More Mortgage Meltdown E-Book

Whitney Tilson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 385

Veröffentlichungsjahr: 2009

Beschreibung

A clear look at how to capture investment profits during difficult financial times

The U.S. economy has become crippled by the credit and real estate catastrophe. Even though we've all been affected by the calamity and have heard no shortage of news about it, it still seems unfathomable and utterly incomprehensible to most people that the actions of certain mortgage brokers, bankers, ratings agencies, and investment banks could break the economic engine of the world.

Now, for the first time, and in terms everyone can grasp, noted analysts and value investing experts Whitney Tilson and Glenn Tongue explain not only how it happened, but shows that the tsunami of credit problems isn't over. The second wave has yet to come. But if you know catastrophe is looming, you can sidestep the train wreck-and even profit. You just need to understand how bad times present opportunity and where to look. More Mortgage Meltdown can help you achieve this goal. The book

• Breaks down the complex mortgage products and rocket-science securities Wall Street created
• Addresses how to find investment opportunities within the rubble and position your portfolio to take advantage of the crisis
• Explains exactly how the combination of aggressive lending, government missteps, and Wall Street trading practices created the perfect economic storm
• Shows you why the crisis is not yet over and what we can expect going forward

More Mortgage Meltdown can help you understand the events that have unfolded, and put you in a better position to profit from the opportunities that arise during these tough financial times.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Acknowledgements

Introduction

Part One - What Happened and Why, Where Are We Now, and What Does the Future Hold?

Chapter 1 - What Happened during the Housing Bubble?

Home Prices over Time

Homes as ATMs

The Collapse of Lending Standards

Rising Home Ownership

The Human Face of the Housing Bubble

Conclusion

Chapter 2 - What Caused the Bubble?

A Mountain of Money Looking for a Home

Wall Street Responds

The Siren Song of Securitization

A Race to the Bottom

The Money Being Made on Wall Street

Rating Agencies

Institutional Fixed-Income Managers

Banks and Mortgage Lenders

The Government

And Finally: Homeowners

Chapter 3 - What Are the Consequences of the Bubble Bursting?

Delinquencies and Foreclosures

Existing Home Activity

New Home Activity

Home Vacancies

Home Price Declines

Underwater Homeowners

Impact on the Broader Economy

Conclusion

Chapter 4 - What Are the Problem Areas?

Overview

From the Top: Prime/Conforming Loans

To the Bottom: Subprime Loans

Alt-A Loans

Option ARMs

Jumbo Prime Loans

Second Liens and Home Equity Loans

Conclusion

Chapter 5 - What’s Next?

Prospects for Home Prices

The Homeowner Affordability and Stability Plan

Other Problem Areas

Prospects for the Economy

What Should the U.S. Government Do to Save the Financial System?

Case Study: Bank of America

A Better Solution

Counterarguments

Conclusion

Part Two - Profiting from the Meltdown

Chapter 6 - Advice for All Investors

Perils and Profits in the Market

Perspectives from Buffett and Klarman

Why Not Go to Cash?

Where Are the Opportunities?

Don’t Swing for the Fences

Be Courageous and Resolute, but Show Humility

You Don’t Have to Pick Stocks

The Fundamentals of Value Investing

Why Isn’t Everyone a Value Investor?

The Threat of Premature Accumulation

Sidestepping Mental Mistakes

Avoiding Overconfidence

The Dangers of Following the Herd

Never Fall in Love

Conclusion

Chapter 7 - A False Alarm on Derivatives

Why Are Investors Panicked about Berkshire Hathaway?

Background

Market Inefficiencies

Overview of Berkshire’s Businesses: Insurance

Overview of Berkshire’s Businesses: Utilities and Other

Investments

Financial Performance

Derivatives Exposure

Hypocrisy or Style Drift?

Succession

Valuation

Look-Through Earnings

What Could Go Wrong?

Conclusion

Chapter 8 - A Battered Blue Chip

History

Credit Card Economics 101

The Spend-Centric Model

Why Are Investors So Worried?

