More Mortgage Meltdown: Noteworthy Nuggets from a Talk by Whitney Tilson

I’ve just attended a very interesting lunchtime talk at the New York Society for Security Analysts (NYSSA) and found the speaker not only smart, knowledgeable, informative and interesting but also a source for a number of pithy statements worth sharing. Below are some of my key takeaways and notations:

– The average annual income is currently in the low $40Ks, up from the low $30Ks in the 1990s (I had thought it was $55,000 back in 2005).

– At the peak of the housing bubble, a consumer could borrow 9 times his or her income, so long as the money was going to buy a house (or home), of course. (I included “home” because condos and coops were the first to default.)

– At the peak of the housing bubble, the requirement to demonstrate your income went away. “Literally, if you had a pulse, you could get a mortgage of several hundred thousand dollars.”

– Prior to the bubble, 2% a year was the worst increase in home values. The change is now SIGNIFICANTLY negative.

– Mortgage resets are what started the surge of defaults. Following the first few years of “teaser” interest rates, mortgage payments reset to much higher rates. If a home owner couldn’t refinance anymore, he or she would default. As home values fell, consumers had trouble refinancing.

– An audience-member from Britain reported that 40% of Americans “in this non-socialist country” do not pay taxes – as part of a question to Whitney during Q&A.

– “Wells Fargo is the Walmart of Banking…”

– “If Wells Fargo is the Walmart of Banking, Citibank is the K-Mart of Banking.”

– Wells Fargo securities are likely to double in 4-5 years. (Don’t quote me, i.e., Karen, on this.)

– The Borders Group hit 35 cents at its low and reached $3.53 today – a ten-fold increase. (What does that say about the outlook of traditional booksellers and/or Borders’ preparation for the digital world – there, I got my allusion to new media in.)

– Mortgages were the largest debt market at the peak of the bubble. Everyone (bankers) wanted in.

– The housing bubble was much bigger than the Internet bubble.

– High end investment bankers, e.g., Merrill Lynch – and particularly CEOs and those in Fixed Income (i.e., securitized loans) were making multi-multi-million dollar salaries and bonuses. 2,000 people were sharing an enormous bonus pool. The average was $5MM, and I-Bank CEOs were earning $35MM a year. There was no way they were going to point out the dangers (and lack of sustainability) of what was going on: “They’re gonna ride this horse until it keels over!” (That was one of my FAVORITE quotes from the talk.)

– California accounts for 10% of homes, 33% of foreclosures and 43% of home value. (43%!!! Seriously? Did I hear him correctly? That’s out of control.)

– GDP is made up of Consumer Spending, Corporate (Business) Spending and Government Spending. (Wow, I remember those macro-economic equations – good old friends). The ratio is 70:10:20. That is the logic behind the stimulus spending, to make up in some way for the lack of consumer and corporate spending. Saving rates are way up. (As Jeff Sachs said when he spoke at the Harvard Club, we want people to spend – need it now – but we want people to save – personal debt, i.e., over-spending or deficit spending, is what fueled the fire.)

– Sales of new homes were up last quarter – that’s because home builders were cutting prices on new homes to get rid of inventory: “Home builders dumping homes are not a green shoot in my opinion.” (I like the “green shoot” terminology.”

– “Jim Cramer [who says we have hit bottom] is right, but about a year too early.” We are halfway through total losses. (Oy Vey.)

And so it goes. Excellent talk.

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