More on the Mortgage Crisis

September 26, 2010

Mo money, mo money, mo moneyThe following is my answer to a friend’s question about “what happened”, triggered the “this should have been a red flag” element of this article on the Huffington Post.

A confluence of events conspired to make this one worse than others (notice my restraint from calling this a “perfect storm”?).  What now appear to have been unnecessarily low interest rates by the Fed after the terror attacks meant investors were more hungry than usual for yield and sought investments that carried a higher return for what was perceived as equivalent risk.  Even though the return was higher on mortgage-backed bonds, the yield wasn’t nearly high enough for investors (insurance companies, pension funds, mutual funds, etc.) to do due diligence on thousands of mortgages buried within AAA-rated securities.

It was a risk/reward calculation for investors.  The investors were working with their coverage teams at I-Banks (a process called “reverse inquiry”).  The I-Banks worked to create securities that met the return and risk criteria set out by the investors–because that’s what they do, they sell bonds and get (well) paid to do so. They, in turn, need product to package so they first buy as much of it as they can from third parties, then, over time, buy their own mortgage companies to originate as many mortgages as possible (a pure vertical integration strategy–capturing the means of production).  Borrowers had low interest rates and plenty of mortgage money to be had were willing participants.  Lenders, having a ready source of cash (the sale of the loans to I-Banks and investors), and eager borrowers, used other people’s money to churn volume.  And this is just the “cash market”, which says nothing about the “synthetic market” in which a short side of the trade was required before anything could even get started (see Magnatar, Goldman, etc.)

Everyone was looking for something and managed to get it, largely by looking the other way and willfully suspending their disbelief.  As is common in these cycles, people who are long the asset always think that they’ll be smart enough to get out before it crashes.  But only some do because once you hop on the profit escalator, it’s tough to jump off when others continue to make what look like profits.  Once everyone is on one side of the ship, it’s gonna tip over.  As people realize that it’s tipping to the starboard side, they start, slowly at first and then en masse to race to the port side, which causes the ship to tip over in THAT direction instead.  It’s the herd mentality that people have written about for hundreds of years.  (One of th best efforts on this topic is Mackray’s “Extraordinary Popular Delusions and the Madness of Crowds” written in the mid-1800s).  In short, it was ever thus.

I did about a 45 minutes blow-by-blow presentation on this to some grad students a while back.  If I can figure out how to post the PowerPoint slides the germane pieces of it (perhaps a video blog post?).

Having never been a fan of the repeal of Glass-Steagall, I honestly don’t think that it’s repeal was much of a factor in this.  Remember that G-S separated commercial from investment banking.  Lehman and Bear and Goldman and Morgan Stanley weren’t commercial banks, so everything they did would have still been done (at 33x leverage).   That said, Citi and BofA were underwriters of bonds and also commercial banks that failed so keeping the wall up arguably would have helped them.  But there’s also the case of the Royal Bank of Scotland–the biggest bank failure of all time.  It wasn’t their underwriting of bonds that got them in trouble, but what they bought that got them into trouble.  There was an element of this in the failure of BofA and Citi, too, so it’s hard to say.

It’s true, there will be a “next time”.  The troubling thing is the observation that the boom/bust cycles are coming both closer together and becoming more violent.  Until meaningful regulations are put (back) into place (and the recently passed regs don’t strike me as such), and investors, underwriters and issuers get serious about risk management we’re likely in for it again.  Never underestimate the imagination and power of people whose interest is in figuring out how to do thinks not prohibited by regulations.  The securitization business has had its epitaph written several times in the last twelve years (think Enron and off-balance sheet issues), only to find new life thanks to creative lawyers, accountants and bankers.

Misunderstanding Headlines

May 23, 2010

Hey Felix, CIGNA and MetLife are on line two.

I was just scanning the headlines on The Huffington Post this morning and saw a couple things that made me sure that I’m not in sync with either the headline writers or the story authors today.  Maybe it’s because I was sick all week, only slept through the night for the first time last night (and in the process apparently set some sort of sonic record for snoring according to close observers) and have been ingesting some of Big Pharma’s best stuff both prescription and OTC.  The combination may have addled my brain.

