What do a 1970 psychology experiment and the 2008 housing crash have in common? In Episode 6 of Built to Divide, Dimitrius Lynch traces how social identity theory—the instinct to form “us vs. them” groups—became a political weapon that helped sell a bipartisan push for mass homeownership, weaken skepticism, and pave the way for subprime mortgages, mortgage-backed securities (MBS), CDOs, and a crisis engineered by incentives.

We move from NAFTA-era globalization and Peter Drucker’s “core competencies” mindset, to the dot-com bust, Fed rate cuts, and the explosion of “stated income” lending. The episode spotlights Washington Mutual (WaMu)—from community-friendly bank to shareholder-driven mortgage machine—then follows the collapse, the scapegoating of low-income borrowers, and the rise of institutional investors turning foreclosures into portfolios. A story about housing, finance, and the narratives that keep us divided—even when the math says we share the same stakes.

Episode Extras - Photos, videos, sources and links to additional content found during research.

Episode Credits:

Production in collaboration with Gābl Media

Written & Executive Produced by Dimitrius Lynch

Audio Engineering and Sound Design by Jeff Alvarez

The year is 1970.

2

Under the buzz of high bay halogen lights, folding tables are set up in rows on the court

of a school gymnasium.

3

A young social psychologist named Henry Tajvel enlists a group of boys for an experiment.

4

He asks the group to look at dots on a projector screen.

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Estimate how many, he says.

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After delivering the responses, Tajvel discreetly tells each

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whether they overestimated or underestimated and split up the boys accordingly.

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In reality, the dot exercise didn't matter at all.

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The two groups were assigned randomly.

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Then comes the part that does matter.

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He asks each boy to distribute points to a pair of unknown participants labeled only by

group, overestimators or underestimators.

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To increase the stakes,

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the points are converted to money at the end.

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The pattern is immediate and eerie.

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Unaware of who was even in their group and understanding that they themselves didn't win

or lose anything in making the decision, the boys funneled more points to their own group.

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Even employing a skewed point system where the total money paid out to everyone increases

if you distribute some points to the other group,

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they sacrifice the increased total to give their side a relative edge.

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A trivial line drawn in an afternoon becomes a fault line.

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Put simply, people instinctively tend to act in favor of themselves and their group over

the benefit of the whole.

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From experiments like these, Tajvel and later his student John Turner shaped social

identity theory.

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We do not only hold opinions,

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We inhabit groups.

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We sort, compare, and identify.

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We favor us.

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We shade them.

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We derive pride, status, and security from the banners we carry, even if those banners

were handed out five minutes ago in a lab.

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The cognitive gears are simple and persistent.

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One, social categorization.

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We label ourselves Dr.

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Driver Renner.

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owner, black, white, coastal or heartland.

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Two, social identification.

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We feel the emotions of our camp and see the world through its narrative.

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Three, social comparison.

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We evaluate our side against the other.

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Who earns, who deserves, who belongs.

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There are general motivational or cognitive processes which one can conceptualize

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in relatively pure individual psychological terms, which whence triggered by some

stimulus, some event, some state, purely psychologically defined, automatically and

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inevitably produces a hostile or negative out-group attitude.

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Because the process is purely psychological, and individual psychological, and therefore

unaffected by the social meaning of any intergroup relationship, of any social

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understanding,

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of the relationship between in-group and out-group.

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It's inherently an irrational process.

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And indeed, in many respects, it can even be seen almost as socially meaningless or

haphazard.

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That was John Turner, who later became a professor of psychology at Australia National

University.

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In this lecture on the concept of prejudice, he highlights the dangerous side of social

identity theory.

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When the right switches get flipped,

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the human mind leans towards seeing them as a threat.

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We saw this in Levittown.

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We would see it again in a different form in the 90s and early 2000s.

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Them to exploit.

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Give people a category and we will act like it's a tribe.

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Give a tribe a story and it will shape policy.

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Starting in the 90s, politics turned this lesson into scripture.

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As rhetoric sharpens, us becomes righteous.

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them become suspect and expendable.

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The result is a politics where policy details dissolve under team loyalty.

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If your group cheers, you cheer.

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If your group booze, you booze.

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Even when the scoreboard, wages, rents, or closures, says you're losing.

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This is how identity can bend an economy.

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How strategically exploiting an outgroup becomes acceptable.

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Identity became a fog thick enough to hide a foreclosure crisis coming straight towards

us.

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I'm Demetrius Lynch and this is Built to Divide.

65

Mr.

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Melby, do you think the line managers knew that loan originators were knowingly sponsoring

mortgage applications that contain lies?

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I think the answer is yes.

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Families are not forming as early.

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There has been certainly a breakdown in what we would have originally called or uh

conventionally called the nuclear family.

70

In our last episode, we traced the pivot from public responsibility to private reward.

71

Nixon's break from the gold standard, the retreat from public housing, the rise of

vouchers and tax favoritism for owners, the intellectual turn toward deregulation and a

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landscape increasingly priced, packaged and policed by markets.

73

We watched the middle-class flicker, the renter's safety net fray, and the idea of home

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morph into an investment product.

75

If you haven't listened to that episode, I encourage you to go back and listen to all the

episodes of this series in order.

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Today we'll dig into the 1990s and 2000s, the lead up to and impacts of NAFTA, the ripple

effects from the dot com bubble burst, how social identity helped sell a bipartisan

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crusade for ownership, how subprime lending surged,

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especially in communities long denied credit, how the machine of securitization spread

risk until it became collapse, and how architects, planners, and investors reshaped cities

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under the banners of revitalization, new urbanism, and smart growth, even as affordability

slipped away.

80

We'll follow the political theater from Jack Kemp's hope to Clinton's national home

ownership strategy to Bush's

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Ownership Society and ask who actually owned the upside and who absorbed the fall and

we'll get into all of that after this break

82

Episode 6, The Fog of Identity.

83

The 1980s didn't just bring new policies.

