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TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

Reporters Jake Bernstein and Jesse Eisenger just won a Pulitzer Prize for National Reporting for their series "The Wall Street Money Machine." They spent months trying to penetrate a world where few records are public, and the players have little interest in talking to reporters.

Their stories explained in detail how some Wall Street firms' manipulation of exotic financial instruments contributed to the near collapse of the nation's financial system. Eisenger and Bernstein work for the online investigative reporting nonprofit ProPublica.

This was the first Pulitzer ever awarded for work that was published on the Web but never appeared in print. However, Bernstein and Eisenger collaborated with NPR's Planet Money team to present some of their reporting on ALL THINGS CONSIDERED and THIS AMERICAN LIFE, explaining the hedge fund Magnetar's efforts to spur the creation of risky mortgage-backed securities while placing huge side bets that the securities would fail.

Jesse Eisenger and Jake Bernstein spoke with FRESH AIR contributor Dave Davies.

DAVE DAVIES, host:

Well, Jake Bernstein, Jesse Eisenger, welcome to FRESH AIR.

Okay, let's talk about the Magnetar story. Magnetar was a hedge fund, and you published this story in April of last year. It had a huge impact. And this involves their manipulation of collateralized debt obligations. First of all, explain what that is.

JESSE EISENGER: Sure, so Wall Street had a boom in packaging mortgages up. A mortgage would be made by a company and then sold to a Wall Street investment bank, and Wall Street would combine it with thousands of other mortgages and get it rated by the rating agencies, so the part was AAA and AA and then all the way down. And you'd have return, more return the lower down you were, because you were taking more risk.

The AAA piece was supposedly really safe, and so it didn't have much risk at all and therefore not much return.

And then Wall Street took slices of those mortgage-backed securities and repackaged them, did the whole thing again, got them rated by rating agencies, combined them with thousands of other securities and then sold those pieces off.

And so it was kind of recombination of already combined thing. And those were called collateralized debt obligations or CDOs, and ultimately they were backed largely by subprime mortgages.

DAVIES: All right. So what we have is a financial instrument in which an investor buys this thing, and what they're buying is a promise of a future revenue stream, which ultimately comes from thousands of homeowners who, right, have mortgages, and they've been repackaged, and some parts are risky, and some parts aren't so risky. But that's what the investors are getting is this promise of future revenue, which ultimately comes from the homeowners, right?

JAKE BERNSTEIN: Yeah, that's correct, and the investor can choose how risky they want it to be. If they buy this bottom piece, it is the riskiest piece, but it offers the highest return, sometimes as much as 20 percent.

But if their appetite for risk is less, then they buy higher up in the CDO, and they won't get as great a return, but presumably they will court less risk. It didn't turn out that way, of course.

DAVIES: Right. Now, of course, those of us who followed this know that many of these mortgages that were issued were far too risky, that in the end, housing prices didn't hold up. Many mortgage holders were unable to pay. They defaulted, which meant that these financial instruments, which ultimately depended on that revenue, began to collapse, and investors who bought them were in trouble.

What Magnetar did was a little different, right? They came along late in the cycle. Explain their approach and how it was different.

EISENGER: Yeah, so Magnetar realized in the spring of 2006, roughly, that the housing market was precarious, overinflated, and they also realized that Wall Street was desperate to do deals, to create more CDOs.

So they went to investment banks, and they said: We'll buy the piece that's very hard for you to sell, the riskiest little piece at the very bottom of the deal called the equity. The equity takes the first loss if anything goes bad. And so it was very difficult to sell because of that.

BERNSTEIN: And the person who bought the equity was so key to the deal and to the creation of the deal that they actually called that buyer the sponsor of the deal because the banks were very reluctant to create a CDO without having someone to buy that first-loss piece, the equity.

EISENGER: Exactly, and so because you were the sponsor of the deal, you had influence over how the deal was put together. Now, the investment bank was really putting it together. Their name was on the prospectus. They went to the rating agencies and got it rated and paid the rating agency for the rating. They went to the investors and sold it and put their good name to it.

