Laurie Goodman: Growing Up on the Street

When Laurie Goodman graduated from high school, at 16, it should have been a sign. Fast was going to be her gear. She was in a hurry. She’s a poster child for the New York minute, which seems right, since she was born in Brooklyn.

And the story moves on quickly from there. Out of high school at 16, she had her undergrad by 19 and then her Ph.D. by 22.

Goodman made a beeline for Wall Street after piling on those degrees, with only a slight detour.  She found herself teaching finance to grad students at NYU at 22. And not surprisingly, she was younger than some of her students.

When you run faster than the pack, you’re often the youngest in the room.

She found her first gig in fixed-income research in 1983, just as the bond markets were starting to party hard. Then she proceeded to master the intricacies of the high-flying mortgage-backed securities markets. She was on the premises when it all came crashing down.

Today, she’s a card-carrying member of Wall Street research royalty, along with a few other famous New Yorkers.

What do Mike Bloomberg and Laurie Goodman have in common? They’re both members of the Fixed-Income Analysts Society Hall of Fame. Only thing is she got there first. True story. This lady rolls with the hotshot Wall Street homies.

Bloomberg, the former three-term mayor of New York and presidential candidate, was inducted into the Hall of Fame in 2015. While, Goodman, now co-founder of the Housing Finance Policy Center at the Urban Institute and long-time bond market research superstar, got in back in 2009.

Between 1995 and 2019, 55 Wall Street notables were named to the Hall of Fame. And many of these folks could be cast members in The Big Short (but Brad Pitt wasn’t a bad choice, either).

It’s worth noting that only seven of the 55 members of the hall are women, as of 2019. Back in the day, bond market bros were everywhere, especially when the hall was first created in 1995.  But things have changed more recently.

And Laurie Goodman, mother of four, can put her resume (and her research) right up there against the best of them. In real life, she was dealing with childcare and maternity leave at the same time she was watching fixed-income securities do their thing. But it was her exceptional research skills that won her recognition. Good research can make people lots of money. And money is gender free.

One true master of the MBS universe who is also in the hall is Lewis Ranieri, of Salomon Brothers’ fame. He was inducted in 2001. Other recognizable names include First Boston’s Laurence Fink. And early on, even dominant originators got tapped for the hall, with Countrywide Chairman Angelo Mozilo being inducted in 2006. And we all know how that ended.

Goodman was one of the first to see the go-go years of MBS start to come apart. Ironically, her team saw those earliest signs of implosion around the same time Mozilo was voted into the hall in 2006.

Her group’s research was like the canary in the coal mine. She remembers when her team at UBS first modeled research that showed top tranches of triple-A rated, collateralized debt obligations (CDOs) were going to take losses. She also remembers the shock that ensued at what was then “an unheard of call.”

To this day, she is proud of that research.  Few believed it at the time. That’s how ahead of the curve—and on the money—it was.

Getting started

Goodman met her future husband at the University of Pennsylvania, where she earned her bachelor’s degree in math. They met in line to see the movie Goodbye Columbus. Following graduation, he planned to go to law school while she was set on a graduate program in economics.  They made a plan to go to the same school.

Two schools accepted them both: Stanford and the University of Chicago. After some diplomatic back and forth (Goodman also got into Harvard) they decided to go to Stanford (an engagement proposal sealed the deal).

The West Coast student-hippie vibe of the late 70s clearly didn’t impress Goodman. She recalls many of her fellow Stanford students as “a bunch of Type-A people pretending they’re Type-B.” (Clearly, she prefers her Type-As to own it. And how New York is that.)

Two of her professors at Stanford encouraged her to go the finance route versus academia. So she headed for New York City with her doctorate and letters of recommendation from two of the “luminaries in finance.”

One of the two was William Sharpe, Professor of Finance, at Stanford’s Graduate School of Business. He won the Nobel Prize in Economic Sciences in 1990. Goodman was a teaching assistant for him. He’s also in the Fixed-Income Analysts Hall of Fame, by the way.

The other influential Stanford professor was Bob Litzenberger. She describes him as “just a very smart guy.” The kind you listen to when you are about to embark on a career.

Finding her way

Goodman joined the faculty at NYU’s Stern School of Business as Assistant Professor of Finance in September 1978.  And she quickly discovered that teaching “was not a good fit for me.”

She says she “floundered” during that year at NYU, partly because she was still very young.

But in the process, she learned something about herself. Her comparative advantage came in getting to answers quickly. She says in academia you spend roughly 20 percent of your time arriving at a solution or an idea, and the rest of the time polishing your paper.  That wasn’t for her. Plus, she was drawn to tackling “more real world problems.”

From NYU, she moved on to the Federal Reserve Bank of New York. She stayed at the Fed as a senior economist from 1979-1983 focusing on international economics.  While there, this go-getter had her first two kids, figuring out childcare on the fly.

