How We Missed the $8 Trillion Housing Bubble

Question: How did we fail to see an $8 trillion housing bubble? (Dean Baker, Beat the Press)

Ernest Patrikis:  Well Shiller at Yale wrote a book, that’s his name, and told us that we had this huge real estate bubble.  I didn’t read the book, but I knew what he was saying.  And awful lot of people knew about it.  The way I look at it, there’s no single cause.  This event, as horrendous as it is, took an awful lot of people working hard to get us there.  It’s bank supervisor’s not doing their job, it’s directors and management of financial organizations not doing their job.  It’s Congress not doing its job with Ginnie Mae and Fannie Mae.  I can go on and on with a large list.  It’s the securitizers who were securitizing and had no skin in the game in terms of the loans they were working at. 

It was the investment banks who would specify the nature of the securitized products and what those loans must call for.  It was the rather slimy brokers for real estate lending and mortgage bankers.  It was S&L’s, Federal S&L’s who had these transactions go through them for usury purposes who really didn’t care what the transactions were.  It just goes on and on.  The Fed, the interest rates too low.  So, it really, I think inappropriate to say it’s any one person when I think it’s a systemic event, and that’s what we have is a systemic event. 

Society is to blame, not any single group of people and we should punish any single group of people.  Our firm gave a presentation last February, and I think we listed two full pages of what I call, “The Villains.” 

Question: How is AIG to blame?

Ernest Patrikis:  Well, at AIG-FP, Financial Products the Swap Sub to me the financial products was unique amongst the AIG Subsidiaries, it was almost as if it was not a part of AIG.  It was extremely independent and set up to be that way.  It also was, I think, unique in that four of the holding company directors were on the board of AIG-FP.  Mr. Greenberg, Howie Smith the CFO, Bernie Adenoff, retired from Sullivan and Cromwell, and Nani Feldstein.  Hank was pushed out because my relationship with these people, they put their arms out and kept me away, as others, and they were successful in doing it because Hank supported them being separate.  I don’t know what kind of oversight was being carried on when we were redoing the Annual Report in 2005 and afterwards.  I’m happy to say, the trades were put on after I left, but I wouldn’t have known about it anyway the way it was run. 

And I also don’t have a full understanding of what happened with risk management.  AIG was perhaps one of the few firms that early on had market risk at both the level of the profit center and in the holding company.  What did happen is that the Senior Market Risk Officer retired.  There was a reorganization and he was going to report to somebody, and I think he decided that he’d rather not report to someone.  He had been reporting directly to Hank and had a good rapport with Hank and he had a feel for financial products and he was tough enough to deal with him.  With him gone, I suspect we lost some edge, and with Hank gone, we lost an edge.  And so the thought about the massive bailout because of the needs of collateral, I don’t know why all those trades were put on. 

But what we’re seeing now is, for many of them, the risk was market value risk.  It was the same thing as long-term capital management.  At AIG, Berkshire Hathaway and Goldman Sachs were going to buy Long-Term Capital Management’s book.  The book would be in the money at maturity.  It was baked-in-the-cake profit, it just didn’t have the capital to get there and we didn’t get a chance to do the transaction because of a meeting at the New York Fed.  In the same way, I’m guessing now, I don’t know, that the financial products book may well be in the money.  Yes, there probably are some bad credit default swaps, but some of that collateral was starting to come back. 

So, it was the need for massive amounts of – the way FP ran is, every transaction was guaranteed by the holding company, by AIG, which was then AAA, which was then AA, and there were triggers in the swaps, so when AIG was downgraded, it affected FP.  Put all of those events together and the massive need for collateral the banks were unwilling to put up, maybe it was just too much for them or they couldn’t see it all, but that was a shock to the system in terms of size, but not a big a shock to the system as Lehman.  I think AIG was sort of gravy.  I think the real massive amount was the Lehman shock to the system of the Lehman failure after the Bear Sterns bailout.

Question: After 2006, what was the thinking among regulators and financial professionals concerning a scenario in which housing prices fell significantly in many areas of the country? (Arnold Kling, Econlog)

Ernest Patrikis:  I think they both had a mistaken view.  And I think – the thought really, if I can recall correctly, really is that the product could withstand it.  That the investors who invested in these products were all mature adults, able to invest buy side investors.  Many of the AAA tranches were acquired by banking organizations who thought they were safe.  And they bought credit default swap insurance on it.  I think there was just too much of an assumption that the product would take care of itself.  That if there were defaults the risk was spread. 