But Magnetar was, unbeknownst to a lot of people, really the influential, the most influential player in this whole deal. They had approached the bank to create it. And then what the central finding of our story was is that they pushed the banks to put riskier and riskier stuff into the deals, stuff that was more likely to blow up.

And that was a central mystery: why would they do that?

DAVIES: Right, so we've got the banks with all of these financial instruments, which look increasingly risky, and investors aren't buying them. And Magnetar says: We'll buy some of those. We'll repackage them with some of these other instruments, which are again all based upon mortgage, expected future mortgage payments, and create new instruments, which we can then sell to investors. And they seem to be asking for the crap, the riskiest stuff to be thrown in. And therein lies the tale. What were they really up to?

BERNSTEIN: What they were really up to was they had a much larger bet, if you will, that these very instruments that they were helping to create were going to fail.

And so with a smaller amount of money, they could cause the creation of this thing, and then they could bet against it, and if it failed, they would make, you know, many times what they had put into it.

DAVIES: So we've got Magnetar, and they're kind of inciting these investment banks to put together these financial instruments that investors will buy and think they're going to make money when in fact what Magnetar, it appears, is doing is making sure that, in fact, they're likely to fail.

And then Magnetar goes around the back door. They're not the legal issuer of these instrument. That's an investment bank. And there's even a manager who technically, legally selects the asset. But Magnetar, as your story says, seems to be influencing things or pulling strings.

Then they go around the back door, and you say they bet against them. They bet and say: We will make money if these investments fail, and they default. The instrument there is a credit-default swap, right?

EISENGER: Right.

DAVIES: And do you want to explain how that works?

BERNSTEIN: And it's actually quite brilliant what they've done because that bottom piece that they bought to spawn the creation of this CDO, well, it throws off money in the beginning, you know, before the whole thing collapses. And so, they use that money to finance their bet against the very same CDO.

DAVIES: So explain how the bet against the CDO works, how the credit-default swap works.

EISENGER: Sure. What they're doing, essentially, is it's an insurance policy, essentially. And what Magnetar is doing is paying a little bit of money, a premium, in order to be insured against the failure of the instrument.

So it's just like homeowner's insurance. You're paying a little bit each quarter. And then if the house burns down, you get the insurance. Let's say it was a million-dollar house. You get the million bucks after you've paid $1,000 a year for three or four years or however long it took.

So, Magnetar is paying a little bit of money, and then they're getting, in return, they're buying protection in the derivatives market. They've bought a credit-default swap.

And one larger point here is that none of this was regulated activity. So nobody could really see this activity. The SEC couldn't see it. Investors couldn't see it. Only the investment banks and the people that actually did these trades knew it.

But it was kind of known in the CDO market, especially among certain investment bankers, that what their real bet was was in buying protection through a credit-default swap.

GROSS: Jesse Eisenger and Jake Bernstein will continue their conversation with FRESH AIR contributor Dave Davies in the second half of the show. Eisenger and Bernstein won a Pulitzer Prize for their series "The Wall Street Money Machine." They write for the online investigative group ProPublica.

I'm Terry Gross, and this is FRESH AIR.

(Break)

GROSS: This is FRESH AIR. I'm Terry Gross. Let's get back to the interview FRESH AIR contributor Dave Davies recorded with Jake Bernstein and Jesse Eisenger about their series of articles "The Wall Street Money Machine," which just won a Pulitzer Prize for National Reporting. They write for the online investigative nonprofit ProPublica.

When we left off, they were talking about how the hedge fund Magnetar spurred banks to create mortgage-backed derivatives from risky subprime mortgage loans. Once these derivatives, these CDOs were created, Magnetar then bet against them by purchasing credit default swaps.

