at the other end of the securitization chain. THAT is where the scheme unravels. And smart securities class action lawyers will finally see that there is more money in this unravelling than anything they have ever worked on in their lives.  


by Jake Bernstein and Jesse Eisinger, ProPublica
– December 16, 2009 3:30 pm EST

This story is part of an ongoing investigation with NPR’s Planet Money [1].

Former SEC chairman Christopher Cox, right. (Chip Somodevilla/Getty Images)
Former SEC chairman Christopher Cox, right. (Chip Somodevilla/Getty Images)

Almost three years since banks started taking losses that led to the worst financial crisis since the Great Depression, the Securities and Exchange Commission is still asking basic questions about what happened.

Were you there?

If you were involved in the CDO business during the end days of the boom, please contact us.


(917) 512-0258 [2]

The SEC is conducting an information-gathering sweep of the key players in the market for collateralized debt obligations, the bundles of mortgage securities whose sudden collapse in price was at the center of the meltdown of the global banking system.

In a letter dated Oct. 22, the SEC sent what amounts to a questionnaire to a number of collateral managers, the middlemen between the investment banks that created the complex financial products and the investors who bought them.

Collateralized debt obligations are made up of dozens if not hundreds of securities, which in turn are backed by underlying loans, such as mortgages. Investment banks underwrite the structures and recruit their investors. Collateral managers, brought in by the investment banks but paid by fees from the assets, select the securities and manage the structures on behalf of the investors. CDO managers have a fiduciary duty to manage the investments fairly for investors.

Since 2005, $1.3 trillion worth of CDOs have been issued, with a record $521 billion in 2006, according to the securities industry lobbying group SIFMA. The collapse in value of mortgage CDOs triggered the 2008 financial collapse.

ProPublica and NPR have confirmed that the SEC letter was sent to several managers, although the distribution list was likely industrywide. At the height of the boom in 2006, only 28 managers controlled about half of all CDOs, according to Standard and Poor’s.

Banks began disclosing the first big losses on CDOs in early 2007. The infamous Bear Stearns hedge funds ran into problems [3] beginning that summer. By that August, the credit markets began seizing up. Merrill Lynch and Citigroup were among the hardest hit by losses on bad investments in mortgage-based securities and CDOs.

The SEC’s letter focuses on information regarding “trading, allocation and valuations and advisers’ disclosure,” though it also asks for other details on how the managers ran their businesses. The letter requests information on CDOs issued since Jan. 1, 2006.

The letter asks collateral managers for information about what investments they made on their own behalf and how they valued these investments. Securities experts say the letter indicates that the agency is still gathering basic information about the CDO market, despite its centrality to the banking crisis.

“One wonders why this letter, especially given the general nature of it, is just now being sent. And why wasn’t it sent several years ago, as the CDO market was exploding?” says Lynn Turner, who was the SEC’s chief accountant in the late 1990s. “It makes it look like the SEC is several years behind the markets.”

Even Wall Street executives and securities lawyers who were involved in the CDO business at its height have privately expressed surprise that the SEC was only now contacting them for such rudimentary information.

The SEC declined to comment on the letter. As a policy, a spokesman said, the agency doesn’t comment on its regulatory actions. The SEC has jurisdiction over CDO managers,and enforces rules against securities manipulation, among other violations. The letter does not use the words “inquiry” or “investigation.”

Interviews with market participants and former regulators point to several areas that the SEC might be investigating. Some managers had their own in-house investment funds and may have taken positions that were in conflict with those of the investors in the structures that they managed. In some cases, their hedge funds may have bet against the very slices of the securities they were managing on behalf of the investors in the structure.

Underwriting investment banks often had influence over the investment choices some CDO managers made, giving rise to another possible conflict of interest. The agency may be looking at whether that influence was proper or not.

“The possibility for conflicts and self-dealing is huge,” says Turner, the former SEC chief accountant.

To date, the agency has little to show for its probes into the causes of the crisis that engulfed global financial markets just over a year ago. In June 2007, Christopher Cox, then the SEC chairman, testified before Congress that the agency had “about 12 investigations” [4] under way concerning CDOs and collateralized loan obligations and similar products. A little more than a year later, Cox told Congress that the number of investigations into the financial industry, including the subprime mortgage origination business, had ballooned to over 50 separate inquiries. [5]

There could be multiple reasons why investigations are proceeding slowly. Such cases are complex and require enormous resources and expertise. Regulators also face the hurdle of proving intent to defraud.

Under Cox’s stewardship, the SEC fell into disarray [6], and it was harshly criticized by Congress and its own inspector general, particularly for its failure to catch [7] the Ponzi scheme of Bernie Madoff. The turnover of the new administration, which ushered in new leadership at the much-criticized agency, has also likely slowed efforts. In recent months, under new Chairman Mary Schapiro, the SEC has made insider-trading inquiries a high priority.

So far, there have been few indictments or civil complaints. In a sign of how long these cases can take, the mortgage company New Century Financial Corporation disclosed in March 2007 that it was the subject of an SEC investigation [8] into possible insider stock sales and accounting irregularities. It wasn’t until last week — Dec. 7 — that the SEC filed a formal complaint against former executives of the company. The government’s highest-profile prosecution involving the financial collapse – the case against two managers of the Bear Stearns hedge fund for alleged securities and wire fraud – failed to gain a conviction when a jury decided [9] that the men were simply bad businessmen rather than criminals.

Were you involved in the CDO business in the latter stages of the boom? We want to talk to you. E-mail us at [10] or call us at               (917) 512-0258         (917) 512-0258.

Write to Jesse Eisinger at [11].

Write to Jake Bernstein at [12].

Want to know more? Follow ProPublica on Facebook [13] and Twitter [14], and get ProPublica headlines delivered by e-mail every day [15].


FINALLY somebody’s paying George Santayana heed. “Those who cannot learn from history are doomed to repeat it.” My bet’s on repeating it, given how our political system works like a pendulum. How many bubbles did we experience in the last 10 years? What happens to regulation and resolve when there is a political changeover?

B e M o v e d @ A O L . c o m

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