
I Saw the Crisis Coming. Why Didn’t the Fed? - jakarta
http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=opinion
======
gjm11
There's an old saying: Academic economists have successfully predicted nine of
the last five major recessions.

That is: One possible answer to the question in the title is: "Because
actually the available information didn't make it clear what would happen and
when; you thought it did, but actually you just got lucky."

Whether that's actually the case here is of course difficult to tell. On the
one hand, hindsight bias (<http://en.wikipedia.org/wiki/Hindsight_bias>) makes
it likely that it won't _feel_ like it is, even if it is. On the other hand,
uh, it does indeed feel like the crisis was pretty predictable. (But I bet
that most people who are now saying "well, that was hardly surprising" failed,
just as FWIW I failed, to short the market heavily or anything. Not-being-
surprised is cheap.)

~~~
VBprogrammer
I have to agree with the idea that he just got lucky.

If he was really so sure of his assessment back then then why didn't he short
sell a bucket load of these mortgage backed securities?

~~~
jakarta
He came up with the credit default swap trade where you buy insurance against
mortgage backed securities failing.

This was really a great trade because his losses were capped at around 5% a
year while his upside was huge, imagine a 6:1 payout.

------
alanthonyc
_"Everybody missed it. Academia, the Federal Reserve, all regulators."_ \-
Alan Greenspan

That is complete bullshit. Try telling that to Paulson, who made billions on
the crash. I saw the signs myself, but did not understand them, not believing
that people like Greenspan would allow something so stupid to take place. When
studies show that Americans trust their government less than ever, mark me
down as a statistic.

When a bank official told me that "jobless, bankrupt, illegal immigrant, it
doesn't matter," they can get somone a home loan, I should have known what
that meant, and so should the Fed.

Greenspan should just shut up and accept his legacy.

~~~
lotharbot
There were a lot of us watching the signs in 2005 or so. There were a lot of
us who didn't miss it. And it wasn't "crackpot conspiracy theory" types; it
was normal people looking to buy a home and wondering why median prices in our
area climbed from 3x to 5x median income within a few years, when the 3x
figure had been pretty steady since WWII. A little bit of research showed that
a lot of houses had been bought on unusual terms -- no-doc loans, very little
down, adjustable rates, and so on. For those of us who expect to buy a home
with 20% down, a 15-30 year mortgage, and payments less than 38% of take-home
income, it seemed very strange that banks were lending people money on
considerably looser terms. Easy money leading to a sharp climb in prices,
combined with a big increase in speculators/flippers, should have been a
tipoff that we were looking at a bubble market.

There's no excuse for "experts" like Greenspan to have missed it, when the
everyday people running websites like seattlebubble.com saw it coming.

~~~
klenwell
It dawned on me when I saw this in the NY Times:

[http://graphics8.nytimes.com/images/2005/06/15/business/arm3...](http://graphics8.nytimes.com/images/2005/06/15/business/arm3.gif)

Note the date.

------
Confusion
The problem is: Greenspan may very well be right in his assessment that Burry
may just have been 'a supremely lucky flipper of coins'. There are thousands
of people in similar positions making predictions about all kinds of
phenomena. Whatever the outcome, there are always a number of predictions that
are 'uncannily' close to that outcome. Unfortunately, these 'correct'
predictions are only seldomly made by the same people. If someone truly had
better insight, you would expect them to make the right predictions more
often. However, if history teaches anything, it is that I can safely predict
that Burry will never again make such an accurate prediction and that it will
never be clear whether he was a prophet or a lucky bastard.

~~~
jakarta
I think that Burry is simply arguing that the methods he and other shorts used
to call this crisis (which Taleb refers to as a gray swan -- since so many
called it) should be more closely examined, rather than being simply dismissed
as statistical aberrations. Maybe investors/wall street can learn a useful
thing or two from them.

To me, spotting bubbles is not so difficult. There are a few great investors
who have excellent track records when it comes to dodging bubbles/crises. They
may not profit immensely, but their downside is usually protected and they are
cash rich to pick up securities on the cheap.

The real difficulty comes from figuring out when a bubble will burst -- which
is really anyone's guess. Burry himself ran into trouble on this end which
created friction and eventually lawsuits with his investors.

~~~
mistermann
Figuring out the "when" is definitely the most difficult part. I had been
watching the markets and the housing bubble very carefully for __years
__before the crisis finally arrived. It is so amazing how long these things
take to play out, and how distorted the markets can get before they finally
snap.