84

They rewired the intellectual backbone of American capitalism.

85

While politicians preached markets and deregulation, another force was shaping the

worldview of the people who would run America's corporations, investment banks, and

86

eventually its trade policy.

87

That voice belonged to Peter Drucker.

88

Strucker didn't speak in slogans.

89

He spoke in frameworks.

90

Born in Austria, trained in law and journalism, he arrived in the United States carrying a

conviction that industrial capitalism was about to be remade.

91

Not by government, not even by capital, but by management.

92

He saw companies as social organisms.

93

He warned executives that organizations get sick the way people get sick.

94

And he pushed an idea that would shape global capitalism for half a century.

95

Focus on your core competencies.

96

Outsource the rest.

97

It was the gospel of efficiency for a country being persuaded to abhor bureaucracy,

regulation, and the hard work of shared prosperity.

98

In the 1970s, Drucker's books, Management, Task, Responsibilities, Practices, and The Age

of Discontinuity

99

were required reading in corporate boardrooms.

100

By the 1980s, his ideas were everywhere.

101

GM, IBM, Procter & Gamble, the business roundtable, and the emerging class of management

consultants who would become the unofficial technocracy of American economic life.

102

Drucker wasn't pushing policy, he was pushing a mindset.

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And in Washington, a generation of lawmakers took note.

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One of them was Congressman David Dreier, a rising California Republican with a

pro-business streak and a Rolodex of corporate allies.

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Dreier wasn't a student of Drucker personally, but he was a product of Drucker's world.

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Southern California had embraced the management revolution early.

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Defense contractors, white collar service firms, technology corridors, and the booming

Orange County corporate culture.

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Drucker actually taught just up the freeway at Claremont Graduate School, where executives

flocked for his weekend seminars.

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Drucker's message was simple.

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Global competition is coming.

111

The companies that survive will be the ones that reorganize, outsource, and transcend

borders.

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For Dreyer, and for the California business community that backed him, it was rocket fuel.

113

When the North American

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free trade agreement, or NAFTA, came up for debate in the early 1990s, Dreier became one

of its fiercest champions.

115

He framed the deal not just as trade policy, but as modernization, a way to help American

firms shed inefficiencies, expand markets, and stay competitive in a globalizing economy.

116

This Drucker speak turned into congressional testimony.

117

Mr.

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Speaker, Teddy Roosevelt said that we have an obligation to support our president when

he's right and a responsibility to oppose him when he's wrong.

119

Tonight, Republicans will provide an overwhelming vote for the North American Free Trade

Agreement

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because bill clinton is right on this issue

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On November 11th of 1979, Ronald Reagan announced his candidacy for President United

States.

122

In it, he envisioned a North American accord, one that would unite Canada, the United

States, and Mexico.

123

He did so because he believed strongly in free markets, an expanding opportunity for

individuals, in reducing taxes.

124

and creating greater political pluralism.

125

Tonight, we are going to have an opportunity to do that here, to finally bring that vision

to reality.

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Now as we look at this struggle that has gone ahead, many people have been involved in it.

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Clearly, President Reagan envisioned it.

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This agreement was put together by President Bush, and many people who worked hard there

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and President Clinton supports it.

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This is the kind of bipartisan support that the American people want and we can do it

again on other issues.

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We have a great opportunity for the future and I happen to believe that when the ideals of

free markets, expanded opportunities are before us, we can support it.

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Vote yes on the North American Free Trade Agreement.

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Dreyer wasn't alone.

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The coalition pushing NAFTA was almost a copy paste of Drucker's disciples, Fortune 500

CEOs, the Chamber of Commerce, the Business Roundtable, tech firms hungry for integrated

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supply chains, and consultants trained in Drucker's belief that the future belonged to

lean organizations with global reach.

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NAFTA shifted the framework of the American economy.

137

According to the US Trade Representative, this trade supported over 140,000 small and

medium-sized businesses in the US through cheaper supply and labor or exports of their

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products to Canada or Mexico.

139

Most economists agree NAFTA boosted the US economy overall by increasing trade, but its

effects were uneven.

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The bigger picture was that manufacturing left the US and supply chains stretched.

141

Productivity rose overall, but jobs didn't always follow.

142

Between 1993 and 2013, the US trade deficit with Mexico and Canada rose from 17 billion to

177 billion, contributing to nearly 852,000 displaced US jobs.

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But the economist Gordon Hansen argued that far more jobs might have been lost to China

without NAFTA.

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Ultimately, the effect was downward pressure on wages, and inequality, moderate through

the mid-20th century, began to increase rapidly.

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The logic wasn't malicious, it was managerial.

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If a company's job was to be efficient, not patriotic, outsourcing was smart for business.

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that it is absolutely impossible to make a financial person understand business.

148

No, They believe that you make money.

149

Hell no, you make shoes.

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This is Peter Drucker, later in 1997, during a CEO forum hosted by Forbes Magazine called

Management Techniques in the Next Century.

151

In front of a room of CEOs, he delivered this prescient warning about an over-emphasis on

shareholders.

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Our owners, our new owners, will have to understand it in the form in which they can

handle it.

153

And so the governance of corporations, we are just beginning to tackle it.

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And let me say so far, oh most of my friends in big businesses try to duck it.

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and things that get away with it.

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They say out loud, we are running this place for the short-term interest of the

shareholder.

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And with that mantra, endless, you repeat it, then try to do the right things.

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Well, one can fool most of the people most of the time.

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But I think we are getting to the end of this.

160

We have to accept the fact that we have to get the cross.

161

It's the interest of the shareholder as expressed in yesterday's Dow Jones is not what we

are running our company by.

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Because if we did, we wouldn't have one very soon.

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Despite his warning, the horse was already out of the barn.

164

What began as Drucker's theory of efficient management, however short-sighted, became

165

firmly rooted in the business world and spread into a political worldview.

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Government should operate more like a business.

167

Be more efficient.