DAVIES: So, if you got Magnetar creating these things, for them to bet against them, for them to buy a credit default swap, in effect an insurance policy that says we'll pay you a little annual premium and then you will pay us a big sum if in fact this instrument defaults. Somebody's got to be on the other side of that. I mean somebody has to be willing to look at that and say yeah, we think that's worth the risk. And, you know...

BERNSTEIN: Yeah.

DAVIES: Alan Greenspan once said, in fact, this is actually a good thing for the economy because it spread risk around. There are people who are willing to write this insurance, these financial arrangements, and if they're wrong and the deals collapse, then they pay and balance is restored. Why was this destabilizing rather than helpful?

EISENGER: Well, in fact, what was happening was there were these concentrated positions. There were fewer and fewer investors willing to ensure these CDOs. And so there were only a handful of insurance companies and banks that did it. And what happened was in the CDO market, it turned out that the exposure to this market, these hundreds of billions of dollars of losses, was only in a small handful of banks. And first it was in these insurance companies that actually were shells almost. They couldn't afford the insurance that they had offered. So when they failed, everything went back to the banks and the banks then started to teeter.

BERNSTEIN: So ultimately, the party that is on the other side of this bet, the Magnetar and others like them are doing, are either the CDOs, the actual instruments, are taking along part of it, or the banks themselves which, you know, in the end when it all explodes, the taxpayers have to bail out.

DAVIES: Because in the end they really don't have the financial resources to pay off their bets, right? They're writing insurance that they're really not able to make good on.

EISENGER: Yeah, well there's this two-step process where Magnetar is entering this bet with the CDO and kind of unbeknownst to everyone the bank that's creating the CDO is buying most of it. And so the bank is really on the hook for it, and when the bank teeters, then taxpayers have to come in and bail it out. And so we were bailing out the banks that had made this bad bet with hedge funds like Magnetar.

DAVIES: Now, so how did Magnetar do? How did the hedge fund do? How did its managers do financially in all this?

EISENGER: They did spectacularly well. They were up 76 percent in 2006, their main fund. They made hundreds of millions of dollars on this.

BERNSTEIN: But again, quantifying exactly how much they made is very hard to do because hedge funds are fairly opaque and they don't have to report great detail about their performance.

DAVIES: Okay. And now broadened the lens for us and tell us why we care about this. I mean people make hundreds of millions and lose hundreds of millions on Wall Street. Why did what Magnetar was up to impact the economy as a whole?

BERNSTEIN: Well, Magnetar created more than $40 billion worth of the stuff at a time when this business on Wall Street it really should've petered out in 2006. There was a bubble, a housing bubble in this country and it was going to pop. And whether Magnetar was involved or not that was going to happen, but the size of it, the scale of it, the incredible damage to the economy in large degree was because it went on for several more years than it should have been Wall Street really just inflated the heck out of it. So Magnetar had a big role in that.

EISENGER: And as late as last year and still up to today, you hear that the financial crisis was a hundred-year flood, that no one had control over it, no one could foresee it. And in fact, what we wanted to show with our stories is that lots of bankers knew that things were in trouble, that the housing market was going down and that demand was falling away for these securities and they went on, they did it anyway. Some of them did it because they could bet against it. Some of them did it because they would make fees helping clients who were betting against it. Some of them did it just to sort of keep the machine going and making bonuses, huge bonuses in 2006 and 2007. 2007 was a record year for CDO production in the early part of the year despite that there was almost no real demand for this.

BERNSTEIN: I mean the CDO market more than doubled from 2005 to 2006. It reached $226 billion. And just in the first quarter of 2007, Wall Street produced 70 billion of this stuff.

DAVIES: Now I want to make sure we get Magnetar's side of this in to the extent that we can. And on your website, of course, you print Magnetar's written responses to you. Did you ever talk to any of the principals?