Goodman met another influential woman economist while at the Fed. Marcelle Arak, a senior Fed colleague, was someone whose work on domestic markets Goodman had followed and admired. Arak was leaving to start a fixed-income market research group at Citicorp. At her going away party, Arak approached the young Goodman about possibly coming to Citicorp with her. Goodman jumped at the chance.

It would be the start of 30 years of doing fixed-income market research from 1983 to 2013. She says, “I fell in love with watching financial markets.”

Stomach aches

There is a clear hierarchy in investment banking, and it’s no secret to anyone who has worked on Wall Street, Goodman says. The three tiers are: 1) traders; 2) sales people and 3) research departments.  Traders get all the respect, in other words.

In June of 1989, after working in research jobs at Citicorp and Goldman Sachs, she finally got her chance to join the trading upper class.  One of her former bosses at Citicorp decided to start a company called Eastbridge Capital and he offered her a job.

The two years she had just spent at Goldman Sachs may have helped convince her to try something new.

Wall Street at the time was still mainly the province of men, especially at certain firms. “Goldman was not very kind to women in the eighties,” she recalls.

The firm was reluctant to hire women back then and didn’t try very hard to hide it. When Goodman went on maternity leave to have her fourth child she had 13 people reporting to her. When she came back, she had zero.

But after leaving Goldman for Eastbridge, where she managed a proprietary trading position, she learned something else about herself. “I wasn’t very good at trading.”

She remembers lots of stomach aches, “more than I’ve had in my lifetime since.” Male traders seemed to complain of backaches, she says, but her stomach bore the brunt of her experience.

Looking back, she doesn’t regret her foray into trading.  “It taught me the kind of research that traders and investment managers need and value most.” She says, “It was a great experience. I don’t regret a day of it.”

After that, her career focused firmly on fixed-income market research. First at Merrill Lynch, as head of MBS strategy, and then at Paine Webber (later UBS, post merger) where she ended up managing a securitized products research group of 140 people.

During her time at UBS, from 1993 to 2008, riskier and riskier products were being introduced on both the origination and securities side of the mortgage market.  Goodman and her team were crunching the numbers that documented a crisis unfolding.

We wondered, what was it like to see that first spark?

A crisis in real time

“The first warning sign came in 2006” when early payment defaults jumped sharply, Goodman says. “But it didn’t become an OMG until 2007.”  And what she saw then made her “seriously worry.”

At the time, issuers were building too much leverage into MBS offerings, she says. Many CDOs were backed by Triple B tranches of subprime securities, which were themselves thin slices near the bottom of subprime deals. But there weren’t enough Triple B tranches of subprime securities to satisfy the demand for CDOs. So many deals used synthetic subprime securities, rather than the securities themselves. These CDOs were carved into securities rated AAA down to BBB-minus.

By the end of 2006, Goodman’s research team at UBS had done simulations that showed the top tranches of these Triple A CDOs would take losses even under modest stress scenarios, and even though the securities were still trading really well.

“It was a real eye-opening experience,” she says. “We became very concerned about the market. We got in lots of arguments with the trading desks.” At the time, UBS traders held lots of positions in mortgage securities, and her research team “became increasingly negative on the market.”

UBS ended up taking big losses. “They weren’t listening to us,” Goodman says. “My research team was totally aligned on the seriousness of the risk,” she says.

The fallout in the MBS market lasted a long time, as securities prices collapsed from 2007 through March 2009.

Initially, many in the MBS market also “didn’t see the contagion effect on the borrower side and the securities side” that would play out during the ensuing market meltdown.

But foreclosures began to come in wave after wave. Goodman says, “We never foresaw a 30 percent decline in home prices” that would come as a result of the massive number of foreclosures.

“We knew there would be foreclosures, but we didn’t see anything like what actually happened,” she says.

By 2007, it was clear things were really bad in the market, and yet it wasn’t until 2008 that regulators and the federal government finally stepped in. That’s when the Treasury Department put Fannie Mae and Freddie Mac abruptly into conservatorship, in September 2008, where they remain to this day—13 years later.

And, as for that GSE takeover, “No, I didn’t see that coming” either, she says. (Not many did.)

Shortly after the GSEs were put in conservatorship, Goodman left UBS for a new job. In December 2008, she joined Amherst Securities where she became senior managing director and head of strategy and business development.

Her team at Amherst made groundbreaking research calls during the murkiest early days of the financial crisis. “We were way more negative than anyone else in terms of how deep the crisis was,” she says.

Amherst’s research helped “spur action” by Washington regulators and Administration officials, she says. Goodman’s team specifically advocated for principal reduction modifications. But she said neither the FHA nor the GSEs ended up doing them, even though a few non-bank servicers did.

