The Big Short – The Next Step Down

“Our investment-strategy was simple. People hate to think about bad things happening so they always underestimate their likelihood.” – The Big Short

If you live in a haunted house, you’re not alone.

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.

I’m no Margot Robbie, but when I’m naked in the bathroom, at least the shower gets turned on.

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.

What’s a three-letter word that starts with gas?  Car.

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.

She don’t lie, she don’t lie . . . romaine.

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.

At least one of you will enjoy this one.

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.

Economics jokes are like bank bailouts.  Most people don’t get them.

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?

Author: John

Nobel-Prize Winning, MacArthur Genius Grant Near Recipient writing to you regularly about Fitness, Wealth, and Wisdom - How to be happy and how to be healthy. Oh, and rich.

22 thoughts on “The Big Short – The Next Step Down”

  2. John, our home loan experiences mirror yours: the first was a sound review, the second was a “no need for documentation except what you tell us; sign here please” (we lost all our equity but at least got out without paying anything else), and the third was the “proctology exam without the proctologist”. That said, we actually proved we could cover our debt and have done so to this day.

    I remember the last time this all happened; I also look around at the $750,000 to $1,000,000 homes near mine and scoff (they are just newer, not really any better). The homes here are sitting on the market a lot longer than they used to and even the “For Lease” signs are up a great deal longer than they used to be.

    I can sense the train hurtling down the track, even though it is night and I cannot fully make it out yet.

  3. History lesson follows. Wachovia was the pinnacle of risk aversion until 1st Union bought it in the early 2000s. A friend high up in 1st Union’s mortgage biz told me, “We’re going to make Wachovia do something they’ve never done before…lend $$$ to someone who really needs it.”

    Aftre Ken Thompson nearly bankrupted Wachovia when he bought World Savings w/out board approval, Wells moved in. I had a biz account w/ Wachovia 1995-2000 or so. Several years back, I received numerous emails from Wells about my “current” account that I had closed out 15+ years earlier. 

    A year later, Wells fessed up that a chick exec had fraudulently created accounts and raked in a $93MM bonus.

    The bottom line is that most bankers are grifters, period.   

  4. Looked like a crash coming to me since about last April. Somehow I see the downturns long before reality (so of limited use), like Micheal Burry. If the downturn will hold off until early spring, we can be sure the leftists (incumbents) will be tossed out like your salad joke.

    Agreed that Keynes’s insanity comment is about the only thing he got right, but boy politicians (esp’ly leftist) love his monetary theory. This despite it being proven wrong several times including the most recent experiment by Brandon.

    And no, the Fed will not pull off a soft landing “this time”.

    1. I think you’re right, and I think the downturn will be before spring. But, see the “irrational” quote.

  5. We bought our previous home the day the banks failed. The first didn’t show at morning closing, but we had a backup. They failed before the afternoon meeting. We had a just in case, that failed hours after closing the next morning.
    Our home lost 80% of it’s paper value in 90 days. 12 years later, we sold it for 80% of what we originally bought it for. But our kids grew up in a reasonably stable, safe, white, small town. (And then the Democrats took over the county school board, the middle and high school principles changed, and they quickly descended into Leftist hell.)

    1. It moves fast, when it changes. I’m told the opposite happens, too, as all the people on the Right have moved to Idaho and are making the RINOS shake.

  6. Working as a bank manager during the last crash, and looking back now, all the warning signs seem to be there but worse. That is comforting.

  7. Schiff just brought up a fact i hadn’t considered. previous bank disasters caused foreclosures, at 7.6 % rates the banks not are losing over 50% on there GOOD paying loans at 3%. Foreclosures might be better LOL

    1. Anon meant to write: “the banks are now losing over 50% on their GOOD paying loans at 3%”. It’s a continuous bleed, either because they raise the interest that they pay on savings (CDs), or customers pull their deposits to invest directly in government bonds. (TreasuryDirect.gov, in case you’re interested. You can still get Inflation-Indexed I-bonds, and Treasure Inflation-Protected Securitys (TIPS), if you have as little faith in the Fed’s ability to tame inflation as I do. The thing that really galls me is that the inflation-tracking compensation is still taxed by the same government that drives the inflation that they claim to protect you from.)

    2. What Anon meant to say was “the banks NOW are losing”. They’re caught in the same trap as the S&Ls were decades ago: long-term lending at low interest rates, but short-term borrowing at higher rates. If they can’t pay to “borrow” deposits, the deposits will go elsewhere (like TreasuryDirect.gov).

    3. They’d love for me to pay my mortgage off, since I can put the same money in a CD and make nearly 4% more.

  8. I sold over a year ago. Just over here waiting.

    Joan your humor was really good today, we all need the laughs

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