Valuation

Not Platinum, but Still Gold

Chapter 9 - Bottom Fishing in Microcaps

Background

Financial Fund Management

Real Estate

Commercial Finance

Balance Sheet

Valuation

Conclusion

Chapter 10 - Opportunities in Pools of Distressed Mortgages

Performance of Long Beach Mortgage Loan Trust 2006-8

How Payments Flow to the Tranches

What We Bought and Its Prospects

Conclusion

Chapter 11 - An Introduction to Shorting

Isn’t Shorting Evil?

Arguments against Short Selling

So Why Do We Short?

Good Places to Short

Chapter 12 - A Case of Questionable Reserves

History

MBIA’s Business Model

Good Bank/Bad Bank

Areas of Losses

Structure of a CDO

MBIA’s RMBS Exposure

MBIA’s CDO Exposure

An Analysis of One CDO

Conclusion

Chapter 13 - An Ill-Fated Acquisition?

The Bull Case for Wells Fargo

Wells Fargo’s Balance Sheet

Losses

Conclusion

Appendix: Background on Equity

Conclusion

Notes

Index

Advance Praise for More Mortgage Meltdown

“Whitney’s presentation makes complex financial concepts easy to understand, and I appreciate that. Despite the gloomy economic forecast, I actually found his calm and rational demeanor very comforting.”

—Debbie Ermiger, Hewlett-Packard Company

“Not only is this topic daunting, but it is also somewhat difficult to understand; however, Whitney does a fabulous job of making it both interesting and comprehensible. His careful consideration of the details really provides an accurate, truly expert view of the economy.”

—Heba Macksoud

“Whitney Tilson’s insights and comments are invaluable.”

—Marilyn Tahl

“Whitney Tilson’s sobering review of the debt bubble, and what we might expect to see in the next 1 to (gulp . . . 25 years is an excellent reminder that we need to constantly plan and be prepared for potentially ugly scenarios in both our personal and our business lives. Tilson also provides an excellent perspective on the current situation.

“I’ve found that people tend to accept a situation and find a way to move through it when they have a fuller understanding of what happened and why. Tilson’s presentation of what happened offers that ‘what’ and ‘why. ’”

—Jesse M. Keyser, The Motley Fool

“I found Whitney Tilson’s presentation on the mortgage mess riveting as well as frightening. I don’t know whether to stuff my mattress or help the economy and buy a mattress! I really appreciated learning what he had to say.”

—Elaine C. Sherwood, Customer Experience, Manager, Sun Microsystems, Inc.

Copyright © 2009 by Whitney Tilson and Glenn Tongue. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials.The advice and strategies contained herein may not be suitable for your situation.You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Tilson, Whitney, 1966-

More mortgage meltdown :6 ways to profit in these bad times / Whitney Tilson, Glenn Tongue. p. cm.

Includes bibliographical references and index.

eISBN : 978-0-470-52876-1

1. Mortgages—United States. 2. Housing—Prices—United States. 3. Investments—United States. I. Tongue, Glenn, 1959- II. Title.

HG4655.T55 2009

332.63’2440973—dc22

2009010821

Acknowledgments

This book would not have been possible without Chris Woolford, who chased down endless amounts of data, created nearly every chart, and wrote the chapter on American Express. We’d also like to thank Tim Melvin, who drafted parts of the book; Jeannie Reed, who did invaluable editing; and our office manager, Kelli Alires, who keeps things running smoothly.

Special thanks also go to John Heins and John Schwartz, our partners, respectively, on Value Investor Insight and the Value Investing Congress. Much of the book’s content comes from work originally done for the conference or the newsletter, which John and John have helped make into invaluable resources for value investors.

Kudos to Pamela van Giessen, Emilie Herman, Kevin Holm, and the rest of the team at John Wiley & Sons for their guidance and astonishingly fast turnaround of this book.

Sean Dobson of Amherst Securities was the original inspiration for this book, and his team, including Laurie Goodman and Emir Boydag, provided us with reams of data.

Finally, we’d like to thank our families and friends, whose love, patience, and support make everything we do possible.