The whole thought of credit default swap and securitization was the spreading of risk and I think that what we’ve learned is that, yes, you can spread it, but the other part of it was, you couldn’t get rid of it because of the lack of liquidity in the market.  And I really see the major issue and the major signal for me was early on when there was no 30, 60, 90-day money in the market and people with positions couldn’t finance themselves.  And I think the Fed was a little slow to pick that up.  But I think too much assuredness in the product. 

It will be interesting to see when the product does come back in a major way, will it just come back again in the same way?  There won’t be any features on it that will yield control in the banking organization so they can get these off balance sheet, not have some of them come back like they are coming back.  But I think there was just too much of an assumption that this product worked.  I guess we’d have to look back to the last recession and say, there really weren’t a lot of issues in housing of a great degree – securitized housing in the last recession, so we lacked experience. 

And the major concern on securitizations was in a market of falling interest rates, people doing refinancing, and we didn’t see that in this market.  Perhaps we’re seeing a little now when people can do it.  But I think the answer is to be a little more skeptical of the product.  I’m disappointed in the buy-side.  We’ve had a lot of criticism of the sell side, which is deserved, but a lot of the people buying these products were institutional investors.

Recorded on November 9, 2009

AIG’s former head council Ernie Patrikis thinks society should take the blame.

Are we really addicted to technology?

Fear that new technologies are addictive isn't a modern phenomenon.

Credit: Rodion Kutsaev via Unsplash
Technology & Innovation

This article was originally published on our sister site, Freethink, which has partnered with the Build for Tomorrow podcast to go inside new episodes each month. Subscribe here to learn more about the crazy, curious things from history that shaped us, and how we can shape the future.

In many ways, technology has made our lives better. Through smartphones, apps, and social media platforms we can now work more efficiently and connect in ways that would have been unimaginable just decades ago.

But as we've grown to rely on technology for a lot of our professional and personal needs, most of us are asking tough questions about the role technology plays in our own lives. Are we becoming too dependent on technology to the point that it's actually harming us?

In the latest episode of Build for Tomorrow, host and Entrepreneur Editor-in-Chief Jason Feifer takes on the thorny question: is technology addictive?

Popularizing medical language

What makes something addictive rather than just engaging? It's a meaningful distinction because if technology is addictive, the next question could be: are the creators of popular digital technologies, like smartphones and social media apps, intentionally creating things that are addictive? If so, should they be held responsible?

To answer those questions, we've first got to agree on a definition of "addiction." As it turns out, that's not quite as easy as it sounds.

If we don't have a good definition of what we're talking about, then we can't properly help people.


"Over the past few decades, a lot of effort has gone into destigmatizing conversations about mental health, which of course is a very good thing," Feifer explains. It also means that medical language has entered into our vernacular —we're now more comfortable using clinical words outside of a specific diagnosis.

"We've all got that one friend who says, 'Oh, I'm a little bit OCD' or that friend who says, 'Oh, this is my big PTSD moment,'" Liam Satchell, a lecturer in psychology at the University of Winchester and guest on the podcast, says. He's concerned about how the word "addiction" gets tossed around by people with no background in mental health. An increased concern surrounding "tech addiction" isn't actually being driven by concern among psychiatric professionals, he says.

"These sorts of concerns about things like internet use or social media use haven't come from the psychiatric community as much," Satchell says. "They've come from people who are interested in technology first."

The casual use of medical language can lead to confusion about what is actually a mental health concern. We need a reliable standard for recognizing, discussing, and ultimately treating psychological conditions.

"If we don't have a good definition of what we're talking about, then we can't properly help people," Satchell says. That's why, according to Satchell, the psychiatric definition of addiction being based around experiencing distress or significant family, social, or occupational disruption needs to be included in any definition of addiction we may use.

Too much reading causes... heat rashes?

But as Feifer points out in his podcast, both popularizing medical language and the fear that new technologies are addictive aren't totally modern phenomena.

Take, for instance, the concept of "reading mania."

In the 18th Century, an author named J. G. Heinzmann claimed that people who read too many novels could experience something called "reading mania." This condition, Heinzmann explained, could cause many symptoms, including: "weakening of the eyes, heat rashes, gout, arthritis, hemorrhoids, asthma, apoplexy, pulmonary disease, indigestion, blocking of the bowels, nervous disorder, migraines, epilepsy, hypochondria, and melancholy."

