The Story of Toxie: An Interview with NPR's David Kestenbaum and Chana Joffe-Walt

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Today I'm here with David Kestenbaum and Chana Joffe-Walt from NPR's Planet Money. Thank you both for coming on the show.

Thanks for having us.

To start off tell our listeners a little about Planet Money.

Planet Money is a collaborative effort between NPR and This American Life and we do radio stories for the big NPR new shows - All Things Considered, Morning Edition - we also have podcast that comes out twice a week as well as longer documentary stories for This American Life. We also have a blog.

Ok we're here to talk about Toxie. What is Toxie? Or who is Toxie?

Toxie was our pet toxic asset at Planet Money. In January, a group of reporters decided that we'd heard and reported on toxic assets during the financial crisis, but we felt that to really understand what they were, we wanted to own one. So we bought a slice of a big mortgage bond, and listeners named it Toxie. It lasted for eight months and it died in late September.

So Toxie is a CDO? (collateralized debt obligation).

She's not actually that complicated and toxic. She was actually a residential mortgaged backed security, which were then cut up and put into CDOs. She was still complicated - the paperwork was 300 pages long.

So to buy something like Toxie you would have to go to a big investment bank, right?

That was who initially put these things together, yes.

But that's not how you bought her, correct?

By the time we're buying her, she's in bad shape and has had many owners. She had a difficult childhood at this point. She was born in 2005, we bought her in 2009. She is not dead, but very very sick. We bought her at a huge discount - 99% off. It was originally worth $75,000, but it was discounted to $1,000.

So even though she was sick, there was still some upside? How did you know that?

There was some upside.

When we looked at this particular asset, the idea was that she was sick, but that it would last for a certain amount of time. About half the people were still making mortgage payments. It would last for at least 8, 9, 10 months. And if it lasted long enough, soon we'd be getting small checks for it. There was the potential to at least double our money. But along the way there were several complications. And there were several mortgages in our asset that were modified. Because we were at the back of the line of investors, this didn't help us.

There were 2,000 mortgages inside her, and when people make their payments that goes into a pot of money, and that pot of money gets paid out to investors - but it is not like everyone gets paid equally. Our spot was in the back of the line. Any small disruption makes the money run out to us.

You guys actually tracked down some of the borrowers that were contributing to Toxie. What did you find when you talked to these people?

Yea and it was surprisingly hard. We had all this information about the mortgages, but there was nowhere that it said the address or the name. We met an 82 year old man who just walked away, because he wasn't worried too much about his credit score - his house was worth less than half what he bought it for.

What do you mean when you say Toxie is dead? How are the other traunches doing?

We had a slice far in the back, so any loss it took, we were hit first. Once losses were too high, our part was worthless.

Originally when you first bought it, you looked at some models. Also with a story you did with This American Life - they had a problem with their modeling software. It seems that whenever we try to model these things, it doesn't seem to work. Can you say a little bit about why it may not pan out the way it is supposed to?

I take a lot of time looking into the rating agencies. They put a letter grade on investings. It's hard to pin them down exactly on what they put into this. Investment grade stuff is supposed to be very unlikely to lose its money. And it all depends on when those investments would fail. If just the housing market in Florida collapses, is there a problem? What about in Arizona and Florida? The entire housing market? You can look at historical data to predict that. There are plenty of people who didn't see this coming. It was hard to put together all the pieces. There were people who said that the levels were unsustainable - but a large plunge? That wasn't a lot of people saying that.

And about our particular bond - they were right on some things, like how long it lasted. They made predictions how quickly homes in certain states would move to foreclosure. There's just a lot of variables that are unpredictable. It was a real lesson to me that there is so much instability in the market now.

By the time you guys were buying Toxie, at pennies on the dollar, was she in fact rated at that point?

Yea it was definitely in the junk range. It was 99% off!

Finally, when you're in the finance industry, you hear a lot about hedging or insurance. Is there any way, knowing that Toxie was a risky investment - could you have put some sort of credit default swap or something along those lines? Some life insurance for Toxie? We actually joked that our editor would do that, but I don't think they do custom deals for a $1000 toxic asset.

We did talk about selling it at some point. The problem is that it was clear that we were going to lose money. We tried to reach the person who sold it to us, but we couldn't find them.

I appreciate you taking the time to talk to us, thank you.