The Man Who Would Save the Economy

For over a decade, Richard Field’s system for helping hospitals shore up their books has languished without takers. Now it just might hold the fix for Wall Street’s scary credit crisis.


Richard Field is the founder of the financial consulting firm TYI, LLC. (TYI stands for Trust Your Input.) A short, cerebral man of 50, he has a mind for finance that even friends in the industry find intimidating. After graduating from Yale, he earned an MBA from Northwestern. He worked at the Federal Reserve, worked at a holding company in Minneapolis, and has worked for the past 20 years on his own, as a portfolio strategist, planner, and trader, the last 10 from his home in Needham. His diverse employment and his curiosity to learn more—to routinely call up, say, bond traders or bankruptcy lawyers when he doesn’t understand something—provides him the mental dexterity to weave disparate ideas into a coherent and, most often, original whole.

Field has a nasal voice, and it tends to screech when he is particularly excited about one of his ideas. And he was never more excited than on the morning of September 26, 2007. He was in his gym clothes as he read that day’s Wall Street Journal, still sweating from his workout on the elliptical machine. The news focused, just as it had for the last three months (just as it does today), on the ever spreading credit crisis. The problem’s trigger was something Field understood well: structured finance, an investment vehicle that financial institutions use to buy bonds that are composed of, in this case, mortgage loans from a bank. Too many of those mortgages, it was then already painfully clear, had been subprime packages extended to people who probably shouldn’t have qualified for a mortgage in the first place. Wall Street wizards had thought they could lessen the risk for banks carrying those loans by slicing them up, shifting them into various bonds, and selling them to third parties. But Wall Street wizards were wrong. With homeowners defaulting on their subprime mortgages, the bonds were suddenly, basically, worthless.

Field had suspected for years that this might happen. Structured finance, he knew, has one glaring flaw: It offers little transparency. The home loans bundled into all those bonds? Wall Street had opted not to monitor the value and status of the mortgages themselves—to say that this mortgage is current, but that one delinquent; this one here is a 30-year fixed-interest, but that one there has a teaser rate that’s about to expire and balloon into something the borrower can’t afford. That information is crucial, Field says: Without it, purchasers of mortgage-backed bonds don’t really know what they’re getting. It’s like buying a house without visiting it, without seeing pictures of it or reviewing its floor plan, trusting only what the seller says is the right price. In the structured-finance mess, everybody was buying properties this way, which is how it was possible for marquee firms to not only lose billions on bum transactions, but also in many cases to underestimate their total losses by billions more.

What made the Wall Street Journal article so exciting for Field, as he sat in his damp gym clothes last September 26, was that the right people were finally acknowledging this flaw. Moody’s Investors Service and Standard & Poor’s are Wall Street’s leading credit-rating firms. They look at the assets that compose a bond and, from that, the likelihood it will default. This is supposed to tell a prospective investor how safe a bet the bond is—yet many of the mortgage-backed bonds that imploded in 2007 had at one time held the credit agencies’ highest rating: triple-A. How could the credit agencies have been so off? Because, as the Journal reported, they didn’t have the information needed to properly assess the bonds, either.

Beneath the online version of the article was a link to the full text of a "special report” Moody’s had published the day before. Field had to read parts of the report five times. It confirmed everything he’d long surmised. Moody’s was saying it could not decipher the actual performance of the individual loans that made up all these securities. There were too many of them, and no one in structured finance—by some estimates a $20 trillion industry—was tracking them. A $20 trillion industry, guessing at the value of each security it traded.

Field leaned back from his computer. He thought to himself, And here I am sitting with the golden key.


In the early 1990s, the executives of a Minnesota behavioral clinic summoned Field to its offices. They told him their clinic risked closing because it was $7 million in debt, and had another $70 million in accounts receivables—in other words, $70 million worth of as-yet-unpaid patient bills. The executives asked Field to find a way to bring it back from the brink. His ultimate solution was a structured-finance deal.

