On Wall Street it was spring 2005 "when we began to hear the first jokes about the housing market," writes Lawrence McDonald, vice president at Lehman Brothers before its historic September 2008 collapse.
McDonald, author of a riveting new inside history of Lehman, "A Colossal Failure of Common Sense," says, "One name in particular kept popping up on the joke menu: Stockton."
Wall Street traders jokingly called the port city a "subprime nirvana" that helped pioneer the NINJA mortgage: "No income, no job, no assets."
But it was more than Stockton that rang the first alarm bells at the massive New York investment bank. It was California's entire Central Valley: thousands of people with small salaries who had gorged themselves on cheap teaser loans and big two-story new houses.
McDonald worked in Lehman's distressed debt division, where traders made large sums guessing which company and industry was headed for the skids, then shorting their stocks.
"The housing boom was so widespread it was difficult to know where to start," he wrote. "But we kept coming back to California, and that invariably led to the central part of the state, especially along Route 99, the original two-lane highway that starts just south of Bakersfield and runs to Sacramento."
Refugees were pouring in from expensive coastal zones "into rows and rows of brand new houses. They were digging up the asparagus fields to build more."
Through 2005 and 2006, even early 2007, McDonald wrote, doubts were not officially entertained at Lehman meetings, especially "when the mortgage guys swaggered in with their balance-sheet-busting results for the month. Because they had the perfect retort: We're making this much money because we know precisely what we're doing, and because the U.S. housing market always goes up. That's always, not sometimes, not usually."
But then, wrote McDonald, people began spilling out of the houses they couldn't afford in Bakersfield, Modesto, Sacramento.
"This was nothing like a few guys in over their heads; now there was a whole scattered army on the march, getting out of their new homes and going back to the poorest areas of the cities where they could afford to live," he said.
Big subprime lenders collapsed and then, "fear, that most terrible of Wall Street predators, was suddenly lurking in our conference room," he wrote.
Recalling early 2005 when the doubts began, McDonald wrote, "There was not one shred of evidence that the mortgage bonanza would ever go wrong or that house prices would fall. But by golly, if they ever did, Stockton would surely be ground zero for financial crisis."
Five years have passed. Stockton is a wreck. A shocked Sacramento still reels. Merced is on its knees.
McDonald's story of Lehman Brothers tells how a band of skeptics once watched this Central Valley landscape from afar, joked about it, saw this coming.
In hindsight, it's easy to see how Lehman's collapse is much the same as Highway 99's.
And both await likely harsh judgments in American financial history.
(Source: http://www.sacbee.com/2010/02/19/2548438/home-front-wall-street-used-stockton.html#mi_rss=Home%20Front)