The piece headlined “Man Sucked into  Sausage Machine” was not as I suspected about the victory of Mark Critz over Tim Burns in the special election in Pennsylvania’s 12th Congressional District to replace the dead but still ear-marking John Murtha.

The story “Famed Bullfighter Gored through Throat” was sadly not written about the underdog bull’s dramatic come-from-behind victory over Julio Aparicio as I would have hoped.  When a man takes on “half a ton of angry pot roast”, sometimes he gets the outcome he deserves.  As a life-long Cub fan, I’ve always appreciated fruitless searches and that makes me cheer for the bulls, in Pamplona and in bull rings everywhere.  The subheadline tells the typical tale, “Famed Surgeon Saves Life, Bull Not So Lucky”.  Sigh.  It was ever thus.  Sometimes you only get one clean shot and you gotta take it, regardless of the consequences.

As far as the story “Skydiver Preparing for 120,000-foot Supersonic Fall” goes, you don’t need to even read the piece to feel the looming disaster ahead for this clown.  His undertaker is already likely carving my favorite line, “It was a good idea at the time” into something small and granite.  I’m pretty sure that this would be a proper time for his life and health insurance companies to cancel his coverage. This stunt, and there’s no other word for it because it surely isn’t science, falls into the category of “Because We (Think We) Can”.  A reading of history will show that God and the forces of nature have this habit of smacking down such hubris on a regular basis.

That said, I think this is a candidate for Best Headline Foreshadowing Disaster ever, along with:

  • Hindenburg Departs for New Jersey
  • Titanic sets Sail, Captain Scoffs at Iceberg Threat
  • Nazis Invades Russia
  • Space Shuttle Challenger Launches Today as Space Travel Becomes “Routine”
  • Stock Pros Assure: “It’s Different This Time”, and…wait for it
  • George W. Bush Takes Oath

P.S.  There’s not enough medicine in the world or lack of sleep that will cause me to misunderstand the headline, “Jennifer Aniston’s Undressed Moments, Which Is Your Favorite?

What I read

March 28, 2010

Probably Enough to Keep Me Busy

My name is Mark and I am an addict.  My drug of choice is information, particularly on current events.

I started really reading in junior high, but it got out of hand in high school.  At first it was two newspapers a day (Chicago Tribune and the Arlington Herald).  Sports first, then the other stuff.  My reading an article about a rape trial got me “the talk” from my dad. I was in Student Congress in high school and there wasn’t a current topic that was off-limits, so preparing meant covering a wide landscape.  The guy behind the periodical desk at the library came to dislike me.  That experience introduced me to the New York Times, Washington Post and Wall Street Journal, as well as a broader range of general and not so general interest magazines.  Foreign Policy, anyone?  It was a gateway drug.

I went into remission in college, then resumed consuming thereafter.  It’s now really out of hand with both internet’s accessibility and my not having a job.  But even when I worked, I still always had about 40 pages of articles I’d reformatted into two-column, 10-point font to carry with me.  Walking to a meeting, waiting for a lunch partner, lunching by myself, on the train, and in other places appropriate or not, my appetite for news could be described as insatiable.  In the last couple years, I’ve fallen in love with podcasting, so now I’ve got news in through my ears and eyes, often at the same time.  If you see me with my headphones, chances are good that I’m tuned into Fresh Air or something similar, rather than Green Day.

I don’t watch much TV; mostly sports and a few entertainment shows (Modern Family tops the list, Wednesdays at 9/8CT).  I only occasionally watch cable news, and that’s only because I like the way certain people write their material, not because it adds much to my knowledge or understanding of a topic.  Cable TV does all of us a disservice by conflating the ideas of “governing” and “politics” and treating both in the same way CNBC treats the stock market or ESPN treats the baseball season.  It’s not a game.  Policy-making, like history, happens over a long arc of time and does not change eight times within 24 hours. I couldn’t help but notice how the so-called conventional wisdom on President Obama turned 180 degrees in the moments following signing the health care bill (and publication of David Frum’s “Waterloo” analysis). One moment, he’s a political blunderer, the next a genius.  It was never either one and there wasn’t a switch magically flipped on Sunday.  While there are addition points made in this this NY Review of Books piece, it encapsulates my feelings on the topic pretty well.