The beauty of structured finance (and there is beauty in it) is twofold. One: If you’re the company, you get paid to have liabilities taken off your balance sheet. Even better, if those liabilities—here, the unpaid healthcare bills—default, you’re no longer on the hook. Two: If you’re the buyer of the securities, you collect easy money on the interest payments for the debt that had been made into the bond.

Field took this basic arrangement a step further. The genius of his idea was that nothing would be hidden. As in any structured-finance transaction, he’d offload the unpaid hospital bills to what’s known on Wall Street as a "special-purpose vehicle,” which would then turn the debt into a security and sell it to investors. But Field would also use software to tag and keep tabs on the underlying claims, making it possible to follow which patients—or insurance company, or government agency—had settled up, and which hadn’t, and if they hadn’t, when they might. It was a necessary step: An earlier attempt to bring structured finance to the hospital world had led to a giant Ponzi scheme. Also, insurance companies are notorious for underreimbursing healthcare claims. Field figured that letting investors know when bills were paid (or not) would give them a critical sense of security.

The Minnesota clinic closed before Field’s fix could be implemented. But he stuck with the notion, refining it, showing that you could, for starters, strip out certain sensitive details—like a Social Security number—from the data a bond buyer saw, without compromising the usefulness of the data itself. Field liked his idea so much that in 2000 he secured a patent for it.

In the years since, a few other hospitals have been on the cusp of working with Field. But each time, the hospitals got their investment bankers involved, and each time the bankers said, "You don’t need Richard to complete this transaction.” Ultimately, each deal fell through. "It remains my life’s biggest disappointment,” Field says. (Adds his friend Ron Parkinson, the chief financial officer of Ames Textile in Lowell, "I’ve been consulting Richard through his woes for years.”) Field believes he could have helped save hospitals billions of dollars, while, of course, also making some decent change, too.

When Field read the Journal story on September 26, and then read and reread the Moody’s report, "it was as if the cavalry had finally come marching over the hill.” It took all of a second for Field to realize that his patent could apply just as well to all asset-backed securities, that his method for stripping out identifiers could work just as well for, say, a mortgage that had been made into a bond. But even more important, Moody’s was saying it would potentially give higher credit ratings to firms that offered the kind of transparency he could provide. In other words, there was at last a market for Field’s big idea.


The first structur
ed-finance deals
were brokered in the 1970s, and they dealt with only the safest of bonds: those made up of mortgage loans provided by government entities like Ginnie Mae. Because the bonds were government insured, because the government guaranteed repayment of the principal and interest, the credit-rating agencies Moody’s and S&P gave these bonds their top ratings. But, by the same token, because the bonds were government insured, no one thought to look at whom the mortgages were extended to, and why. It was a habit investors wouldn’t be able to shake, even as the market became flooded with bonds that were nowhere near as secure.

Over the years, Wall Street innovators have realized almost anything can be packaged into a security: credit card debt, college loans, auto loans. In 1997, even David Bowie got into the act, issuing "Bowie Bonds” backed by future revenues from 287 of his songs. Prudential Insurance bought them for $55 million; with that money, Bowie bought out the master rights to the tracks, owned at the time by a former manager. James Brown and the Isley Brothers later issued bonds of their own.

As structured finance absorbed the subprime mortgages that became popular as the housing market boomed, Wall Street was content to rely on computer models—but not data on the loans themselves, remember—to predict how well the bonds would fare. The banks’ models were based on historical performance, and historically performance had been great. In 2006, sales of mortgage-backed securities hit $1.1 trillion, double the $586 billion sold just three years earlier.