EISENGER: Yeah. We had, you know, extensive conversations with Magnetar and were very very careful about trying to understand exactly what their point of view was. And we had a lot of written communication; we published all of that, including all of our written questions and their responses and then their letter that they published and then a subsequent letter that they sent to their investors. And I think you can summarize their argument like this: that they never had a view on the housing market. They say, we were not making a bet on whether the housing market was going to fail or succeed. We were just doing an arbitrage, a complex kind of investment where you buy one thing that you think is cheap and you sell another that you think is expensive and you're making the little spread, the difference between the two. And so we were just doing that kind of trade because we thought that these things were more correlated than Wall Street thought and we had never had a view that these things were going to fail and we never were building anything to fail.

BERNSTEIN: Yeah, and that they were covered. If the housing prices continued to go up than the stuff that they had purchased from the CDO would do very well; and if they went down, then they would also do very well. So it was just, you know, playing the spread.

DAVIES: This is, I believe, the first Pulitzer in this category awarded for a piece that never appeared in print. What were some of the advantages or drawbacks to writing online?

BERNSTEIN: I think one of the things that the Internet allowed us to do was really be very creative in our storytelling, if you will. We didn't just write a piece, a long story that we threw up on online. We did do that, but we also had a comic strip. We had interactive graphs. We had a song that was commissioned by "This American Life."

(Soundbite of laughter)

BERNSTEIN: And a radio program, several radio programs actually. So the sort of Internet gives you the freedom to do that kind of interactive, you know, different kinds of ways of getting the same message and the same story across, which is very liberating.

DAVIES: Now this is complicated stuff and you collaborated with NPR's Planet Money team for them and they did this very memorable piece about the Magnetar deal on "This American Life" and then there were other pieces, and these are folks who take complicated stuff and try and become audio storytellers. Did working with them affect the way you reported the story and even the way you reported it in your own text versions?

BERNSTEIN: Yeah. Not as much the reporting as the telling. These guys are so great at taking complex topics and really sort of boiling them down and making them not only understandable but enjoyable. And a lot of this stuff, as you said, is very complex and difficult to absorb. And so we actually we learned a tremendous amount from working with them. And I think at least in the Magnetar story particularly, it was a huge help. Alex Bloomberg, who's the producer on the "This American Life" piece, really spent a lot of time on the storytelling of it and really influenced the way we approach the story as well.

EISENGER: One of the most amazing meetings we had is we sat down with those guys and we walked through all this complicated stuff. Okay, the tranches and the CDOs and their buying credit default swaps and we were, you know, sweating to try to explain this very early on and Ira Glass says, you know, I think we'd like to change, turn this into a musical.

(Soundbite of music)

BERNSTEIN: And it was so funny. Alex turns to Ira and says, this is the hardest story we've ever done and you want to layer on top of that a musical. You must be insane. And Ira just would not let it go. And what he had done is he had really sort of boiled it down to this idea that this was very much like the musical "The Producers." You know, they were sort of creating the musical and betting against it. And so we sort of put that aside, but Ira certainly didn't and he commissioned two of the guys who had been the main guys doing "The Producers" and they wrote a song and it was perfect.

DAVIES: We're talking with Jake Bernstein and Jesse Eisenger. Their series "The Wall Street Money Machine" is the winner of the 2010 Pulitzer Prize for National Reporting.

We'll talk more after a short break.

This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, our guests are reporters Jesse Eisenger and Jake Bernstein of the nonprofit investigative reporting organization ProPublica. Their series "The Wall Street Money Machine" has won the 2010 Prize for National Reporting.

We should talk about the second story, which you published in August of last year. And this involved the way as the mortgage-backed security market wound down, as there were more concerned about risky mortgages and less demand for, by investors to buy debts based on these increasingly risky products, that you concluded that the banks kept the market going by creating fake demand. What does that mean? How did they do it?