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Just get out of the way.

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Markets should organize themselves.

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The winners deserve their gains.

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The losers must adapt.

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NAFTA was the policy embodiment of that worldview.

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A bipartisan embrace of borderless capital at a moment when working class wages were

stagnating

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Unions were weakening and the foundation of the American middle class had been slowly

dismantled.

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All for the bottom line, in service of the shareholder.

176

And the consequences didn't stop at trade.

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They spilled into housing, global investment into real estate, upward pressure on land

values, offshore manufacturing jobs, hollowing local tax bases, and working class families

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pushed into more prog-

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various forms of shelter and debt.

180

By the time the housing market became the next frontier for, quote, innovation, the

ideological groundwork was already set.

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Efficiency over equity, deregulation over guardrails, individual responsibility over

shared obligation.

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A country managed like a corporation, and now housing would be managed like a product.

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By 1990, home ownership

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plateaued around 64%.

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That number carried the weight of a national promise.

186

For black and brown families shut out by redlining, covenants, and neighborhood stability

codes, ownership was more than a deed.

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It was back pay on a stolen century.

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Politicians in both parties seized the symbolism, increased the home ownership rate,

closed the gaps, and healed the nation's wounds with a key.

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Let's not kid ourselves.

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To maximize and squeeze that last bit out of the housing market, buyers needed to come

from somewhere.

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There was a problem, however.

192

Decades of exclusion meant many low-income families had little wealth for down payments

and spottier credit histories.

193

So the question became, how do you turn denied borrowers into approved buyers?

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In the spirit of, quote, compassionate conservatism, a philosophy that trusted markets,

along with support from government, churches, and charities to uplift the poor, Jack Kemp,

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a professional football player turned politician, emerged as a housing evangelist.

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His mission was bold, put assets in the hands of the poor.

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First of all, the economy has been through some very tough times.

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Interest rates have been very high.

199

There's a direct correlation between high mortgage rates, high long-term interest rates,

and the ability of people to afford housing.

200

That's one problem.

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A second problem is the demographics of the country are changing.

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Families are not forming as early.

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uh There has been certainly uh a breakdown in what we would have originally called or uh

conventionally called the uh nuclear family.

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I would say they're both demographic as well as economic reasons for it.

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It's a very small dip, but any dip is disappointing because really home ownership is at

the heart of the American dream.

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And HUD and FHA and Jenny May and the things I'm involved with, we all loosely put

together as helping people to recapture the American dream.

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That is to own property, to own a home, and to get that first time home particularly.

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So I believe that in the Bush administration we can change those figures, but nonetheless

it's a daunting challenge.

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As HUD secretary under George H.W.

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Bush from 1989 to 1993, Kemp pushed a pet project called HOPE, Home Ownership and

Opportunity for People Everywhere.

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Like Margaret Thatcher, he sought tenant ownership of public housing units, a

transformation from occupant to owner that he believed would save families and

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neighborhoods.

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He found a partner in Kimmy Gray.

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the Kenilworth Parkside Resident Management Corporation, a DC pioneer of resident control.

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The rhetoric was revival-temp powerful.

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Ownership would spark dignity, discipline, and responsibility.

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But turning distressed buildings into sellable assets required massive capital for rehab,

deep subsidy, and careful governance, everything the politics of the moment wanted to

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avoid.

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Kenilworth Parkside never achieved broad-tenant purchase and the idea stalled.

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Yet Kemp's sermon echoed.

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You could hear it later, on the house floor, in campaign speeches, and behind the doors of

Fannie Mae and Freddie Mac.

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It aligned perfectly with American self-image.

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Opportunity if you reach.

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Ownership if you try.

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Today, all across the country, I say to millions of young working couples who are just

starting out,

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By the time your children are ready to start the first grade, we want you to be able to

own your own home.

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All of our country will reap enormous benefits if we achieve this goal.

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Home ownership encourages savings and investment.

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When a family buys a home, the ripple effect is enormous.

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It means new homeowner consumers, they need more durable goods like washers and dryers,

refrigerators and water heaters.

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And if more families can buy new homes or older homes,

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More hammers will be pounding, more saws will be buzzing, home builders and home fixers

will be put to work.

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When we boost the number of homeowners in our country, we strengthen our economy, create

jobs, build up the middle class, and build better citizens.

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In the 1990s, the Clinton administration built a grand coalition of public and private

entities around the idea of expanding home ownership.

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The National Home Ownership Strategy promised

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to quote, target new markets and quote, tear down barriers of discrimination.

237

The path to do so was to push the government sponsored enterprises or GSEs, Fannie Mae and

Freddie Mac, to buy more mortgages from low and moderate income borrowers, enlist lenders

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with flexible underwriting, make a national campaign out of a moral goal.

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The instrument the GSEs found valuable

240

was one that originally emerged in the 1970s, mortgage backed securities or MBS.

241

See, a mortgage was historically held by an individual bank, a relationship between lender

and borrower.

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Even with GSEs as a secondary loan market, loans were limited.

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Investors were a new way to expand the market, but the traditional one-to-one relationship

was too cumbersome to engage with.

244

So financiers developed a system for banks to sell their loans to aggregators who then

bundled multiple loans and other assets into a single product that an investor could

245

easily buy into like a stock.

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MBSs.

247

Wall Street later developed more complex forms in the 1980s and early 90s, expanding

securitization and establishing it as a major way to finance mortgages.

248

But the financial industry still had its hands tied by the fallout of the Great Depression

and rules intended to protect depositors.

249

Here's where identity meets incentive.

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Banks and mortgage companies saw new customers.

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Wall Street saw new assets to package and flip.

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GSEs saw volume and political favor.

253

And communities long denied loans saw an open door.

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Finally, someone saying yes.

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But a yes should have guardrails.

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And in the 1980s and 90s, guardrails, even prudent ones, were being removed,

reinterpreted, or routed around.

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The SEC learned to blindly trust lending models.