Despite the attention I paid to it, I still failed to make a profit. When
things finally started unravelling, I took several put option positions
(assuming the price would decrease) in the obviously doomed companies, for
really cheap prices. But my mistake was not goibg out further time wise. I was
up substantially (500% was my best) in almost all my positions within a week
or two, but when the fed and other players weighed in with changes to the
rules of the stock market, and CEO's taking actions that are blatently
fraudulent but not enforced by the SEC, things turned against me and I ended
up selling for a 40% loss. Of course if I had simply taken a boring short
position I could have made a guaranteed 40-60 percent, but how exciting is
that?? :)

Making money in the market, even when you KNOW what is going to happen, is
amazingly hard. Especially when the FED and SEC are literally changing the
rules on a daily basis, as they were back then, and when CEO's can lie, cheat,
and steal with impunity.

~~~
jakarta
For ordinary investors, the housing bubble was a tricky thing to play.

There were two public companies that had CDS portfolios where they stood to
make a lot of money. A direct equity investment or LEAPS would have worked
well there. I took this approach.

Alternatively, it seems like out the money puts on financial institutions
would have done really well. Michael Lewis chronicles a few guys from Cornwall
Capital that made something like 100:1 payouts on out the money puts for Bear
Stearns. These guys crushed it when Bear went BK. This cheap insurance
approach is used by a few really well known investors and it is the one I'm
gravitating towards for the future.

~~~
mistermann
Ya, out of the money puts was the route I took as well. However, when the
company you buy puts in suddenly takes on a couple hundred million of new debt
in order to do a share buy back so the CEO can cash his shares out, puts don't
perform too well.

Nor do they do so well when the SEC decides to suddenly ban short selling on a
certain subset of stocks.

------
muerdeme
"Mr. Greenspan said that he sat through innumerable meetings at the Fed with
crack economists, and not one of them warned of the problems that were to
come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing
bubble would have been invited into the ivory tower, so if all those who were
there did not hear it, then no one could have said it.

As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking.
The truth is, he should have seen what was coming and offered a sober,
apolitical warning. Everyone would have listened; when he talked about the
economy, the world hung on every single word."

Instead of expecting Greenspan to see exactly what Burry saw, wouldn't it be
better if we didn't have a single point of failure? In the absence of Wall
Street's reliance on the Fed, Burry's insurance plays could have further
pushed up prices and signaled to everyone else that something was wrong.

~~~
natrius
"In the absence of Wall Street's reliance on the Fed, Burry's insurance plays
could have further pushed up prices and signaled to everyone else that
something was wrong."

Can you explain this point further? How did Burry's investments not raise the
prices of credit default swaps? What does Wall Street rely on the Fed for that
led to that result?

~~~
joelhaus
This is precisely what needs addressing. CDS are over the counter trades
without a central clearinghouse. Therefore little data is available and the
counter parties create terms blindly.

This is what they mean when talking about transparency.

------
jakarta
For anyone interested in learning more about Michael Burry, I wrote a post
using material from an old message board he used to run:

[http://streetcapitalist.com/2010/03/24/learning-from-
michael...](http://streetcapitalist.com/2010/03/24/learning-from-michael-
burry/)

It is pretty amazing to see how far he has come since then, from a young
doctor posting about investing on the internet to going head to head with
Greenspan.

------
hristov
Most people could have predicted it and many people did. This includes not
only people like Mike Burry, George Soros and others that made money out of
the whole mess, but also those bastards in Goldman Sachs who after touting and
selling housing debt derivatives for the entire bubble ended up being short on
housing just when the bubble burst.

Multiple people in academia predicted the crash. Nouriel Roubini (spelling is
wrong) Peter Schif, every economist that ever posted on Counterpunch, etc.

And also of course most ordinary people predicted it. If you look at the
housing forums on the Internet from about 3 to 4 years ago you will see that
most people were sure there would be a crash and only people that were already
deeply invested in real estate were trying to think of ever more creative ways
to deny it.

So Greenspan's statements speak more about him than the actual reality. He and
the Bush government just surrounded themselves with economists from one very
narrow school of thought and did not listen to anyone else. It is not that
people did not predict the recession, it is that Greenspan would not listen to
anyone who predicted it, therefore nobody that he bothered to listen to
predicted it.