EISENGER: Well, what happened was investors were leaving the market as early as late 2005, early 2006. Before this been selling to banks around the world, to insurance companies. But those savvy investors, sophisticated investors were dropping away; not completely leaving the market but going away. And so Wall Street replaced that demand with new CDOs. So they would create a CDO and the CDO would buy pieces of the CDO. Then the new CDO would have pieces that were hard to sell and so they would create a new CDO. And the CDO would buy pieces of that. And what we found was that the banks were actually orchestrating these sales. They were swapping sales, so they were doing you buy mine and I buy yours type of deals. And they were essentially having this kind of daisy chain of demand that people hadn't really understood before.

DAVIES: Here's what puzzles me about this, is if the banks are basically repackaging the stuff and buying these newly minted CDOs from themselves and from each other, I mean one of the reasons you explain they do that is that the people who put the deals together get fees and bonuses and they're significant - if they're - a tiny piece of a multibillion dollar deal it's a couple million, so there's an incentive. But what I'm wondering is if they're not really getting new investors and bringing new money in, where do they get the funds to pay the fees and bonuses?

EISENGER: I mean it's astonishing but the banking system was so levered. The banking system was running on borrowed money. So when the bank itself kept the top of a CDO, it didn't actually have to put up a lot of money to maintain that asset because it was supposedly AAA and safe as houses, you know, safe as U.S. Treasury bonds. And so they could actually fund that position, as they say on Wall Street, with very little actual money. And so there were lots and lots of IOUs going through the system and that's why it collapsed so quickly and so dramatically.

BERNSTEIN: And the other piece of this is that these mortgages were throwing off money initially. You know, when the deals are created, these CDOs are actually producing some revenue, certainly enough revenue to pay off banker bonuses. So...

DAVIES: Because the source of revenue is essentially thousands of homeowners who have mortgages and some of them are still able to make payments, right?

EISENGER: Exactly.

DAVIES: Right. And so it, in effect, when we do a new deal and we generate a few million in commissions and bonuses, that's really coming out of what the homeowners are paying?

EISENGER: Not exactly. I mean what's amazing about it is that the bankers get paid before the investors get paid. They get paid based on the closing of a deal. That's when the fee comes. So the fee is coming, essentially, from borrowed money that is backed by the mortgages that will eventually supposedly be paid off.

DAVIES: And they're borrowing from whom?

BERNSTEIN: Well, they're initially borrowing from the CDO.

EISENGER: But ultimately the banks are borrowing from each other in this incredibly interlocking global financial system that seizes up in September, 2008, because of this very reason, that they're borrowing from each other, which is mindbogglingly complicated, but they're borrowing in this very short-term market, overnight market, where they're going back and forth with hundreds of billions of dollars, back and forth overnight, and that seizes up in part because the assets backing those promises to pay them back are CDOs that are supposedly AAA but no longer AAA.

BERNSTEIN: And this is actually the question that we tried to answer in our third story, which we called "The Subsidy." And we looked at the biggest CDO producer during this period, which was Merrill Lynch, and we wanted to know why they would take so much of this stuff. You know, if there weren't investors for it, if it was clear that the market was retreating, not advancing, why would they take 80 percent of a billion or a two billion dollar CDO?

And we found this very complicated financial arrangement, whereby the CDO business was not allowed to keep the stuff they were producing. As they would say, we're in the moving business, not the storage business. You know, it was obviously a bad incentive for them to keep the stuff that they were creating. So they created a special desk within the bank of traders and these traders would take the CDO stuff that they couldn't sell.

Now, why would the traders take it, because traders want to make money and what's their incentive to take a money-losing deal? And what was going on was that the CDO group was sharing their bonuses, sharing their profit with this new group of traders that had been created just to take it.

EISENGER: You know, just to follow up on Jake's point, I mean this whole business was extraordinarily fake. It was based on demand that wasn't there and promises that couldn't be kept. And so when we came out of meetings, starting to get glimmers of understanding about this, that this business that had been worth supposedly hundreds and hundreds of billions of dollars was really on an edifice of tissue, we were astonished. It was scary. It was terrifying. But these were all deals largely that had no substance behind them.