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Private rating agencies wielded rubber stamps.

259

Congress learned that the phrase market-based

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a willingness to set limits for real estate loans by type and geographic market could sell

on both sides of the aisle.

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Then in 1999, the Graham Leach Bliley Act dismantled core protections of the 1933

Glass-Steagall Act, which had kept investment banks away from everyday deposits to prevent

262

speculation.

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Once those walls fell,

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Commercial banks, investment firms, and insurers could fuse into financial giants.

265

An open runway for the explosive growth of mortgage securitization.

266

Unleashed, this amplified the market for mortgages, including the first wave of subprime

risky loans.

267

Lenders began pouring credit and home loans into neighborhoods that had long been shut

out.

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Through companies like Long Beach Mortgage Company,

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Alta Residential Mortgage Trust, PNC Mortgage Corporation and PNC Mortgage Securities

Corporation, Fleet Mortgage Corporation, Homicide Landing, Bayview Capital Corporation,

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Commercial Capital Bank Corp and its Commercial Capital Bank FSB, and Pravidian Financial.

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All companies that, one by one, would be absorbed into a ticking time bomb.

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Washington Mutual.

273

A humble little bank that was too local, too friendly, too solid to ever imagine being

considered too big to fail, but became one of the biggest players in the impending crisis.

274

For generations, Washington Mutual was an institution that projected stability without

arrogance.

275

An accessible West Coast giant that many families saw as the opposite of Wall Street.

276

And for a while, it was.

277

Washington Mutual began in 1889, not as a bank chasing shareholders, but as a mutual

savings institution, owned by its depositors, accountable to the people who actually put

278

money in its vaults.

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Its mission was straightforward, help working families build a financial foothold.

280

Mutuals were designed as the economic equivalent of a safety net

281

and a ladder at once.

282

No hedge funds, no exotic instruments, no games.

283

That ethos carried Washington Mutual, WAMU as everyone eventually called it, well into the

20th century.

284

Through depressions, booms, busts, wars, and suburban expansion, its identity remained

civilized and steady.

285

It was the kind of bank your parents felt safe recommending.

286

The kind that advertised thrift,

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Home loans and community branches rather than yield spreads and arbitrage opportunities.

288

Guamu was part bank, part civic institution.

289

And in the 1990s and early 2000s, that reputation resonated especially deeply in black and

brown communities.

290

Washington Mutual wasn't perfect, but it branded itself differently.

291

Low fees, decent savings rates, a customer-friendly persona.

292

For many families, it felt welcoming in ways other banks didn't bother attempting.

293

I felt the appeal myself.

294

I had banked with my family at Bank of America for years, but in 2002, as a freshman in

college, I started managing every dollar on my own and the rules and fees hit hard.

295

Minimum balance charges, overdraft penalties, it felt like death by a thousand cuts.

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One afternoon after finally deciding enough was enough, I walked into B of A to close my

account.

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The branch felt like a dusty old vault, a relic of the 70s.

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Dim, formal, brown.

299

Lots of brown.

300

With staff sealed behind aftermarket thick glass.

301

The teller coldly slid my remaining $600 through a metal tray without eye contact.

302

like an automated transaction rather than a person.

303

I drove straight to Washington Mutual.

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Wammu branches felt like the future.

305

Open, bright, friendly.

306

No bulletproof glass, no attitude, low fees, savings rates that helped your balance grow.

307

In neighborhoods where banks could feel predatory or unwelcoming, Wammu felt like the

opposite.

308

Accessible, affirming,

309

almost like it belonged to us, modern, fresh community facing.

310

For a lot of us, WaMu wasn't just a bank.

311

It was a place where people felt seen.

312

But while WaMu marketed itself as the people's bank, behind the scenes, it had been

rapidly transforming.

313

In 1983, it formally shifted from a mutual model to a publicly traded company.

314

That pivot changed everything.

315

A depositor-driven institution now had shareholders to satisfy, earnings to grow, and

analysts to impress.

316

One quarter's good performance wasn't enough.

317

The line had to rise quarter after quarter, year after year.

318

And that transformation accelerated under CEO Kerry Killinger, who led the bank from 1990

319

As you can tell in this upbeat promo, Killinger was ambitious and determined to turn WaMu

into a national powerhouse.

320

The Walmart of banking, he once said.

321

would like to think of Washington Mutual as a company that's focused on looking at

financial services from the customer's point of view.

322

And so some people have called us the unbanked.

323

I think that showed up for us with the launch that we did nationwide of free checking.

324

For me, Washington Mutual is just a terrific institution that has been built with some

great people over the years.

325

And it has this underlying warm, friendly culture that values diversity, that allows

people to kind of be themselves, and we have a good time.

326

but it's also uh a performance-oriented culture, so it's very dynamic and driven.

327

And in the middle there is Harry Callenger ringing the opening bell.

328

We are always on the outlook about where is the landscape changing, where are the

opportunities, how can we add value for shareholders by staying a little ahead of the

329

curve.

330

We went off in inner California with the acquisition of American Savings, which doubled

the size of the company.

331

Then Ray Western, which doubled the company again, and right on the heels of that we did

HF Robinson, who were a growth company.

332

We know we have to continually adapt and we never accept the status quo.

333

I tell our employees often that we have to totally reinvent the company within a five-year

period.

334

So if we look at anything like we did five years ago, that's probably unacceptable.

335

The same thing for the next five years.

336

I expect this company will look totally different five years from now than what it does

today.

337

The path to that dream was aggressive expansion.

338

Waumu went on a buying spree, acquiring more than two dozen banks,

339

mortgage companies, and finance firms.

340

Each acquisition brought market share, customer accounts, and critically, mortgage

portfolios.

341

Mortgages became the bank's lifeblood, and then its poison.

342

By the time I opened my account with Wammu, Clinton's term had already come to an end,

successfully increasing the U.S.

343

home ownership rate.

344

When George W.

