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BEFORE OUR VERY EYES 

money every night to finance Bear Stearns’s broader securities portfolio. In Septem-
ber , Cioffi created a hedge fund within Bear Stearns with a minimum invest-
ment of  million. As was common, he used borrowed money—up to  borrowed
for every  from investors—to buy CDOs. Cioffi’s first fund was extremely success-
ful; it earned  for investors in  and  in —after the annual manage-
ment fee and the  slice of the profit for Cioffi and his Bear Stearns team—and
grew to almost  billion by the end of . In the fall of , he created another,
more aggressive fund. This one would shoot for leverage of up to  to . By the end
of , the two hedge funds had  billion invested, half in securities issued by
CDOs centered on housing. As a CDO manager, Cioffi also managed another  bil-
lion of mortgage-related CDOs for other investors.
Cioffi’s investors and others like them wanted high-yielding mortgage securities.
That, in turn, required high-yielding mortgages. An advertising barrage bombarded
potential borrowers, urging them to buy or refinance homes. Direct-mail solicita-

tions flooded people’s mailboxes. Dancing figures, depicting happy homeowners,
boogied on computer monitors. Telephones began ringing off the hook with calls
from loan officers offering the latest loan products: One percent loan! (But only for
the first year.) No money down! (Leaving no equity if home prices fell.) No income
documentation needed! (Mortgages soon dubbed “liar loans” by the industry itself.)
Borrowers answered the call, many believing that with ever-rising prices, housing
was the investment that couldn’t lose.
In Washington, four intermingled issues came into play that made it difficult to ac-
knowledge the looming threats. First, efforts to boost homeownership had broad po-
litical support—from Presidents Bill Clinton and George W. Bush and successive
Congresses—even though in reality the homeownership rate had peaked in the spring
of . Second, the real estate boom was generating a lot of cash on Wall Street and
creating a lot of jobs in the housing industry at a time when performance in other sec-
tors of the economy was dreary. Third, many top officials and regulators were reluc-
tant to challenge the profitable and powerful financial industry. And finally, policy
makers believed that even if the housing market tanked, the broader financial system
and economy would hold up.
As the mortgage market began its transformation in the late s, consumer ad-
vocates and front-line local government officials were among the first to spot the
changes: homeowners began streaming into their offices to seek help in dealing with
mortgages they could not afford to pay. They began raising the issue with the Federal
Reserve and other banking regulators. Bob Gnaizda, the general counsel and policy

director of the Greenlining Institute, a California-based nonprofit housing group,
told the Commission that he began meeting with Greenspan at least once a year
starting in , each time highlighting to him the growth of predatory lending prac-
tices and discussing with him the social and economic problems they were creating. 
One of the first places to see the bad lending practices envelop an entire market
was Cleveland, Ohio. From  to , home prices in Cleveland rose , climb-
ing from a median of , to ,, while home prices nationally rose about
 in those same years; at the same time, the city’s unemployment rate, ranging