If there's any doubt that the problems of Wall Street have reached Main Street, look no further than Wit Solberg, a sort of "toxic asset detective" in Kansas City. As the head of Mission Peak Capitol, he helps small banks unravel the investments they have bought so they can estimate what they might be worth.
Many of the biggest banks are teetering under the weight of toxic assets — complicated pools of mortgages, collateralized debt obligations, mortgage-backed securities. But some small community banks — the kind that would usually lend to the guy down the street — also got sold these toxic goods.
Solberg is trying to clean up the mess.
Before coming back to his hometown, Solberg had made a career on Wall Street, in the industry that created these kinds of securities. These days, he really does work on Main Street: 1908 Main St., to be specific. It's the first time he's worked below the 30th floor.
A Broker Comes To Town ...
Last summer, Solberg moved back to Kansas City and was shocked to find that a small bank in town owned toxic assets.
It was as if the animals from the Wall Street zoo had escaped and hidden in bank vaults halfway across the country. Solberg found himself driving around the Midwest on a kind of toxic asset road trip.
"Most of the banks we're working with, nobody has ever heard of before. They're small little places," he says. "And as you get closer to the town, you start seeing the branches of the banks. So you're like, 'Oh, there it is.' And we get out of the car and take a picture of the bank and say, like, 'The bank is actually for real!'"
Small community banks typically made local loans to people they knew. And maybe they bought Treasury bonds.
But then one day, a broker came to town.
"These guys, they're brilliant salesmen," Solberg says. "They're like, 'You're buying these old stodgy government products, when look what Wall Street has created to get yield. And it has this credit rating on it.'"
In fact, it had the highest credit rating: AAA.
The bankers did not want to admit they didn't understand it, Solberg says.
Most of the local banks seem to be fine, but for others, it's the same story over and over. They tell Solberg they have an asset that has plummeted in value and no one will buy it. Often, they just want him to find out what it really is or figure out what it might be worth. They'll give him basic information and sometimes a huge complicated legal document that came with the asset.
When they don't have the paperwork, they may only have receipts that often have less detail than a Costco receipt. For example, Solberg explains, it will say: Bought bond. $10 million, Dec. 4, 2005.
"We'll just be like, 'OK, is this is all you have?'" Solberg says.
The banks tell him that they've been getting payments and that the real big payment comes at the end, when you get the money back.
"That's the story," Solberg says.
Toxic assets come in all shapes and sizes. In general, wrapped inside them is money someone promised to someone else — mortgage payments, maybe credit card debt — something that is beginning to go bad or that people worry will go bad.
Solberg's detective work usually begins with something called a CUSIP number. CUSIP — short for Committee on Uniform Security Identification Procedures — is an asset's nine-character alphanumeric code.
Most CUSIPs provide a lot of information: that a homeowner with a $1 million mortgage is 60 days past due or that a third of the mortgages in the pool are in California.
But for one CUSIP number Solberg calls up on a Bloomberg computer terminal, not a lot of financial data can be accessed. It's private, and the screen is basically blank.
"When it's private, it can be anything," he says. "You're not going to get collateral description."
Sometimes, Solberg will call up the person listed on documentation for the asset, only to find he's been fired or that the company just doesn't exist anymore.
There's also good news — or what passes as good news for his clients: He calls a woman who works at a small bank in the Midwest. The bank had thought its toxic asset was worthless. Solberg tell her that although he didn't get the bank its money, he found a document that proves it hasn't lost everything just yet.
A Tangled Knot
Solberg admits that his industry made complicated finance structure products "and we sold them to people who knew what they were buying."
But are some of the products too complicated?
"Yeah, absolutely," he says. "There are pools of bonds that own pieces of this bond in it, that have a whole new other layer of rules. I could have stacks of books to the ceiling that I have to drill through to figure out what [they're] worth. Yeah, it's too complicated."
The thing about these complex financial structures is that they work fine when everything is going well. Almost everyone who puts money in gets paid back. As the mortgages get paid off, this tangled knot just disappears.
But a lot of these things were just not made to go bad. They don't fail gracefully.
The strange thing about this story is that these little banks Solberg has seen are fine. If they bought toxic assets, it was a small fraction of their investments.
The big banks, though — the ones that were best equipped to understand this stuff — are the ones that are really in trouble.