Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming

cramer-- You're right, and it clearly was.

breal said:

If you are suggesting that the buyers had no idea that, if they borrowed money, they would have to pay it back, then I don't believe you.

I don't believe that either. But we're not talking about one buyer. The default rates on mortgages are statistically pretty well known. I used to be the production manager of the "Standard Formulas" manual, which had hundreds of pages of formulas and tables for precisely what ranges of defaults and prepayments you could expect under a wide range of financial environments. 

In other words, it's no surprise that people default on loans; it's expected and built into the system.

Right, we're talking incredible fraud and greed by the "lenders" and by their enabler politicians.  I'm willing to stipulate that.  But there was another ingredient to the bubble that no one talks about, except that depressing movie in the short scene with the stripper who "owned" 5 houses.  The banks ended up owning them, I bet. The banks that you and I had to bail out.  I don't like that, against my will, my money funded that idiot's greedy speculations in real estate, and, yes, I assign some blame to her. She's in an all-cash business.  Probably very few of her tax dollars were directed by the stripper politicians toward bailing out the stripper banks. But lots of other people's were.  Including people who aren't rich and who are not risk takers. Like those retirees hunting around for CDs paying more than 1%.

I read that Hudson City Savings Bank holds its own notes.  Why can't all banks? 

The mortgage originator (sales person), the banks and the people who bought and resold the mortgages (read Smith Barney, Goldman and so forth) all have responsibility. Their object was to produce and flip as many mortgages as possible. Each one was worth thousands of dollars.

Since the mortgages were sold almost as soon as they were written, there was no incentive to fund only responsible borrowers.

Right.  Which argues for regulations along the lines of, you issue the note, you hold the note.  Incentivizes due diligence on the lender's part. 

And curtails home ownership.    Works for me.  So much for closing the class gap however, but it's a game of tradeoffs.

A couple of things on this topic.  First on the financial crisis.  People have pointed out that the Banks were making crazy loans, the buyers were taking out crazy loans, Investors were buying these crazy loans.  The question I think people need to start asking themselves is "Why did everyone go crazy at the same time?" 

People act like the Fed came in and lowered interest rates as a way to fight this Great Recession as they were the only game in town because there was no Fiscal Stimulus to be found.  This is actually quite untrue.  There were massive fiscal bailouts and a large Fiscal Stimulus package.  These two packages were what?   $1.6 Trillion?   Math may not be my thing, but I'm pretty sure $1.6 Trillion is not nothing.  

Even if it were, this was not the first time the Fed used low interest rates.  How about the decade preceding the Financial Crisis?  I remember low interest rates during the housing boom.  In fact, I remember low mortgage rates being used as a reason to buy housing at inflated prices.  Anyone who mentioned this at the time was a crank.  But, it played out how many thought it would.

Which brings us back to the question:  why did everyone go insane at once?  This is pretty simple.  People act upon their incentives.  You tell someone they can have a bigger house with the same monthly payment?  Most apparently are going to sign up.  Don't have any $$ to put down?  Even better, you have no skin in the game.  Mortgage bankers can make a killing without taking on any risk?  What do you think they are going to do?  

Remember, this was championed as the ownership society.  Left & Right supported this.  Krugman called for the housing boom as an elixir to the tech burst.  Politicians celebrated how more people could get loans for housing.  Well, how exactly was it that this could occur? 

And the Fed?  You think the fed wanted to stop this? The Chairman was telling people to take out ARMs.  The problem with the Fed is that when a sector of the economy should be getting a Red light, they always give it a green light to mitigate some slowdown.  

And how does this affect retirees?  Here's the thing.  When investing we are supposed to look at our time horizons.  Your investments should reflect the risk you are willing to take.  Retirees need their money now.   That is their time horizon.  Low interest rates essentially make them take on more risk.  It eats away at their $$'s buying power.  These are dangerous(risky)  times to be a retiree.  I am always concerned about my parent's investment portfolios and have structured mine in such a way that I could help them if and when things take a turn for the worst. 

we live in a time when individuals are expected to be in charge of their own retirements.  that means within the time horizon of their lives they need to be ready to deal with booms, busts, changes in interest rates, and anything else that effects the value of their investments.

if we don't all have defined benefit programs from private pensions, or a more generous public pension system, this is what we have to live with.  

if we're on our own with regard to our retirements, there is no way to ensure that we aren't subject to some degree of risk.