Introduction

It was a cold day in early February 2008 as we biked to the Peninsula Hotel in midtown Manhattan to meet Sean Dobson, the CEO of Amherst Securities.We were there because we were intrigued by this e-mail a friend had sent us a few days earlier:

Sean is the best mortgage technician I know and has developed a unique database that includes virtually all mortgages originated since 1998, sliced by month of origination, product type, and further stratified by a proprietary coding system that picks up loan-level characteristics with unusual predictive capability. He has monthly delinquency and default statistics, new defaults as a percentage of current outstanding and CPR [conditional prepayment rate] stats. Loans can be assigned to securitizations and you can see where you can go from there for RMBS [residential mortgage-backed security] tranches and CDOs [collateralized debt obligations].

He runs a mortgage broker-dealer and advises many hedge funds and institutional accounts on their mortgage-related investments, including CDSs [credit default swaps] and the various indexes. He is definitely someone you should get to know.

Sean presented slide after slide filled with wild, multicolor charts and squiggly lines, explaining them in a strange language we didn’t understand (which we now call “mortgagese”).

From what little we could understand, the message was clear: The U.S. housing market had experienced a bubble of enormous proportions, and countless mortgages were defaulting at unprecedented, catastrophic rates. More importantly, there was no sign of a letup and, in fact, Sean argued that things were likely to get much, much worse.

We started to ask him a lot of questions, trying to figure out what all the squiggly lines meant and understand terms like DTI, CDX, sTr, cTr, SMM, and vPr. Fortunately, Sean was patient and, as we began to understand mortgagese, our eyes got big and our jaws hit the floor as we realized: Holy cow, he’s right! This bubble is much bigger and more far-reaching than almost anyone realizes, and is only in the early stages of bursting.

This conclusion was in sharp contrast to the consensus view among investors, government regulators, and policy makers, who thought that the worst was behind us. It wasn’t an unreasonable view, given that almost a year had passed since subprime mortgages had started to default at high rates, defaults in other areas weren’t yet at alarming levels, and the fallout seemed to be contained to a handful of firms and funds that had blown up, like Novastar, New Century Financial, and the Bear Stearns hedge funds. But Sean’s data told a very different story: that we were in the second inning, not the seventh inning, of the mortgage meltdown.

As we write this book a year later, we’re now in roughly the fifth inning, which has important implications for investors (not to mention policy makers, bankers, and CEOs).

Before we met Sean, we’d been following the housing and mortgage markets for years and had long believed that a significant bubble had occurred and was in the process of bursting. Thus, we were skeptical of the calm assurances throughout 2007 and well into 2008 that the worst was behind us that were offered by President Bush, Fed Chairman Ben Bernanke,Treasury Secretary Henry Paulson, the CEOs of financial and real estate firms, and Wall Street analysts who, with very few exceptions, simply parrot what CEOs tell them. Given our skepticism, by the time we met Sean we’d already sold a number of stocks with exposure to the housing market that had previously been among our favorites, such as USG Corporation and Mueller Water Products, and had shorted a number of financial stocks, including Allied Capital, Ambac, Farmer Mac, Lehman Brothers, and MBIA Inc.

Nevertheless, in February 2008 we were much too sanguine about the economy and the markets and thus had left ourselves dangerously exposed, with a long portfolio nearly four times the size of our short portfolio. Our meeting with Sean was the catalyst for us to do a lot more work.

We went back to the office that day and started digging . . . and digging . . . and digging, seeking to understand the U.S. housing market and what the future might hold. Every data point we uncovered confirmed Sean’s thesis, so as we developed greater conviction we began to take action. Within two months, we’d trimmed our long exposure by a quarter and increased our short exposure by nearly a third, such that our longs were only twice as much as our shorts; and we maintained a more defensive position throughout the rest of the year than we otherwise would have.

These steps enabled us to survive the carnage of 2008. A number of the smartest value investors we know lost 40 percent, 50 percent, 60 percent, or more during the year as markets around the world crashed—and we would have likely been in the same boat had we not developed tremendous conviction about how bad the mortgage meltdown would be and acted on it.