------
stretchwithme
The Fed DID see what was happening. They saw M3 soaring.

So they did the logical thing. They discontinued publishing the M3 statistic
in 2006.

Yep, they decided we just need to bury our heads in the sand and the
developing crisis would just go away.

But did it?

[http://www.shadowstats.com/alternate_data/money-supply-
chart...](http://www.shadowstats.com/alternate_data/money-supply-charts)

~~~
mcantor
Dear God.

------
T_S_
There will always be a distribution of opinions and therefore people with
"foresight".

The real challenge is to design a system with more stability.

My opinion is that while we have had many putative capitalists in charge of
regulating markets, we have very little understanding of what it takes for
markets to function well. One thing missing from the debate is an interest in
reducing informational asymmetries. If I have two bags of apples one paper and
one see-through plastic, you are going to buy the plastic bag (environmental
issues aside).

Our financial markets don't work very well, because financial accounting is
the opaque paper bag.

------
TorKlingberg
The problem is, there are always a lot of people seeing a crash coming. The
difficult part is telling if they are right or just being crackpots.

~~~
startuprules
1.) 'Crackpots' labeling is an easy way for corporate mass media to label the
truth tellers to discourage you from researching further (If you look at
2005-2007 CNBC interviews, they called alot of these people 'crackpots') 2.)
Most of the time these 'truth tellers' are way early in their calls. It's up
you to look at the numbers/charts and figure out when the said phenomenom
should occur.

~~~
TorKlingberg
Unfortunately there are also real crackpots, and they all claim to be
marginalized by the establishment. If I have to look at the numbers and charts
and figure it out myself, then I would rather also find the data myself. Then
I avoid getting data that is doctored or otherwise deceiving.

That said, it is often worth paying attention to those who are a little bit
outside the mainstream. That goes especially in economics, which is far from
an exact science, and is full of political agendas.

~~~
startuprules
Agreed; you put it better than I did :)

------
sliverstorm
Give it 10 years, and when the LHC spawns a dimensional rift connecting us to
Xen, I guarantee at least one man will come forward and say, "I can't believe
nobody else saw it coming". He will be treated like a prophet, when in reality
he was just a lucky alarmist.

Either that, or he will be me- a lucky satirist.

------
rfreytag
I think this is actually an argument for more accessible markets. Retail
investing was not offering vehicles to the average investor who wanted to
invest believing that house prices would fall. I wondered to many professional
and non-professional investors how t invest against the housing market to no
avail. If people had understood how to "bet" against house prices then I am
confident the bubble would have deflated more gently and earlier. The easiest
retail position to take is a "long" purchase of an investment instrument. What
is needed is the knowledge of and retail accessibility to bubble-deflating
investments.

How far should this go? Anyone should be able to own and even construct
derivatives. Such a market would bring along a host of educational material
and means to understand the provenance of your derivatives and the counter-
party risk. Obviously this accessibility and transparency would benefit
professional derivative investors as the pool of clients, information,
transparency, and alternative parties and views with which to trade expands.

But this is impossible as long as the notion of "qualified investor" exists.
If Greenspan and traditional economics has any hope of being correct then what
is needed is to enlarge the pool of "qualified investors" to simply everyone.
We need not more regulation but less but for the requirement that the
prospectus be accurate, intelligible, and anyone that sells "investments" must
do business with anyone has the purchase price.

Taleb says market-based black swans are becoming more common. The question is:
are they common enough to make a profitable business out of suppressing them?

~~~
grandalf
A very insightful comment.

I like to say that if Greenspan had replaced his famous "irrational
exuberance" comment with one citing "incredible short selling opportunities
for insightful investors" things would have turned out much better.

------
grandalf
The only time Greenspan could have meaningfully intervened was back in 2002 or
earlier, and even then intervention would have caused enough pain to have the
media deem it a "crisis" in itself.

Notably he did speak up about Fannie and Freddie in the early 2000s but was
silenced by the GOP's drive to make war -- nobody wanted the economy cooled at
all when gas prices were already creeping up.

So what's the man to do now? He could admit all that about the war and cast
serious doubt on the Fed's independence and the US financial system, or he
could insist that the boom/bust was a complete and total mystery.

In his last book he goes to great pains to marvel at seemingly impossible
"risk adjusted rates of return" throughout a variety of markets, but concludes
that in the case of housing it's still "froth" and not a bubble. Since the
bubble hadn't become obvious at the time of the book's publication, what else
would he say?

But more practically, we should all realize that if housing prices had dipped
about 1-2% less than they did, most of the damage would not have occurred. Our
institutions (banks, etc.) were calibrated to handle some amount of systemic
risk, but not as much as it turned out they should have.

Hindsight is 20/20 and Burry may have been extra prescient, but like any
bettor he could have been wrong. Since he had no additional information than
the rest of the market, we can conclude that the rest were all sheep (or
idiots) or that there was actually some _\-- gasp --_ chance going on.

The difference is that the majority of people, institutions, etc., misjudged
just how much calamity would be caused by price deviations that they
calculated to be highly improbable.