Especially when interest rates are engineered to be below market.  This brings with it a devalued dollar making saving difficult and also the boom  bust phenomenon that is becoming more and more pronounced as monetary policy gets more radical.

There is no reason why people can't save for retirement.  Government policy makes it much more difficult than it should be.

ctrzska, did the bubble help poor people own homes that they were able to keep?  Serious question.  It seems to have hurt the middle class and heightened income inequality.  But are more low-income, low-asset persons in their own homes now?  That they themselves are able to pay to maintain?  Serious question.  It would be nice if something good came out of this for someone.  Besides the bankers.

breal said:

ctrzska, did the bubble help poor people own homes that they were able to keep?  Serious question.  It seems to have hurt the middle class and heightened income inequality.  But are more low-income, low-asset persons in their own homes now?  That they themselves are able to pay to maintain?  Serious question.  It would be nice if something good came out of this for someone.  Besides the bankers.

Way too many solid minority homebuyers were pushed into bad subprime loans when in fact they were eligible for conventional loans at good rates. I read somewhere that this downturn has wiped out huge amounts of total African American wealth, not to mention devastating their neighborhoods. Let me go find some articles ...

ETA: Quote from the NYT article linked below:

All in all, Hispanic families lost 44 percent of their wealth between 2007 and 2010, the Urban Institute estimates, and black families lost 31 percent. White families, by comparison, lost 11 percent of their wealth.

That didn't take long.

http://www.theatlantic.com/business/archive/2015/06/black-recession-housing-race/396725/

The Recession's Racial Slant

By 2031, the downturn will have decreased the wealth of the median black household by almost $100,000.

The recession, while painful for everyone, was especially disastrous for black Americans.
Now a report from the ACLU says that black families will continue to suffer the effects of this disproportionately for decades to come: By 2031, white household wealth will be 31 percent below what it would’ve been had the recession never happened, according to the report. For black households, wealth will be 40 percent lower, which will leave black families about $98,000 poorer than if the recession hadn’t taken place.

This is  particularly worrying because black households have always trailed significantly behind their white counterparts when it comes to wealth accumulation, and recession expanded that gap. In 2013, the net worth of white households was 13 times greater than that of black households, the largest the gap has been since 1989, according to Pew Research. Wealth often determines not only how well families can provide for themselves when it comes to basics like food and shelter, but it is a safety net for emergencies and helps to set up future generations for education, home ownership, and other opportunities that improve people’s lives.

A big part of the reason that the recession hit black Americans so hard was that it gutted home values, and home ownership is a much more significant part of the group’s overall wealth.  

Between 2007 and 2009, home equity for white Americans decreased by about 9 percent; for black Americans the decrease was 12 percent.

In order to illustrate the importance of home equity to the wealth of black households, the ACLU compared total wealth for median black and white households in 2007 with and without factoring in home equity. Prior to the crash, the median wealth for a white household excluding a home was $92,950. For blacks that figure was 4,200. When factoring in home equity, the wealth of black households grew more than four-and-a-half times, to $63,060. For white households factoring in home equity helped wealth figures grow by only about two-and-a-half times to 244,000.

But it’s not just the loss of home equity that caused these outsized losses for black households. The study also points to predatory loans that put owners into homes with high-interest mortgages and unaffordable balloon payment structures—where they then defaulted as home values collapsed—a practice that was disproportionately perpetrated against the poor and communities of color. Even for upper-income black households, subprime financing was still much more common than it was among low-income white households. The ACLU points to a report from the Department of Treasury which found that black families living in upper-income neighborhoods were two times more likely than white households in lower-income neighborhoods to have refinanced their homes with subprime loans. The report also notes that black and Latino households were nearly 50 percent more likely to face foreclosure than their white counterparts.

