Imagine my surprise this morning.
I stayed up late last night reading "The Big Short." I was captivated by the story of Dr. Michael Burry who started Scion Capital in 2000 after leaving medical school in part because he really didn’t like dealing with people face to face. Burry was fascinated by investing and preferred to deal with numbers rather than people. So in 2000 he started his own hedge fund with what little money he could scrape together even though he was $150,000 in debt.
Burry studied the sub-prime market as it developed and realized it was a house of cards that could not stand. His final tip-off that the end was near came when he began seeing second mortgages offered that required no payments, they simply rolled the interest back and added it to the principle (the interest only negative-amortizing adjustable-rate sub-prime mortgage).
Realizing this was an impossible business model, he began looking for a way to bet against it.
At first there was no way to do that, but before long there was, the newly invented credit default swap. It’s a long story and I certainly can’t summarize it adequately here read the book). But, Burry in the end wound up 8 years later closing his hedge fund now worth billions.
So this morning, I pick up the NY Times to find a op-ed piece by none other than Michael Burry, entitled I Saw the Crisis Coming. Why Didn’t the Fed?. An excerpt"
Since then, I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, "The Big Short," which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a "statistical illusion." Perhaps, he suggested, I was just a supremely lucky flipper of coins.
As I started to read in fascination, there on ABC News This Week was Alan Greenspan (link here) being asked about the Burry piece in the NY times. His response (again)? Burry was just lucky, he flipped a coin and won. Total denial. He repeats "no one saw this coming".
I haven’t read the whole book yet but one thing really caught my attention, a quote from another analyst, who along with Steve Eisman, who also saw the bubble coming. Said Daniel:
It was as if the ordinary rules of finance had been suspended in response to a social problem. How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.
For me that clicked. For well over a decade wages and real income for average Americans have remained flat while the wealthy grew wealthier by leaps and bounds. The evidence for that can be found here:
Saez & Pikety. For more go here
Someone was bound to notice. So what better way to fool people into thinking they were making more money than to let them borrow money against the value of their home? Hell, even help them buy one so they then could borrow against it? What convenient way to conceal what was really happening? And then, diabolically, when the whole thing collapsed and Bush was on his way out the door? Bail out the banks and insurance companies who ran the whole scheme and let your successor deal with the problem, even shift the blame to him.
There is quote that has stuck in my mind from around 2002 that I have searched for, I can’t find the source (wish I could). I believe it was either Norquist or Cheney being asked about the deficits being run up back then while the Bush administration cut taxes and fought a war "off budget." In essence the quote "we don't care, we'll run the deficits so high that whoever comes after us will be so busy paying off the debt they can't restore the social programs we we cut." The sheer cynicism of that has remained with me ever since. Today we live with the consequences.
And as President Obama struggles to cope with the wreckage left behind, they're laughing all the way to the bank, the bank they already own and which they bailed out with taxpayers money.
Financial reform cannot come too soon enough and MUST be next on the agenda. And in contrast to health care, most American voters will find easy reasons to support it.
Other links regarding Burry:
Dr. Michael Burry and The Greatest Trade Ever
Betting on the Blind Side