345

Bush took office, his administration continued the work, and by his second term, he pushed

housing even harder.

346

The ownership society became a centerpiece of his rhetoric, particularly ownership for

minorities who had been locked out.

347

Fannie and Freddie benchmarks rose again.

348

Now, before we dig into how the crisis was supercharged, it's important to understand one

other piece for context.

349

The dot-com bubble had burst in March 2000, wiping out roughly $5 trillion in market value

350

To revive the economy, the Federal Reserve slashed interest rates, eventually reaching

near historic lows around 1.2%.

351

It was a stark

352

contrast from the 1970s and early 80s.

353

Back then, under Chairman Paul Volcker, inflation had crossed 11%, peaking at just above

354

To combat it, the Fed raised rates dramatically to a high of 20%.

355

It worked, but at a steep cost.

356

High borrowing costs crushed demand for cars and heavy industry.

357

and the industrial Midwest never fully recovered.

358

Between 1979 and 1983, the U.S.

359

lost 2.4 million manufacturing jobs.

360

Steel employment fell from 450,000 to 170,000 with remaining workers seeing wages drop

17%.

361

Auto manufacturing was hit even harder, plunging from 760,000 workers in 1978

362

to 490,000 just three years later.

363

So when the early 2000s arrived, the economic conditions couldn't have been more

different.

364

Low rates poured fuel on demand, the complete other extreme that would quickly overheat

the economy.

365

See, the Federal Reserve's interest rate changes how expensive it is for banks and big

investors to borrow and lend money.

366

Higher rates make them nervous.

367

and they demand bigger returns on long-term investments for the risk.

368

With low rates, they're willing to accept less of a return.

369

Now mortgage loans being long-term investments react to investor sentiment.

370

Mortgage rates increase when investors demand a higher return.

371

The rate falls when investors are willing to accept less of a return.

372

So when the Fed's interest rate goes down,

373

It should theoretically start a chain reaction that encourages everyone to lend and borrow

money, eventually leading to cheaper mortgage rates.

374

However, it's important to understand that with exceptionally cheap money in the system,

inflation is soon to follow due to the amount of activity or demand that impacts labor and

375

supply.

376

Econ 101, when there's high demand, prices are bound to go up.

377

Now, while this is all happening in the background,

378

things really came off the rails fundamentally.

379

Wall Street invents its most dangerous products.

380

CDOs and synthetic CDOs, private label securities overtake government backed ones, and

subprime MBSs rapidly expand.

381

Lenders, now overwhelmed with competition, fought to attract buyers through gimmicks that

lowered monthly payments.

382

Interest only, adjustable rates, low or no down payments, balloon features,

383

and negative amortization.

384

On the ground, mortgage brokers fanned out with clipboards and promises, pushing homes

like a drug.

385

People who were once denied access were aggressively pursued as part of a new game.

386

Mortgage brokers just needed any loans to create more MBSs.

387

Then, financing only required what was referred to as stated income and stated assets.

388

where borrowers just had to declare the income and assets needed to get the loan without

verification.

389

This became an area of focus in later congressional hearings.

390

Where uh a state income loan is one where the uh loan consultant asks the person how much

they make and they enter that onto the credit application.

391

and there's no further follow-up of that number?

392

Correct.

393

When was that developed?

394

I guess it was during your period, Mr.

395

Vanisek, is that right?

396

It preceded me by some period of time, but it became a higher percentage of the loans over

time as it became more market acceptable.

397

Mr.

398

Kathkar, why do you think stated income loans became a higher percentage of the loans that

being originated?

399

Well, as Mr.

400

Vanesick said, it originated as a product for self-employed individuals who didn't have

pay stubs and whose financial statements didn't necessarily reflect what they made.

401

um It was intended to be available for only the most credit-worthy borrowers, and it was

supposed to be tested for reasonableness so that a person who said that they were a waiter

402

or a lower-paid individual couldn't say that they had an income of $100,000.

403

I think that the standards eroded over time, at least I've become aware reading all that

has happened, standards eroded over time and that it became a competitive tool that was

404

used by banks to gather business so that if a loan consultant could send his loan to bank

A or bank B, the consultant would say, well, why don't you go to bank B?

405

You don't have to state your income.

406

I do think...

407

um

408

thinking it through that there was a certain amount of coaxing that was possible from

between the loan consultant and the individual, which would be something which would be

409

invisible to a bank that received the application.

410

And the only test for that would be reasonableness, which as you've heard, there were some

issues with in the portfolio.

411

Mr.

412

Vanasek, how far up the management chain in Washington Mutual do you think they're aware

that?

413

percentage of stated loan incomes of people were engaging what Mr.

414

Cathcart said and that more and more this is becoming a way to get around the rules in

order to package as many mortgages as possible to that sell-off and mortgage-backed

415

securities?

416

I have to believe that given the long-term experience of the executives that they knew.

417

Mr.

418

Cathcart?

419

I would say that all of the review functions were pulled were were

420

Identifying that as a risk issue and that therefore both senior management and the board

was aware.

421

Mr.

422

Melby.

423

would agree.

424

Mortgage brokers convince people that they were in a financial position to own a home.

425

Communities starved of credit were suddenly overrun with it.

426

From the President of the United States down to the local trusted experts, the message was

clear and relentless.

427

You can afford a home.

428

housing market began to feel less like an economy and more like a carnival.

429

Bright lights, fast money, and no visible exits.

430

The fear of missing out was a vortex, sucking in anyone within reach.

431

Between 1983 and 2000, the share of subprime loans in minority communities leapt from 2 %

to 18%.

432

Policymakers called it inclusion.

433

Wall Street called it inventory.

434

And for buyers, the pitch was intoxicating.

435

Homes only go up.

436

Get in now.

437

This payment is temporary.

438

Refinance later.

439

If not, sell it to the next person climbing the ladder.

440

On TV, flipping houses look simple.

441

In coffee shops and break rooms, people boasted about their second condo, their third

investment property, the check they made painting cabinets and relisting a week later.