These problems have not changed since the recession, and homeownership in America is deeply uneven. The gap between homeownership rates of white and black Americans has remained virtually unchanged for more than 100 years. According to a 2014 report from Zillow, black Americans make up only 3 percent of conventional mortgage applications, the lowest rate of any racial group, and blacks also face the highest denial rate, about 25 percent versus only 10 percent for white applicants. And as recently as May of this year, instances of racist mortgage policies, such as redlining, which deny minorities access to the housing market, have come to light. In a largest redlining settlement in its history, the Department of Housing and Urban Development ordered a Wisconsin-based bank to pay $200 million after the lender refused loans to qualified black and Hispanic clients. With limited access to loans, black families are often left to rent, or opt for less favorable mortgage options, that increase the likelihood of financial hardship, especially when recessions hit.

Losses from homes that are underwater or were foreclosed upon have far-reaching and long-lasting consequences for black families. For instance, black Americans saw larger declines in retirement savings than other groups in the years following the recession. The ACLU report suggests that this may be because they raided their accounts in order to cope with more severe losses and higher interest rates than their non-black counterparts. The wide-reaching and long-lasting financial trauma is especially harmful for black Americans who not only have lower wealth levels to begin with, but higher levels of unemployment and lower levels of income, rendering the chance of recovery all too slim, even as white Americans start to get back on their feet.

There are plenty of other articles, but the short answer is that the relaxed lending policies that were supposed to help people with low incomes become homeowners and the environment it created ended up crushing them like bugs. Zoinks will be along in a few minutes to tell us why it's all their own fault.

http://www.businessinsider.com/great-recession-exacerbated-a-big-racial-disparity-in-the-housing-market-2015-6

http://www.nytimes.com/2013/04/29/business/racial-wealth-gap-widened-during-recession.html?_r=0

All in all, Hispanic families lost 44 percent of their wealth between 2007 and 2010, the Urban Institute estimates, and black families lost 31 percent. White families, by comparison, lost 11 percent of their wealth. The economic turbulence worsened a gap that has persisted for as long as social scientists have measured it, and has its roots in institutional racism, they said, which, for instance, prevented black Americans from benefiting fully from the G.I. Bill back in the 1940s and 1950s.

ml1 said:

we live in a time when individuals are expected to be in charge of their own retirements.  that means within the time horizon of their lives they need to be ready to deal with booms, busts, changes in interest rates, and anything else that effects the value of their investments.

if we don't all have defined benefit programs from private pensions, or a more generous public pension system, this is what we have to live with 


if we're on our own with regard to our retirements, there is no way to ensure that we aren't subject to some degree of risk.

We are on our own but the banksters giving money to the likes of Clinton and the Republican candidates are not. They even have lobbyists to write the laws that their bought-and-paid-for politicians will introduce and vote for.

Who is on our side?

historically, it's never been a particularly good idea to invest in CDs for retirement.  At best the returns only slightly outpace inflation, and in bad times actually lag behind inflation.  

http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html

Usually, a person has to trade off risk for return.  And a CD is going to be super safe, but under almost no circumstances is it going to grow your investment in real dollars.

If people want to be responsible for their own retirements, they have to expect that they'll be taking on some risk if they want their savings to grown.  Otoh, that's why pensions and other defined retirement benefits are so much better deal for most people.  It spreads the risks out over millions of people, and over a much longer time horizon.  But we've been sold on the idea that a 401k is a great deal because we're in control of our own money.  We're in control, but generally we also have to live with more risk (or lower return).

@terp, yes, people follow their incentives. This is why we need regulations (there's that ugly word) to create incentives to act in a way that is mutually beneficial for themselves and for society at large.

It's not that "we've been sold on the idea that a 401K is a great deal because we're in control of our own money".  The issue is that DB plans are no longer offered, so 401K's are all we have. 

ml1 said:

historically, it's never been a particularly good idea to invest in CDs for retirement.  At best the returns only slightly outpace inflation, and in bad times actually lag behind inflation.  

http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html


Usually, a person has to trade off risk for return.  And a CD is going to be super safe, but under almost no circumstances is it going to grow your investment in real dollars.

If people want to be responsible for their own retirements, they have to expect that they'll be taking on some risk if they want their savings to grown.  Otoh, that's why pensions and other defined retirement benefits are so much better deal for most people.  It spreads the risks out over millions of people, and over a much longer time horizon.  But we've been sold on the idea that a 401k is a great deal because we're in control of our own money.  We're in control, but generally we also have to live with more risk (or lower return).