Fast forward to the present. When does she think the GSEs are likely to come out of conservatorship? Not any time soon, she says. “Not in my professional life. And I don’t plan to retire soon,” is how she put it.

Both sides now

Today, you’ll find Goodman sitting on corporate boards and in policy conferences, while operating from her perch in Manhattan.

“I actually really love the combo,” she says. The Urban Institute’s Housing Finance Policy Center allows her to be a player on the policy side and her boards allow her to stay in touch with what’s going on in the markets. The information flow is in both directions. She’s in the sweet spot and loving it.

Goodman serves on boards for MFA Financial, Arch Capital Group Ltd., DBRS Inc., and Home Point Capital Inc.

So, what does she see as the major housing policy issues of the day?

“The single biggest issue facing the housing market is the supply shortage,” she says.  Steeply rising home prices currently come down to the lack of inventory. “I do not think we’re in a housing bubble. We have an acute shortage of inventory.”

“Honestly, I don’t see how we fix it,” she says.

There’s no “silver bullet” to fix zoning problems because that’s primarily a local issue, she says. And in terms of the supply shortage, it doesn’t come down to just one problem.  Contributing factors include restrictive zoning, building regulations and supply costs.

And what about Covid? How will that affect the housing market?

Goodman says, “I’m actually pretty optimistic” about the post-Covid recovery in the housing market, in terms of successful exits from forbearance programs and fewer foreclosures.  Plus, she notes the overall economic recovery appears to be pretty strong.

She says government loans and GSE loans provide a range of options for people coming out of forbearance that will minimize the likelihood they go into foreclosure. Plus homeowners, in general, have been building equity as prices have rallied, which gives them the option to sell as a last resort if they encounter distress.

She’s more concerned about renters. “Unlike 2008, this crisis hit renters far harder than owner-occupants,” she says. More renters were hit by layoffs during the pandemic, and renters share none of the benefit from home price gains.  Renters also tend to have less of a financial cushion to start with, she says.

So what else is on her radar?

An overreaction

“One wrong lesson” was learned from the Great Recession, she says. And it boils down to the fact that the mortgage market became overly risk averse.

Goodman expects the current rate of home price increases to slow, but it won’t go negative. She sees housing as a good investment right now. So why not try and get as many qualified borrowers approved as possible?

She describes the policy conundrum that arose in the aftermath of the Great Recession: the market only wants to make safe mortgages. But no mortgage is completely safe, every mortgage has some probability of default. And we, as a society, are currently unwilling to tolerate a reasonable probability of default.

Here’s the tradeoff: “By tightening so much, it curtails homeownership. There’s a problem with curtailing all default risk,” she says.

So what should be done?

One change in particular could make a huge difference, she says. Taking account of on-time rental payments could make the biggest difference.

Goodman says, “I think it’s a big omission that the version of credit scores that are used for mortgage origination includes no rental payment history”

New versions of credit score models do try to incorporate rent payment history when it is available. But it is missing most of the time, as landlords don’t have to report this data and the credit bureaus don’t have access to a consumer’s bank account data, which would include rent payments.

Goodman also says the way we count income for some mortgage applicants is “unnecessarily restrictive,” as it requires two years of consistent employment in the same job or a job in the same field.

Currently, it does not fully reflect income earned by some GIG workers, such as Uber or Lyft drivers, when they work extra hours. And it also doesn’t include added income earned by full-time teachers who work most but not all summer school sessions.

A kibitzer

Would this born problem solver ever consider being on the inside making policy? Could she see herself at Treasury, say, or HUD, or the Federal Housing Finance Agency?

We asked the independent-minded Goodman if she’d be interested, and she didn’t exactly seem excited. If research people are third-class citizens in investment banking, one can only imagine where government types fall.

But she was actually pretty diplomatic about it. “I like the role of outside kibitzer. I’m not left enough for the Democrats, or right enough for the Republicans.” (So, I’m guessing that’s a no.)

And don’t forget she runs on New York time—which is nothing like DC time.

While New York has its famous minute (under 30 seconds), Washington has its infamous recesses, where no one shows up, and nothing gets done. So we’re thinking that’s probably not a good fit (as she might say).

But here’s a thought. Put Washington on New York time. Senators, set your watches please. Now go. (Think of the roads that could get fixed.)

But, of course, that’s all just wishful thinking. And if there’s one thing we know about Goodman, it’s that she tells it like it is. Straight talk—no sugar coating.

Just listen to her recitation of some of her early resume stops: “I did so much trial and error to find myself and where I fit. NYU was not a fit. Goldman didn’t like me. At Merrill, I annoyed a lot of people. I had to find my way.”

And find her way she did.

She was just a kid when she first came to Wall Street. Now she’s in the Fixed Income Analysts Hall of Fame.  And she’s not done yet. Let’s see what else she can do—Mayor of New York, maybe? I hear they really like their kibitzers.