442

Everyone knew someone suddenly in real estate.

443

The home builder industry was drowning in demand.

444

I've heard stories about the industry in the early 2000s.

445

From offices to construction trailers, bonuses were handed out like party favors.

446

Sales reps got new cars.

447

Holiday parties swelled into champagne soaked spectacles.

448

Entire subdivisions rose from dirt in months.

449

Stucco, granite countertops,

450

cul-de-sacs with dirt yards and no trees.

451

Some teams worked 70-hour weeks.

452

Some marriages didn't survive the overtime or the parties.

453

And behind it all, the institutional math made everyone feel invincible.

454

If a borrower defaulted, the bank could just take the house back.

455

Prices were soaring so fast, fueled by cheap credit and low interest rates that even

foreclosures penciled out as profit.

456

Wall Street raked in fees, executives collected bonuses big enough to rewrite lifestyles,

designer suits, luxury SUVs, beach weekends, and rented villas.

457

You could feel the mania in the air, like static before a lightning strike.

458

Everyone at every level believed they had discovered the cheat code to easy money, until

they didn't.

459

Beneath the surface, there was a rock.

460

Within each bundle of loans, they are divided into groups, or tranches, based on their

level of risk or return.

461

And the volume of risky loans only increased over time, mixing in with other assets to

make them more acceptable.

462

Banks paid off private rating agencies to assign the securities their highest rating, AAA.

463

In addition, there were the collateralized debt obligations, or CDOs,

464

and synthetic CDOs which essentially operated like a Ponzi scheme.

465

If some loans defaulted, the most junior investor of that security suffered losses first.

466

But again, these two were stamped AAA, at least at the top.

467

Investors, pension funds, insurance companies, municipalities were all entangled into the

game.

468

The poison leached into every facet of the financial system.

469

Mr.

470

Melby, do you think the line managers knew that loan originators were knowingly sponsoring

mortgage applications that contain lies?

471

um I think the answer is yes.

472

We had certainly picked that up in several of our investigation reports through

discussions through our independent investigation work.

473

The witness being questioned is Randy Melby, former general auditor at Washington Mutual

474

Concerned the uh specific uh investigation I'm referring to goes back to Senator Levin had

referred to a request by an insurance agency relative to fraud.

475

And so we had conducted an investigation uh back in the issue.

476

The report was issued in 08.

477

Those results were very telling from the standpoint that uh we had this pattern of conduct

that had been occurring for a period of years.

478

where limited or no action had been taken.

479

So a report was addressed again up through executive management, up through the board.

480

This sounds suspiciously like fraud.

481

I mean, if you know that you are selling a product that is not truthful.

482

I guess is this just caviatimetor or is this something that could be considered in a,

let's play poor business practice.

483

Concerning to say the least.

484

Yes Remember Tajwell we protect our in groups in the 1990s and 2000s The in groups were

not just political parties or race.

485

They were coalitions built around an idea If your team was the home ownership team

skepticism sounded like heresy Worn about predatory lending you might be accused of trying

486

to keep minorities out

487

weren't about systemic risk, you might be dismissed as anti-market.

488

When identity hardens, policy hygiene weakens.

489

Questions we should have asked about standards, enforcement, counseling, and concentrated

risk were drowned out by the cheer of our own side and the boo from the other.

490

Frankly, people at the top were also making too much money to care.

491

Washington Mutual, through fevered acquisition,

492

became one of the largest suppliers of home loans.

493

Subprime mortgages, option arms, zero-down loans, formats once viewed as fringe or

dangerous were recast as innovation.

494

Guamu's mortgage subsidiaries became factories for these products, especially in

low-income and minority neighborhoods where traditional financing had long been withheld.

495

This was the tragic irony.

496

The bank that had once represented access and trust became one of the biggest producer of

loans designed to fail.

497

Later hearings revealed that WAMU embraced a high-risk strategy, deliberately targeting

borrowers without fully verifying income, assets, or repayment ability.

498

By mid-2005, the focus had shifted again to becoming more of a higher-risk subprime

lender.

499

at exactly the wrong time in the housing market cycle.

500

This is James Vanasek, former chief enterprise risk officer at Washington Mutual from 2004

501

Washington Mutual was a reflection of the mortgage industry characterized by very fast

growth, rapidly expanding product lines, and deteriorating credit underwriting.

502

This was a hyper competitive environment in which mistakes were made by loan originators,

lending institutions, regulatory agencies, rating agencies, investment banks that packaged

503

and sold mortgage backed securities, and the institutions that purchased these excessively

complex instruments.

504

It was both the result of individual failures and systemic failures fueled by self

interest,

505

failure to adhere to lending policies, very low interest rates, untested product

innovations, weak regulatory oversight, astonishing rating agency lapses, weak oversight

506

by boards of directors, a cavalier environment on Wall Street, and very poorly structured

incentive compensation systems that paid for growth rather than quality.

507

One must also seriously question the wisdom of the elimination of Glass-Steagall and its

impact on the securitization market.

508

Loan officers were incentivized to close deals, not evaluate them.

509

And the securitization market rewarded volume, not safety.

510

The old mutual bank DNA had been overwritten by the demands of modern finance.

511

By 2008, it all collapsed.

512

As introductory rates began to balloon, homeowner after homeowner defaulted.

513

I saw family members swept up by the fall.

514

Demand of new buyers couldn't keep up, so home prices dropped.

515

Some that were upside down on their loans just walked away.

516

But the second change was that customer behavior also changed.

517

This is Ronald Cathcart, former chief enterprise risk officer at Washington Mutual from

518

to 2008.

519

we had a phenomenon which we had never seen before, which was that a buyer who bought a

house that ended up being so-called underwater, where the house was worth less than the

520

mortgage, actually stopped making payments.

521

We first saw this in 2006, and what resulted is when you looked at the delinquency rates

for a population of borrowers, you found that the high FICO score borrowers would

522

were delinquent at exactly the same rate as the low FICO score borrowers, which in theory

was impossible.