Let me see if I have this right.  You support a system where 70 something people who may or may not be equipped to navigate the current financial waters that are becoming more and more volatile to invest in the stock market?  This is because you support an inherently inflationary regime.  Do I have that right?

Or do you suggest we spread the risk over millions of people.  That sounds pretty familiar.  Anyway, who is going to pay for these pensions? 

breal said:

ctrzska, did the bubble help poor people own homes that they were able to keep?  Serious question.  It seems to have hurt the middle class and heightened income inequality.  But are more low-income, low-asset persons in their own homes now?  That they themselves are able to pay to maintain?  Serious question.  It would be nice if something good came out of this for someone.  Besides the bankers.

kthnry's info provides some great color so I won't rehash, but there was an interesting article on the impact of the bubble on the poor (mainly minority) in Chicago that was truly jaw-dropping.  What it stressed was not only the means that lenders employed to get the poor into homes, but the underhanded tactics that individuals used to steal (almost literally) the homes out from under them when they found themselves unable to keep up.  If I can find it I'll post it.

terp said:

ml1 said:

historically, it's never been a particularly good idea to invest in CDs for retirement.  At best the returns only slightly outpace inflation, and in bad times actually lag behind inflation.  

http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html


Usually, a person has to trade off risk for return.  And a CD is going to be super safe, but under almost no circumstances is it going to grow your investment in real dollars.

If people want to be responsible for their own retirements, they have to expect that they'll be taking on some risk if they want their savings to grown.  Otoh, that's why pensions and other defined retirement benefits are so much better deal for most people.  It spreads the risks out over millions of people, and over a much longer time horizon.  But we've been sold on the idea that a 401k is a great deal because we're in control of our own money.  We're in control, but generally we also have to live with more risk (or lower return).

Let me see if I have this right.  You support a system where 70 something people who may or may not be equipped to navigate the current financial waters that are becoming more and more volatile to invest in the stock market?  This is because you support an inherently inflationary regime.  Do I have that right?

Or do you suggest we spread the risk over millions of people.  That sounds pretty familiar.  Anyway, who is going to pay for these pensions? 

I'm not going to speak for ml1, but he seems to be saying that "we've been sold on the idea", not that he's selling it.  (And FWIW I'm not sure where ml1 said anything about seventysomethings investing in the stock market or even that 401ks were limited to equities.)

So if not for your split of his Option A (401k) or Option B (DB), then what?

And let us not forget the robot-signing by banks of countless foreclosures without proper verification. Adding injury to injury.

yup

ctrzaska said:

terp said:

ml1 said:

historically, it's never been a particularly good idea to invest in CDs for retirement.  At best the returns only slightly outpace inflation, and in bad times actually lag behind inflation.  

http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html


Usually, a person has to trade off risk for return.  And a CD is going to be super safe, but under almost no circumstances is it going to grow your investment in real dollars.

If people want to be responsible for their own retirements, they have to expect that they'll be taking on some risk if they want their savings to grown.  Otoh, that's why pensions and other defined retirement benefits are so much better deal for most people.  It spreads the risks out over millions of people, and over a much longer time horizon.  But we've been sold on the idea that a 401k is a great deal because we're in control of our own money.  We're in control, but generally we also have to live with more risk (or lower return).

Let me see if I have this right.  You support a system where 70 something people who may or may not be equipped to navigate the current financial waters that are becoming more and more volatile to invest in the stock market?  This is because you support an inherently inflationary regime.  Do I have that right?

Or do you suggest we spread the risk over millions of people.  That sounds pretty familiar.  Anyway, who is going to pay for these pensions? 

I'm not going to speak for ml1, but he seems to be saying that "we've been sold on the idea", not that he's selling it.  (And FWIW I'm not sure where ml1 said anything about seventysomethings investing in the stock market or even that 401ks were limited to equities.)

So if not for your split of his Option A (401k) or Option B (DB), then what?

lisat said:

And let us not forget the robot-signing by banks of countless foreclosures without proper verification. Adding injury to injury.

And on top of that, dollars notwithstanding, you can add the government's laughably inept response to it (and for the hell of it the similarly undereffective response even before it) as adding injury to injury to injury.