"That is all very specific! But really, even the term 'reading mania' is medical," Feifer says.

"Manic episodes are not a joke, folks. But this didn't stop people a century later from applying the same term to wristwatches."

Indeed, an 1889 piece in the Newcastle Weekly Courant declared: "The watch mania, as it is called, is certainly excessive; indeed it becomes rabid."

Similar concerns have echoed throughout history about the radio, telephone, TV, and video games.

"It may sound comical in our modern context, but back then, when those new technologies were the latest distraction, they were probably really engaging. People spent too much time doing them," Feifer says. "And what can we say about that now, having seen it play out over and over and over again? We can say it's common. It's a common behavior. Doesn't mean it's the healthiest one. It's just not a medical problem."

Few today would argue that novels are in-and-of-themselves addictive — regardless of how voraciously you may have consumed your last favorite novel. So, what happened? Were these things ever addictive — and if not, what was happening in these moments of concern?

People are complicated, our relationship with new technology is complicated, and addiction is complicated — and our efforts to simplify very complex things, and make generalizations across broad portions of the population, can lead to real harm.


There's a risk of pathologizing normal behavior, says Joel Billieux, professor of clinical psychology and psychological assessment at the University of Lausanne in Switzerland, and guest on the podcast. He's on a mission to understand how we can suss out what is truly addictive behavior versus what is normal behavior that we're calling addictive.

For Billieux and other professionals, this isn't just a rhetorical game. He uses the example of gaming addiction, which has come under increased scrutiny over the past half-decade. The language used around the subject of gaming addiction will determine how behaviors of potential patients are analyzed — and ultimately what treatment is recommended.

"For a lot of people you can realize that the gaming is actually a coping (mechanism for) social anxiety or trauma or depression," says Billieux.

"Those cases, of course, you will not necessarily target gaming per se. You will target what caused depression. And then as a result, If you succeed, gaming will diminish."

In some instances, a person might legitimately be addicted to gaming or technology, and require the corresponding treatment — but that treatment might be the wrong answer for another person.

"None of this is to discount that for some people, technology is a factor in a mental health problem," says Feifer.

"I am also not discounting that individual people can use technology such as smartphones or social media to a degree where it has a genuine negative impact on their lives. But the point here to understand is that people are complicated, our relationship with new technology is complicated, and addiction is complicated — and our efforts to simplify very complex things, and make generalizations across broad portions of the population, can lead to real harm."

Behavioral addiction is a notoriously complex thing for professionals to diagnose — even more so since the latest edition of the Diagnostic and Statistical Manual of Mental Disorders (DSM-5), the book professionals use to classify mental disorders, introduced a new idea about addiction in 2013.

"The DSM-5 grouped substance addiction with gambling addiction — this is the first time that substance addiction was directly categorized with any kind of behavioral addiction," Feifer says.

"And then, the DSM-5 went a tiny bit further — and proposed that other potentially addictive behaviors require further study."

This might not sound like that big of a deal to laypeople, but its effect was massive in medicine.

"Researchers started launching studies — not to see if a behavior like social media use can be addictive, but rather, to start with the assumption that social media use is addictive, and then to see how many people have the addiction," says Feifer.

Learned helplessness

The assumption that a lot of us are addicted to technology may itself be harming us by undermining our autonomy and belief that we have agency to create change in our own lives. That's what Nir Eyal, author of the books Hooked and Indistractable, calls 'learned helplessness.'

"The price of living in a world with so many good things in it is that sometimes we have to learn these new skills, these new behaviors to moderate our use," Eyal says. "One surefire way to not do anything is to believe you are powerless. That's what learned helplessness is all about."

So if it's not an addiction that most of us are experiencing when we check our phones 90 times a day or are wondering about what our followers are saying on Twitter — then what is it?

"A choice, a willful choice, and perhaps some people would not agree or would criticize your choices. But I think we cannot consider that as something that is pathological in the clinical sense," says Billieux.

Of course, for some people technology can be addictive.

"If something is genuinely interfering with your social or occupational life, and you have no ability to control it, then please seek help," says Feifer.

But for the vast majority of people, thinking about our use of technology as a choice — albeit not always a healthy one — can be the first step to overcoming unwanted habits.

For more, be sure to check out the Build for Tomorrow episode here.

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Credit: World Values Survey, public domain.
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