~~~
anamax
> Notably he did speak up about Fannie and Freddie in the early 2000s but was
> silenced by the GOP's drive to make war

Wrong. Fannie and Freddie were protected by Dems, not Repubs. Mccain got his
teeth kicked in over this one.

Interestingly enough, Fannie and Freddie execs during that time were largely
Dems, most of whom who landed in the Obama administration. While at Fannie and
Freddie, they took out millions.

Oh, and during this time, Fannie and Freddie were lying about the mortages in
their portfolios, which threw off everyone's risk evaluation. (Their
portfolios contained far more subprime than they admitted to.)

If Fannie and Freddie weren't politically connected GSEs, folks would be in
jail.

~~~
grandalf
Everything you say is accurate except the insinuation that Democrats are
mostly at fault. George W. Bush was in office for the worst of it, and he
spent his political capital trying to convince people that a war was
necessary.

He spent 99% of his political capital on war and at best 1% on everything
else. He was far from powerless, having control of both houses of congress.
The fact is he was perfectly fine with the GSEs being someone else's problem
so nobody would get distracted away from the "war".

Incidentally the GSEs were taken off government books in order to make the
budget look better so we could "afford" the Vietnam war.

~~~
anamax
> Everything you say is accurate except the insinuation that Democrats are
> mostly at fault. George W. Bush was in office for the worst of it

In this matter, Bush's sins are sins of omission - as you point out, he didn't
do anything. Dems did something, but what they did was wrong. For example,
they actively protected Fannie and Freddie. Those are sins of comission.

Note that Bush didn't change the regulatory structure - he went with what
Clinton left him. Again - omission vs comission.

It's the difference between manslaughter and murder.

And, that's ignoring ACORN's role. Among other things, they picketed banks
that didn't make enough loans to folks who couldn't afford them. They tried to
intervene with regulators. And so on.

Yes, Bush might have been able to keep this from happening, but he would have
been fighting Dems the whole way.

He didn't fight. They pushed bad policies. There is a difference.

And, I note that Barney Frank is still in office and Gorelick, among others,
are in the Obama administration.

Bush? Not in office.

~~~
btilly
There is plenty of blame to go around, but one of the biggest mistakes leading
up to the financial crisis was significantly lowering the amount of cash
reserves the investment banks needed to keep on hand. That happened on Bush's
watch with Republicans in charge of every branch of government.

And the revoking of Glass-Steagall under Clinton? That was introduced by
Republicans in both the House and Senate, with the Senate vote being almost
entirely on party lines. Yes, Clinton signed it, but it was a Republican bill.

~~~
anamax
> And the revoking of Glass-Steagall under Clinton?

Irrelevant because it didn't have any effect on the crisis.

In fact, it allowed some transactions that had some hope of slowing things
down.

Note that the non-regulated institutions did better, as did the non-regulated
arms of regulated institutions.

AIG was regulated up the wazoo.

~~~
btilly
Some of the "too big to fail" issues we saw was definitely because companies
got into multiple lines of business that Glass-Steagall would have prevented.

~~~
anamax
> Some of the "too big to fail" issues we saw was definitely because companies
> got into multiple lines of business that Glass-Steagall would have
> prevented.

Those "other lines of biz" provided some diversification that gave them some
chance of survival. It also made it possible for banks to save some of the
trading firms.

You clearly disagree, so let's have names.