And yet, up thread it was suggested that regulations causing the lenders that issue the loan to have to then hold the note --would somehow hurt a person's chance to rise from a low economic class to a higher one. But lending money to homeowners beyond their apparent ability to pay it back turns out not to have been a way to increase home ownership among persons with low income and low assets.  That policy also hurt the     Neighbors of the no-income-verification borrowers, as their home values went down amid a sea of foreclosure signs.

Burry made his killing by thinking 3 steps ahead of the game.  Our politicians at that time, by contrast, never thought beyond their next sound bite.

ml1 said:

yup

ctrzaska said:

terp said:

ml1 said:

historically, it's never been a particularly good idea to invest in CDs for retirement.  At best the returns only slightly outpace inflation, and in bad times actually lag behind inflation.  

http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html


Usually, a person has to trade off risk for return.  And a CD is going to be super safe, but under almost no circumstances is it going to grow your investment in real dollars.

If people want to be responsible for their own retirements, they have to expect that they'll be taking on some risk if they want their savings to grown.  Otoh, that's why pensions and other defined retirement benefits are so much better deal for most people.  It spreads the risks out over millions of people, and over a much longer time horizon.  But we've been sold on the idea that a 401k is a great deal because we're in control of our own money.  We're in control, but generally we also have to live with more risk (or lower return).

Let me see if I have this right.  You support a system where 70 something people who may or may not be equipped to navigate the current financial waters that are becoming more and more volatile to invest in the stock market?  This is because you support an inherently inflationary regime.  Do I have that right?

Or do you suggest we spread the risk over millions of people.  That sounds pretty familiar.  Anyway, who is going to pay for these pensions? 

I'm not going to speak for ml1, but he seems to be saying that "we've been sold on the idea", not that he's selling it.  (And FWIW I'm not sure where ml1 said anything about seventysomethings investing in the stock market or even that 401ks were limited to equities.)

So if not for your split of his Option A (401k) or Option B (DB), then what?

This issue as I see it is not what people choose to do.  It is the choices they have and how the regulators force their hands.  401K's are good as a tax deference.  I would suggest people take advantage of this if they don't have a pension option.   

What I do take issue with is that regulators have pegged interest rates too low.  This is not a recent phenomenon.  This has been going on for decades.  The 1 notable exception being Paul Vollker's Fed.   This punishes the saver and forces her hand to take on risks that they probably are not well positioned for.   This hits the retiree the hardest as they typically live on fixed income and have the lowest time horizon and thus should have the lowest risk profile.   And this is really only 1 issue with the price of credit being fixed by a politburo type agency. 

breal said:

And yet, up thread it was suggested that regulations causing the lenders that issue the loan to have to then hold the note --would somehow hurt a person's chance to rise from a low economic class to a higher one. But lending money to homeowners beyond their apparent ability to pay it back turns out not to have been a way to increase home ownership among persons with low income and low assets.  That policy also hurt the     Neighbors of the no-income-verification borrowers, as their home values went down amid a sea of foreclosure signs.

Burry made his killing by thinking 3 steps ahead of the game.  Our politicians at that time, by contrast, never thought beyond their next sound bite.

I think its worse than that for the politicians. They champion the government policies that are artificially expanding credit during the boom forgetting and then hoping we forget all that when during the inevitable credit contraction.  To their credit, most people do forget.  So, there is that.

So, have we given the even-more-too-big-to-fail banks a reason not to do again what they just did, so profitably?  

terp: I don't think you'll find too many banks arguing against higher interest rates.

breal: how?  Not necessarily, disagreeing, just not sure how you're basing the question.

Consonant man, maybe you'll take a crack at saying how.  The old system was an invitation to fraud, to which millions RSVP'd "Yes, I'd love to!"  How can we fix it?

Well, you've killed the prop desks, forced everyone to come up with a living will and jacked capital requirements through the roof, amongst other things, so there's that.  But one way among many left: scrap 2/3 of the regs, rewrite the remaining third to be enforceable with teeth extending to the individual, hire competent auditors (and armies more of them) and pay them as if they weren't working for the govt, and stop the "take the money and run" approach.