523

So it had the whole industry scratching its head.

524

That phenomenon appeared about Q4 of 2006.

525

In retrospect, what became clear was that in the past, uh borrowers would have first let

their credit cards go, and the very last asset that they allowed to go delinquent was

526

their home.

527

This time around, it literally went in reverse.

528

where it was deteriorating housing prices that caused the mortgage to go delinquent and

the credit cards were preserved.

529

And we actually saw that phenomenon in our credit card portfolio where we found that

people who didn't own houses had performance that did not deteriorate in the earlier

530

stages of the cycle, whereas people who owned homes deteriorated.

531

And that was completely counterintuitive.

532

So these sorts of changes, um when you throw them into an environment

533

where there's an over-dependence on FICO, results in really basically steering with the

lights out.

534

Banks stuck with depreciating assets went bankrupt.

535

Securitized risk became systemic contagion.

536

The institutions that had bought the AAA tranches, pension funds, 401Ks, insurance

companies, municipalities, discovered that ratings weren't reality.

537

Investors were unable to cash out.

538

Banks failed or were forced into shotgun mergers.

539

The global economy shuttered.

540

Washington Mutual suffered the largest bank failure in American history.

541

Regulators seized the institution and sold its assets to JPMorgan Chase for $1.9 billion,

a fire sale price for what had once been a $300 billion plus giant.

542

Chase even retained property held by Washington Mutual.

543

For customers like me, the shift was abrupt.

544

One day you had a WAMU debit card, the next day a Chase logo arrived in the mail.

545

The personal bank that had welcomed so many was absorbed into a behemoth, yanking runaways

like me back into the same rules, minimums, and fees I tried to escape.

546

For communities that once saw WAMU as a partner, the failure was violating.

547

It wasn't just a bank collapse.

548

It was a collapse of trust, a familiar story in American housing and finance.

549

An institution built for people morphs into an institution built for profit and the people

pay the price.

550

Washington Mutual's story is a study in American transformation, how a mission can

migrate, how incentives can mutate purpose, and how the system of finance can turn a

551

community bank into a cog.

552

in a machine that ultimately devours itself.

553

It's a story about what happens when the logic of shareholder value eclipses the logic of

community value.

554

And it's a reminder that in the long arc of American housing and credit, even trusted

allies can become instruments of harm when the system rewards risk over responsibility.

555

But the even colder part is in the immediate aftermath,

556

Low-income Americans were the ones blamed for the crash.

557

This can be explained by what is known as the frustration aggression hypothesis or

frustration aggression displacement theory proposed by psychologists John Dollard, Neil

558

Miller, Leonard Doob, Orville Maurer, and Robert Sears in 1939, described here by John

Turner.

559

the frustration-aggression theory or frustration-aggression displacement theory.

560

A more accurate way of thinking about it for my purposes is the displacement theory of

scapegoating.

561

This is the notion which goes back to Freudian psychodynamics but was developed

particularly in the 30s by Dollard and his colleagues is the idea that for all kinds of

562

reasons people develop frustrations.

563

These frustrations tend to produce an automatic instigation to aggress

564

and yet under conditions where the aggression cannot be directed against the real target,

the real cause of the frustration, because either it may be unknown or because the real

565

cause of the frustration is too dangerous, too powerful or unavailable, then nevertheless

the instigation to aggress continues to build up.

566

The drive to aggress continues to build up and at some point it has to spill over.

567

It has to be displaced.

568

It has to go somewhere.

569

and it goes almost in a haphazard way on some other target, some group who are not the

cause of the frustration.

570

So inherent in this notion, this frustration, aggression, displacement, that frustration

automatically and inevitably produces aggression and where the aggression cannot be

571

directed rationally against the cause, it must go somewhere, becomes obviously an

irrational psychological account of scapegoating.

572

That idea is still widely current.

573

Many politicians and pundits deflected and provided cloud cover for corporate finance,

pointing their fingers downward rather than upward.

574

Low income borrowers, particularly black and brown families who had long been denied

credit, were cast as reckless buyers who should have known they were getting in over their

575

heads.

576

The narrative ignored the real engine of the collapse.

577

Lenders pushing toxic products, Wall Street

578

packaging them into poisoned assets and regulators looking the other way.

579

Instead of questioning the system that targeted vulnerable households, the system blamed

its victims and it was all acceptable because they were an outgroup.

580

There was further salt in the wound.

581

From 2003 to 2011, lower income households lost about 74 % of their wealth compared to

582

while top income households only lost about 19%.

583

Retirement accounts evaporated, small businesses withered, families doubled up, moved in

with parents, or watched their belongings set on the curb.

584

We told a generation to buy into the American dream.

585

Many did, at the worst possible moment, with the worst possible products, into the worst

possible pipeline.

586

And of course, again in crisis,

587

opportunists rise.

588

As foreclosures mounted, institutional investors moved in.

589

Private equity funds, real estate investment trusts, new platforms backed by Wall Street

credit.

590

Portfolios of single-family homes, once too scattered to bother with, became scalable with

new tech and cheap capital.

591

Rent rolls replaced lawn signs.

592

In some metro areas, entire neighborhoods

593

tilted from owner-occupied to investor-owned within a few years.

594

For families who had lost homes, this meant returning as tenants, sometimes in the same

houses, but now with corporate property managers and market rate increases.

595

The American dream was outsourced, then leased back.

596

At the same time, for the multifamily market, deindustrialized districts were reborn as

playgrounds

597

of the high-earning knowledge economy.

598

Warehouses became loss, rail-side land became condos, coffee shops replaced corner stores.

599

This had genuine benefits.

600

Less crime, more transit, better parks, but also a hard edge.

601

Displacement.

602

Long-time renters priced out.

603

Cultural fabrics thinned.

604

Postmodern housing tried to right modernism's sterility.