DAVIES: Did people in the business realize this at the time?

BERNSTEIN: I think more people realized it than didn't, frankly. And the way that they sort of rationalized it was, if it's really that bad, if it really is such a tissue of sort of false promises, as Jesse said, then when it goes bad, it's going to go bad for everybody and it'll be, you know, colossal. And so we really don't have to worry about it.

But certainly by 2007 there was a real understanding of this.

EISENGER: Yeah. Yeah. On Wall Street they say IBG, YBG - I'll be gone, you'll be gone. So let's just do the deal.

BERNSTEIN: We found that in the last two years of the boom, nearly half of all the CDOs sponsored by Merrill Lynch, which was the lead CDO producer during this period, bought significant portions of other Merrill CDOs.

So I mean clearly, when you're buying your own stuff, you know, and you're moving one unsold portion into another unsold portion, you understand that there's something seriously wrong.

DAVIES: We're speaking with Jake Bernstein and Jesse Eisenger. Their series "The Wall Street Money Machine" has just won the Pulitzer Prize for national reporting. We'll talk more after a short break. This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, our guests are reporters Jake Bernstein and Jesse Eisenger. They work for the non-profit investigative organization ProPublica. They've just won the 2010 Pulitzer Prize for national reporting for their series on the financial crash called "The Wall Street Money Machine."

Among the things we've talked about is the lack of regulation over some of these instruments like credit default swaps. I mean, nobody knew how many of these insurance policies Magnetar was buying on bad debt because there's -they're not public records. If there were a real regulatory system in place at the time, with rules for transparency and integrity and some active monitoring and enforcement, how might have all this gone differently, do you think? Take the Magnetar case.

EISENGER: I mean that supposes - yeah, we could give everyone a pony too. But...

(Soundbite of laughter)

DAVIES: Give them a pony for purposes of this question. I mean, seriously, you know, because I think this is the thing that Congress looks at. You know, we don't want this to happen again. You know, you want people to have the ability to be creative and to make money and have a financial system which, in which, you know, assets are used in creative ways, but we don't want this to happen again, and we want rules that will make some sense. And so I'm kind of - I mean, it's a big question, I know, but...

BERNSTEIN: One of the amazing things about what Magnetar did was, they did it very quickly. They put together more than 40 billion worth of deals in about a year's time. And so, I think it's always going to be hard for regulators to sort of be that on top of what's happening to stop that kind of behavior, but certainly if there had been more disclosure, if there had been more active policing, if there had been more of a deterrent factor, I think a lot of this would not have happened.

EISENGER: We've often said that we thought that the disclosure was the key here because if an investment bank came to an investor with a disclosure and they said, OK, we've got investment for you, a hedge fund actually asked us to create it, and - oh, by the way, the hedge fund has had a lot of influence over what kind of assets are backing this instrument - oh, and by the way, they're betting against it, would you like to buy it - that's the kind of disclosure that I think would have deterred an enormous amount of this activity.

DAVIES: Right. But the fact is that, I mean every - I mean, I've read bond prospectuses before and there's a lot of disclosure. I mean, they talk about every financial arrangement, potential litigation and relevant laws. You're asking them to kind of disclose the sort of secret relationships. Can you legislate that?

BERNSTEIN: Well, this is - I mean this is actually one of the things about disclosure, right? I mean, you've looked at these prospectuses, they're 300 pages. They've got all kinds of ifs and buts and wherefores. A lot of legalese and a lot of sort of hypothetical - or hypothetical in quotes - scenarios. And that's obviously not helpful, but I mean, if there are specific things that are happening in the construction of the deal, they should not be buried in a 300-page prospectus in a way that it's not clear that this is actually happening.

