"The Big Short – The Next Step Down"
by John Wilder
“Our investment-strategy was simple. People hate to think about bad things happening so they always underestimate their likelihood.” – "The Big Short"
"I watched "The Big Short" the other night. It’s about the financial system and the shenanigans that led to the near collapse of the Western financial world, but presented with elements of light-hearted comedy, so, of course I enjoyed it. And having Margot Robbie sitting in a bubble bath describing mortgage-backed securities, subprime loans, and credit default swaps while drinking champagne was genius.
The premise of the movie is that several groups of people figured out that the housing market was fraudulent, and that any human with a heartbeat (and, as described in the movie, at least one dog) could borrow enough money to buy a house. Why not? House prices only go up. There have been many people who have done excellent pieces describing the sheer insanity of the housing market and the incestuous relationships between the lenders and rating agencies that kept the party going with cheap money far too long. You can read them, but they don’t feature a picture of Margot Robbie in a bathtub.
In my personal experience, a bank that rhymes with Hells Rarmo offered me a loan for over six times my annual income with only my stated salary as the basis. My response, “You know, I could never afford to pay that back. Why would you offer a loan that big to me?” “I know, but I’m required to tell you about it,” was the answer from the uncomfortable voice on the other end. Even I could see the con from there, especially since they offered to lend me my downpayment.
The next home loan I got (after the collapse, in 2009) required enough personal information from me that I had to hire a proctologist to help me fill out the paperwork. The result of the Great Recession that followed was a retooling of the industry, bankers and people from the ratings agencies went to prison for fraud, and the government decided to create a system of sound money so these sorts of manias were tamed. Okay, you can laugh now, because none of that really happened. The government just shoved so much money down the throats of the banks that they got even richer for manipulating the system in ways that would make Al Capone’s scar twitch.
What I saw during the run up to the disaster is that the economic taint (heh heh, I said taint) from the housing bubble spilled everywhere. The place I noticed it first was that waitresses became worse. Why? During the bubble, everyone upgraded their job, and good, smart waitresses became, (spins wheel) mortgage brokers and realtors. The mark of a really good economy is crappy customer service.
I wrote a couple of weeks back about how I can see this happening in restaurants locally here:
"The Invisible Recession." "People are hurting, and the first thing to cut are the luxuries. Some people take eating out at McDonald’s© as a luxury versus heating up leftover lasagna, and now they’re bringing the lasagna. Garfield® would be proud, but McDonald’s® rarely makes money from cartoon cats.
Add in gasoline prices that are so high they make prescription drugs look cheap, and the squeeze is here. CarMax© just recently announced that they’ve taken a 10% hit last quarter in number of cars sold. People don’t buy cars when they’re worried about choosing between day-old lasagna and a McChicken™ sandwich."
The biggest tension in The Big Short came from the fact that the guys who saw the fraud went all-in. In one case, Micheal Burry put $1.3 billion into “insurance policies” that would pay multiples of the invested amount if the mortgages bonds started collapsing the way that Burry was sure that they would.
Burry made a $1.3 billion bet, and on top of that, he had to pay monthly premiums in the millions to keep the policy in force. Yet, even as the housing market started to fail, the housing bonds weren’t failing. If those bonds didn’t start falling Burry and his fund would be buried. John Maynard Keynes famously said that “The market can stay irrational longer than you can stay solvent,” proving that he was at least occasionally right. They did fail, and Burry made his investors rich, just in the nick of time before his fund became insolvent. Burry (according to rumors) ended up making over $800 million during the financial crisis.
All this brings us to where we are today. I might be wrong, but what I’m seeing everywhere I look are people that are at the end of their rope. The reason? Because we never took the pain and we didn’t clean up the financial system and make it a servant rather than a master. But I have a plan. Maybe Margot Robbie could explain our way out of this one?"
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