I used to have a business relationship with CNN and conversations with their executives taught me much about how they think and their need to “feed the monster”.  Essentially, their argument was:  We’re on for 24 hours and have to have something to talk about, so we take small things, small differences, highlight them and if we’re lucky, we’ll get a run of a couple days out of a story.  If that happens, it’s that many fewer other little stories that we’ll have to report. It was akin to taking crap and throwing it against the wall to see what would stick, then talking about it until it fell off the wall.  It works great at first (e.g., the first Gulf War), but with the proliferation of channels, the hosts of these shows have to continually come up with unique things to be outraged about, lest they lose their gigs (think Beck and Olbermann; Hannity and Ed).  If there’s nothing to be outraged about, what’s the point of having them on the air?  So outraged they are.  And we lose the concept of rational discourse in the process.

But I digress.

So, I read.  Don’t tell my business colleagues, but reading about business bores me.

I occasionally get asked what I read.  Unlike someone who came to national prominence in the last couple years and was unprepared for that question, I have an answer.  It’s a long one.  I’m exhausted looking at it.  You’ll note that it doesn’t include Time, Newsweek or any of the other “general interest” magazines.  My sense has been that if they’re only going to publish weekly, their analysis had better be excellent because it comes so late; I find their websites generally uninteresting, too (too much celebrity coverage).  The last time I checked, I didn’t think it warranted the effort.

It’s a habit I can’t kick.  I read the occasional book, but while doing that, I’m thinking of the other current things I could be reading about, so it sort of sucks the pleasure out of it.  The only exception is when I get my hands on a good history book, since I can put myself in the historical context and read it as if it was a current event.  It’s more confusing to explain than to do.

So here’s the list.

Physical media:

Online – consistently (I pay for access to the WSJ.  I would pay for content at other providers, too.  The notion that this stuff all has to be free is flawed as far as I’m concerned):

Online – occasional


  • PTI
  • C-SPAN After Words (from Book TV)
  • Fresh Air
  • NPR’s It’s All Politics
  • NPR’s Planet Money
  • PBS NewsHour
  • Slate’s Culture Gabfest
  • Slate’s Hang Up and Listen
  • Slate’s Political Gabfest
  • Countdown
  • This American Life
  • On The Media
  • Today in the Past

No Politico, Talking Points Memo or Daily Beast.

If I’m missing something, let me know.  There’s always room on the browser and in the stack of papers for another view.

Typos in the news

May 22, 2009
The extra "i"s have it!

The extra "i"s have it!

Typographical errors are in the news lately. I came across two typo stories in the last 48 hours; one charming, one an abject lesson.

The first from yesterday’s WSJ discusses errors in the engraving on Lord Stanley’s Cup.  Goalie Jacques Plante has his name spelled three different ways on the Cup.  Team names are wrong.  An Assistant Manger is identified as an “ass man”.  In general, guys are so happy and proud to have won the Stanley Cup that they’ll take it.  In all, it’s charming.

Then there’s the story of Hayden Panettiere.  Today’s Huffington Post reports that Ms. Panettiere (a person unknown to me until this morning) has a typo problem of her own.  Her tattooed philosophy  “to live without regrets” is being sorely tested by the fact that her desire to have this message written in Italian was not matched by either her ability to tell the tattoo “artist” how to spell it or the “artist’s” ability to read.  The result is a life-long, permanent “oops” moment.  The story does not report whether she regrets the incident.  I wonder if she’s crossed Italy off of her vacation list.

The desire or attractiveness of tattooing has always escaped me, so perhaps I’m less sympathetic to Ms. Panettiere’s fate than I should be.  Even at my most intoxicated, the thought of creating a permanent record of the event never occurred to me.  Running the risk of having a permanent spelling error is just reason #245 for me to avoid the “parlor”.

Topical Yogi Berra story (probably apocryphal, of course).  Yogi goes two-for-three, but the next day’s newspaper showed Berra only going one-for-three.  Yogi confronted the beat reporter for the paper about it.  The reporter apologized and said that it must have been a typographical error.   Yogi says, “Typographical error, my eye.  It was a clean single.”

UPDATE:  More tattoo typos in the news courtesy of the Huffington Post

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