With the benefit of hindsight, which is always 20/20, we should have been even more aggressive. In particular, we failed to anticipate how widespread the damage would be.We believed the mortgage meltdown would create a significant economic headwind, to be sure, but thought that the government would throw enough money at the problem to contain it. We certainly didn’t foresee the near-Armageddon fallout that instead occurred, so we left our portfolio exposed to many retail and consumer-related stocks, which were crushed. Fortunately, however, we had big gains on the short side such that our main hedge fund was down less than half of what the S&P 500 declined. We survived the Great Bear Market of 2008—a year I suspect we will tell our grandchildren about someday.

Most investors, having discovered a valuable treasure trove of data like Sean’s and coming to firm conclusions with powerful implications for the markets, would have kept this information to themselves. But we didn’t. We started shouting from the rooftops—writing articles, speaking at conferences, appearing on television (most notably on 60 Minutes in December 2008), putting together and widely disseminating a slide presentation with the data we’d collected from Sean and others, and finally writing this book.

Why have we spent so much time and energy being the bearers of bad tidings? In part because, by talking about our ideas, we’ve gotten a lot of valuable feedback and information. But the main reason is that we feel a duty to teach and share.

Neither of us has a traditional money management background, in which one learns at the feet of a master for many years and only then launches a fund, in the Tiger Cub model (the name given to the many successful hedge fund managers who started their careers by working for famed investor Julian Robertson of Tiger Management). Instead, we are largely self-taught. But that doesn’t mean we started from scratch. We owe a huge debt of gratitude to the legendary investors who taught us through their writings and/or public speaking, starting with Benjamin Graham, Warren Buffett and Charlie Munger, but also including Phil Fisher, Peter Lynch, Seth Klarman, Joel Greenblatt, Bill Miller, Marty Whitman, Bill Nygren, Mason Hawkins, and the managers of Tweedy Browne and Ruane Cuniff.

There’s a great tradition in the value investing community of teaching and sharing. Having benefited so enormously from it, we wish to continue this tradition.

In writing this book, we’re not claiming that we know more about the housing market than anyone else—Sean Dobson has probably forgotten more than we’ll ever know—nor that we were the savviest or earliest investors to figure out what was happening—John Paulson, Seth Klarman, and Bill Ackman, among others, figured it out before we did.That’s one reason why they’re a lot richer than we are!

But having presented our work dozens of times to thousands of people across the country and all over the world (including Italy, Mexico, and Peru), we think we’ve figured out a way to present what we’ve learned so that anyone can understand what happened and why, where we are today, and what the future holds.

The focus of this book is the U.S. mortgage market, the single largest debt market in the world and the one that is the locomotive of the credit crisis. Until the carnage here is dealt with—or simply begins to ease due to the passage of time—it’s hard to imagine that the U.S. (and world) economy is going to turn around.

It’s important to understand, however, that this bubble was not limited to mortgages but infected nearly every type of debt, and it wasn’t just a U.S. phenomenon but a global one.

In the first half of the book, we explain what happened and why, where we are now, and what the future holds. In the second half of the book, after some general thoughts aimed at all investors, we share six in-depth case studies of stocks that we were long or short in the hedge funds we manage as of March 2009. In doing so, we are not trying to give you hot stock tips, but rather hoping to teach you to be a better investor—to share with you how we think about certain companies and investment situations so that you can learn and apply these tools in your own investing career going forward.

Part One

What Happened and Why, Where Are We Now, and What Does the Future Hold?

Chapter 1

What Happened during the Housing Bubble?

Talk to your parents or grandparents about buying their first home and they’ll tell you it was the fulfillment of the American dream, long process that involved years of saving and sacrificing to gather enough cash for the 20 percent down payment. They’ll tell you that the day they bought their first home was one of the greatest days of their lives, that it represented more than just a place to live. In fact, that home was the single biggest purchase most would ever make, and it represented stability, safety, and security for themselves and their families.

In those days a mortgage was regarded as a sacred obligation, to be paid off steadily over time. And when it was paid off, there was often a mortgage-burning party to celebrate owning the house free and clear.

Home Prices over Time

Historically, there was good reason to believe that homes represented stability, safety, and security. For more than half a century, home prices had marched steadily upward at a rate exceeding inflation by about one-half of 1 percent annually, with very little volatility, as shown in .