------
hasanove
Check out "Peter Schiff was right" video:
<http://www.youtube.com/watch?v=2I0QN-FYkpw>

Now, talk about "nobody could have predicted this" (c) Obama

~~~
mistermann
Yes, Peter Schiff was probably the most prolific person on warning about the
impending crisis. However, despite how smart he is, when the crisis finally
came, his portfolios (precious metals,short US$) got hit very hard, for a
short period of time.

------
portman
If this article piqued your interest, please PLEASE read The Big Short by
Michael Lewis, in which he tells the entire, fascinating story of Michael
Burry, the one-eyed genius with Asburger's who fought against the entire Wall
Street establishment.

<http://www.amazon.com/dp/0393072231>

~~~
archgoon
Previously featured on ycombinator, with a link to an excerpt about Michael
Burry from _The Big Short_.

<http://news.ycombinator.com/item?id=1160552>

------
tomkinstinch
Related: [http://www.vanityfair.com/business/features/2010/04/wall-
str...](http://www.vanityfair.com/business/features/2010/04/wall-street-
excerpt-201004?printable=true)

------
balding_n_tired
It was pretty obvious, I think. And I will remark that the NY Times at least
once wrote up the people doing interest-only mortgages as bold financial
innovators.

------
Estragon
I saw it coming too. (But I only put my money in a shorting mutual fund.
Didn't have the great vision, this guy did. Still, I avoided the losses most
experienced.)

If I could see it, anyone could have. I'm not particularly smart or well-
connected.

------
RyanMcGreal
I started seriously worrying about the crash back in 2004 [1], and while I was
wrong about a lot of details (not least, ahem, the result of the 2004 US
presidential election), I was bang-on about the underlying problem. What
eventually surprised me was just how long the bubble was able to continue
inflating before it finally popped.

[1] <http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html>

------
manderson2080
The relationship between Wall Street and Washington blurred the lines too
much. As a regulator, its tough to recognize a fundamental flaw in the
investing practices of the firms that these people used to work for.

The "good old boy" network was reluctant to admit that they all screwed up.

------
yason
Well, you don't see what you wouldn't want to see even if it's right in front
of your face. And that works collectively in a society as well.

No matter how many people are yelling "soon, we're toast!", you won't hear it
if you don't want to imagine such an outcome in the first place.

Boom.

------
WalterBright
A couple years back, I remember reading an article that argued that housing
was way overpriced because the rents were only about half the value of the
house. They should be in line with each other.

------
djcjr
What do you mean they didn't see it coming?

The Fed _engineers_ this stuff.

------
startuprules
Audit the fed: <http://www.auditthefed.com/>

Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the
American taxpayer on the hook for over $12 trillion in bailouts and loans; and

Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell
Congress who has received trillions in these funds from the Federal Reserve;
and

Whereas: Allowing the Fed to operate our nation's monetary system in almost
complete secrecy leads to abuse, inflation, and a lower quality of life for
every American

~~~
jrockway
The banks paid TARP back, with interest. That means the taxpayers _made_
money.

~~~
_delirium
Only if you exclude the AIG bailout (much of which went directly to the banks
as counterparties) from the figures...

------
anonjon
It is a fucking conspiracy. fed is run by the banks, banks didn't want fed to
intervene bc they were making big bonuses and it was good for the people
there. duh.

This is an obvious case of corruption of our government. No one was regulating
because they _didn't want to regulate it_.

This is why there needs to be things like campaign finance reform and people
should seriously go to jail without chance of being pardoned for these types
of crimes.

Willful ignorance of this shit should have been considered aiding & abetting
theft.

But no, no one will go to jail because the rich and powerful never go to jail.
They didn't get rich and powerful by not being corrupt.

~~~
anonjon
go fuck yourself guy who down-voted me, you are part of the willful ignorance.

Greenspan was a goddamned Rayndian. Stephen Friedman had super strong ties to
goldman sachs, In fact, almost everyone high up in the fed has ties to banking
in one form or another. None of the people involved are even interested fair
in regulation.

I don't understand why this is controversial. it is a fucking conspiracy and
I'm calling it as it is.

Would my post have been better if I had suggested execution, or is the real
reason it is downvoted because it is unpopular to call something a conspiracy?

we all tell ourselves these fairy tales about how the world is fair and there
are no conspiracies and closed door deals between those in power, but it is
all a lie.

~~~
mcantor
Dude. What in the history of Hacker News would make you possibly believe that
a post starting with "It's a fucking conspiracy" in earnest would do anything
except get brutally downvoted?