DAVIES: Let me ask a specific question about credit default swaps. And we talked about these. These are essentially insurance contracts. I mean, if I can make an arrangement with an insurer which says that a multi-billion dollar security that I don't even own, I can make a bet that it's going to collapse by paying a little premium, and then the insurer writes me a contract that says, OK, we'll take your money and then if it does collapse you'll get X, you know, hundreds of millions of dollars - now, in casualty insurance - I mean, that's a regulated industry by states, right? And I don't think I can go and buy an insurance policy on a warehouse down the street from me in which I make money if it burns down. Should this be permitted? I mean, they are - it's a private financial contract. But should these kinds of arrangements be permitted? Should they be public records like a mortgage? I mean, you can look at mortgages in country records offices.

EISENGER: Well, you're certainly right that in the insurance business you cannot take out insurance without an insurable interest. And so there's a good argument that the credit default swap market shouldn't exist the way it does. I'm not entirely persuaded. I think that if credit default swaps were traded on an open market where the prices were visible to people, where there was some disclosure of the ownership or exposure, and where - and this is the key - you had to put up some capital, then I think that the market would be a lot safer. And we're moving in that direction. I'm not entirely convinced that we're going to get there.

But the problem with credit default swaps was largely that you didn't have to put up anything. You could just promise to pay off the insurance at some point. And AIG did this to the tune of hundreds of billions of dollars, saying we'll just pay this off when and if there's any problem, and then they couldn't, and when the crisis happened, and that's why the government had to take them over.

BERNSTEIN: I mean credit default swaps completely magnified what happened. I mean, you could take a mortgage bond that was, say, worth ten million dollars and there could be 50 times that in credit default swaps on it. So when that 10 million dollar mortgage bond went bad, the impact of that was not just 10 million dollars, it was many, many millions of that.

EISENGER: Right. And the problem was not the buyers of the insurance, largely, although with Magnetar they were bringing these things into creation that were going to fail and amplify the losses and that would not have otherwise been created.

But the real problem was the sellers, the people who were offering to insure things, they were concentrated. They were the big insurance companies, they were the big banks, and when they couldn't make good on their promises, that's when they collapsed and then when the global financial system collapsed and when we had to have all the bailouts.

BERNSTEIN: And what's amazing is in the deregulatory mania of the early 2000s, Congress actually forbade the SEC from regulating this stuff. So for 10 years there was no regulation of this, and it sort of blossomed into this mammoth market. And I think it's sort of a case study on the danger sometimes of deregulation.

DAVIES: Well, Jake Bernstein, Jesse Eisenger, thanks so much for speaking with us.

EISENGER: Thanks so much for having us.

BERNSTEIN: Thank you, Dave.

GROSS: Jake Bernstein and Jesse Eisenger spoke with FRESH AIR contributor Dave Davies. Bernstein and Eisenger just won a Pulitzer Prize for national reporting for their series "The Wall Street Money Machine," which was published by online investigative non-profit ProPublica.

We'll close with the song they mentioned that was commissioned by THIS AMERICAN LIFE for their Magnetar story. If was composed by Robert Lopez, who co-wrote the songs for "Avenue Q" and the Broadway hit "The Book of Mormon." The singers are John Tracy Egan and Christian Borle.

(Credits)

(Soundbite of song)

JOHN TRACY EGAN and CHRISTIAN BORLE: (Singing) Step One: We write a check for ten million dollars, hand the check to a Wall Street bank, and ask them to make us a CDO. Step Two: They create the CDO using risky stuff - very risky stuff. Extremely risky stuff! Step Three: Other investors commit hundreds of millions of dollars to the CDO. Step Four: We bet against the CDO using a credit default swap. Step Five: the housing market crashes, the CDO's value drops to zero, our bet pays off and we make hundreds of millions of dollars and before you can say Step Six, we're rich!

We're gonna bet against the American dream. We're gonna be on the winning team. Purchase risky debt on a massive scale, then place a bet that the debt will fail! Hundreds of millions for Magnetar - the economy collapsing like a dying star -no-one'll know till it's on NPR, and who cares...

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