We know what happened next. In 2006, the housing market waned, new homes went unsold, interest rates climbed, and homeowners began to default on their mortgages. The scary stuff hit Wall Street in July 2007. That’s when hedge funds operated by the Wall Street giant Bear Stearns collapsed. Two funds that were worth $1.5 billion in 2006 were one year later worth next to nothing; both were loaded with securities from subprime mortgages. Trading in mortgage-backed securities slowed until investors could figure out what they were actually worth. Trading stopped last fall when they realized they couldn’t. Merrill Lynch said it expected a third-quarter write-down of $5 billion, only to say three weeks later that it was in fact $8.4 billion, the biggest in Wall Street history, only to say last month that it might write down an additional $15 billion for the fourth quarter. In all, assets in certain structured-finance sectors are down more than $550 billion worldwide. The Treasury Department has tried to orchestrate a $75 billion deal with Citigroup, Bank of America, and JPMorgan Chase to shore up debt, but the banks backed out in December. They said they didn’t want to set off a panic.


So today there are basically two ways forward: regulate or innovate. Massachusetts Congressman Barney Frank, the chair of the House Financial Services Committee, perhaps more than anyone else wields the power to answer which it’ll be. "Securitization has substantially diminished the accountability of the marketplace,” he says. "Sometimes innovation outstrips regulation.” One of the provisions of a bill he cosponsored, which is out of the House and now on to the Senate, asks the people who issue securities to "sample” the mortgages that compose them—to look at the terms of some of the individual loans themselves—"kind of like what [Field] is doing,” Frank says. (A senior policy adviser for the committee has phoned Field several times to discuss his idea.) But Frank, who says, "We have a mess right now to sort out,” and that urgency is required, is also considering the nuclear option: turning away from structured finance and having banks do business as they did 40 years ago, which would mean carrying on their own balance sheets the debt from each mortgage they issue. "I talked with [Federal Reserve Chairman] Ben Bernanke about this. We may need to move back to that,” Frank says.

Wall Street would howl if that happened. "You can’t put the genie back in the lamp,” says Sylvain Raynes, a leading structured-finance analyst and principal at R&R Consulting in New York; to do so would slow the economy even more. Structured finance, he says, has allowed poor kids to go to college and working-class parents to own a home. Of course, structured finance also allowed Andy Fastow, of Enron fame, to work his magic—but, okay, take that example, Raynes says: Neither consumer groups nor Congress nor even the Bush administration is satisfied with the resulting reforms. This is why, Raynes argues, Field’s plan deserves more consideration than any legislation. "It’s an excellent idea,” he says. If Raynes could know, as an investor, who’s square on his mortgage and the credit scores of each borrower, "you could almost predict the future.” Says Brad McNamee, vice president of Lewtan Technologies of Waltham, one of the world’s leaders in the analysis and computer modeling of structured-finance securities—and another person who could benefit from Field’s innovation: "An idea like this would be useful…. Richard is very smart. You know, I wanted to hire him a few years back.”

Field says that he’s been in talks with Deloitte & Touche, the Wall Street accounting firm, about launching a program that would put his idea into practice. (Deloitte says in a statement that its conversations don’t always lead to business partnerships, and that for now it has no arrangement with Field.) For his part, Field says he will work with any takers. He sits one Saturday morning in late December in the booth of a Needham diner, too excited about the future to finish his oatmeal, or, apparently, wear a shirt under his zip-up sweater jacket. He says he’s asked all the time: How does he know Wall Street will go for his idea?

He pulls from a folder a story about the New York hedge fund Paulson & Company. In the lead-up to the credit crisis, it bet against mortgage-backed securities because, as Paulson said in a letter to its investors, it had actually done its homework, looking at thousands of the individual loans that made up these securities and deciding they were potentially worthless. For its acumen, for its willingness to ignore the high credit ratings bestowed by Moody’s and S&P and buck the Wall Street herd, Paulson pocketed $15 billion in 2007.

Field says that when the free market knows what it’s dealing with, securities get priced accordingly. The opposite is also true. "The pricing spiral has no logical stopping point if no information is gathered,” he says. If financial institutions don’t let the sunlight in, they may never be able to unload (and recover from) the mortgage-backed bonds they now find themselves stuck with. Field is told that Sylvain Raynes thinks his idea could be worth $2 billion a year on the Street.

Field has heard this, too.