605

with cultural appropriateness, context, and play.

606

New urbanism, championed by architects like Andres Duany and Elizabeth Platter-Zyberg,

preached walkable blocks, mixed units, and traditional streetscapes.

607

Done well, it produced places people loved, but done at price points the market demanded,

it often skipped the people who needed it most.

608

Scholar Edward Glazer

609

argued that zoning deregulation, allowing more density where jobs are, could lower costs

across the board.

610

He was right about supply pressure, but even where rules loosened, the price of urban

land, the appetite of global capital, and the concentration of high-wage jobs often

611

swamped affordability gains.

612

Low interest rates in the early 2000s juiced housing demand.

613

Alan Greenspan's bid

614

criticized later for keeping rates too low for too long and for trusting markets to police

themselves, helped inflate the bubble.

615

When it burst, the Fed's successor stabilized the economy, but the recovery too was

uneven.

616

Asset owners rebounded faster, renters and the asset poor lagged.

617

Identity continued to sort and cloud the dialogue.

618

Urban versus rural,

619

owner versus renter, landlord versus tenant, yenby versus nenby, left versus right.

620

Social identity can motivate solidarity, but it can also blind us to shared interests.

621

The homeowner in a fire risk exurb and the renter in a flood risk basement both need

insurance and infrastructure that works.

622

The teacher priced out of her school district and the electrician priced out of his job

site

623

both need abundant, well-located housing.

624

The retiree relying on home equity and the young worker drowning in rent both need

stability without extracting it from someone else's future.

625

When politics turn complex problems into team jerseys, we get symbolic victories instead

of solutions.

626

Blame circulates.

627

Responsibility evaporates.

628

Meanwhile, the math is unforgiving.

629

Half of Americans earn $30,000 or less.

630

5 % of landowners hold three quarters of privately owned land.

631

Construction costs climb, labor is scarce, land is expensive, permitting drags on.

632

We feel the strain in rent checks and mortgage quotes, yet policy keeps circling around

affordability instead of confronting it.

633

Home ownership is stabilizing, but without guardrails,

634

delivered through fragile loan products in neighborhoods with few choices, it becomes

extraction, not empowerment.

635

In the 90s and 2000s, we tried to close opportunity gaps through a system built to profit

from them.

636

The outcome was predictable, then painful, then quietly erased from memory.

637

Identity helped sell the dream of ownership and drowned out the warnings.

638

But identity isn't destiny.

639

We can choose to look beyond our own lane and recognize shared interests.

640

Instead of small divided groups, we need broad coalitions, renters and owners, cities and

suburbs aligned around abundant housing near jobs with protections and public investment

641

strong enough to support everyone.

642

We need to expand the in group until it's big enough to be called a country.

643

In the wake

644

of the Great Recession, a new normal emerged.

645

Wages stagnant as housing costs continue to rise.

646

Investors collecting second and third homes while workers are pushed out.

647

The sharpest rise in inequality in a generation.

648

We'll take a deeper look into how the system was saved while redefining who it served.

649

How realtors framed falling prices as national crisis.

650

Fueled demand and fought

651

principle reduction, follow landlord empires and eviction driven profits, and meet the

financiers, tax breaks, and post-Citizen United politics that built the modern housing

652

machine.

653

Next time on Built to Divide.

654

Here was a company that made all kinds of unconscionable bets.

655

uh Then when those bets went wrong, we had a situation where the failure of that company

would have brought down the financial system.

656

Thanks for listening.

657

Built to Divide is presented by Lines, my architecture and creative studio.

658

This podcast is produced in collaboration with Gable Media.

659

If you enjoyed the show, please tell a friend and rate and review it on Apple podcasts and

Spotify.

660

It really helps others find it.

661

And if you're looking for similar content, Built to Divide is part of the Gable Media

network where you can find even more like this.

662

Visit gablemedia.com.

663

That's G-A-B-L media.com.

664

And before I go, if you want to see additional photos, video clips and content that went

into this episode, you can visit me at lines.studio slash podcasts.

665

Talk soon.

666

Since we're going to the East Room next, perhaps its history will give you some idea of

the evolution of a single room.

667

The East Room was originally intended as an audience room, something like the throne room

in European palaces.

668

Used for funerals, weddings, meetings with American Indians and other dignitaries, the

East Room gradually became associated in the American mind as the place for the grand

669

events in the White House.

670

The artists...

671

made the East Room seem larger and larger and raised the ceiling higher and higher until

it resembled the hall of mirrors at their side.

672

Here, from Leslie's chimney corner, the dignitaries of the Civil War are greeted by

President Lincoln.

673

Nobody smiled, and everybody but President Lincoln is frozen upright.

674

The artist left a respectful amount of carpet showing.

675

Mary Lincoln had spent a lot of money for the carpet, and her husband was angry.

676

The figure is Vice President Johnson.

677

And this, the earliest photograph, is the East Room in President Johnson's time.

678

When General Grant became President Grant, he put forth elaborate timbers across the

ceiling and furnished the room in a style causing ancient Greece with what someone called

679

Mississippi Riverboat.

680

The predominant feature became three cut glass chandeliers.

681

Under Presidents Arthur and McKinley, more more potted palms were placed into the room.

682

until it looked like a jungle.

683

This is the East Room, just before Theodore Roosevelt ordered his changes.

684

Theodore Roosevelt's renovation.

685

The rug, the timbers, and most of the potted palms were discarded.

686

The room is simple and classic.

687

Roosevelt used it for estate functions, and he once had a jujitsu exhibition there.

688

After Theodore Roosevelt, the potted palms came into the East Room once more, but there

689

President Truman raised the chandeliers and reduced them slightly in size.

690

Mrs.

691

Kennedy, this is the East Room pretty much as Americans have known it now for 60 years.

692

Obviously, you haven't felt that you had to make any great changes in it.

693

No, I think it's lovely.

694

I hate to make changes, really.

695

So when you find a room like this, it's wonderful.