Shorting Home Equity Mezzanine Tranches (2007) [pdf](static1.squarespace.com)
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Shorting Home Equity Mezzanine Tranches (2007) [pdf]
http://static1.squarespace.com/static/56e34fd9e707eb512223f372/56e89b00fd211959539d959d/56e89b02fd211959539d9669/1458084610683/2007_Subprime_Shorting-Home-Equity-Mezzanine-Tranches.pdf?format=original
42 comments
From what I gather, they're basically saying that the 10 year old housing boom is at an end now.
If you want to see some crazy financials, you should go and look at the oil and energy sector right now.
why is that?
Can you share the original source / how you found the document? Thanks!
I've actually reposted this a couple times since I thought it was interesting and it never gained traction, so at this point I don't remember for sure how I originally came across it. A quick search shows this page has the same link and some more info: http://www.scmessinacapital.com/blog/2015/04/where-can-i-see...
So I suppose the context was probably that I had just watched The Big Short and was reading up on the topic some more haha.
So I suppose the context was probably that I had just watched The Big Short and was reading up on the topic some more haha.
It looks like an addendum to (or part of) "Wall Street & the Financial Crisis-Anatomy of a Financial Collapse"
https://www.hsgac.senate.gov/imo/media/doc/PSI%20REPORT%20-%...
Yep, there's a reference on page 289.
1119 2/2007 “Shorting Home Equity Mezzanine Tranches,” Deutsche Bank Securities Inc.,
and there was an earlier version, from 2005.
1314 See, e.g., 2/2007 presentation, “Shorting Home Equity Mezzanine Tranches,” prepared by Mr. Lippmann, DBSI_PSI_EMAIL01988773-845
https://www.hsgac.senate.gov/imo/media/doc/PSI%20REPORT%20-%...
Yep, there's a reference on page 289.
1119 2/2007 “Shorting Home Equity Mezzanine Tranches,” Deutsche Bank Securities Inc.,
and there was an earlier version, from 2005.
1314 See, e.g., 2/2007 presentation, “Shorting Home Equity Mezzanine Tranches,” prepared by Mr. Lippmann, DBSI_PSI_EMAIL01988773-845
Thanks for posting, I been looking for one of these pitches, but never found it.
Would this have convinced you to short home equity mezzanine tranches in 2007? I'd like to think I'd have had the foresight to see what was coming if someone was pitching it to me like this. If I'm being honest however I'm not sure how convinced I'd have been by these slides.
When you're long timing doesn't matter as much, but when you are short it does. The Economist in 2005 had a cover story warning of a crash triggered by real estate. But if you shorted then you probably would have lost a lot of money.
As they say, the market can stay irrational longer than you can stay solvent.
As they say, the market can stay irrational longer than you can stay solvent.
If I remember correctly, the Economist also had cover stories warning of a too hot real estate market in 2004, 2003, and 2002.
It probably was. What role did post-dot com, post-9/11 monetary policy play in creating the real estate bubble?
Artificially deflated lending rates, 5 year fixed-rate loans, explicit government pressure to expand the mortgage base, and what happens 5-ish years after the interest rates start coming back to their long-term averages?
I remember back in 2004, some of my colleagues were all chatting about flipping McMansions. My housemates and I threw a party, and some poor half-drunk girl I didn't know was telling me that Warren Buffet was warning about a housing bubble and asking me, a stranger, if she and her boyfriend had made a big mistake in recently buying a house. I felt very uncomfortable on several levels trying to give her comfort. Going to a party without her bf and pouring her heart out while half-drunk to a stranger wasn't the biggest sign of looming trouble. There were long warning signs that things were not going to be alright. Hopefully she and her bf were able to ride out the crash.
I remember back in 2004, some of my colleagues were all chatting about flipping McMansions. My housemates and I threw a party, and some poor half-drunk girl I didn't know was telling me that Warren Buffet was warning about a housing bubble and asking me, a stranger, if she and her boyfriend had made a big mistake in recently buying a house. I felt very uncomfortable on several levels trying to give her comfort. Going to a party without her bf and pouring her heart out while half-drunk to a stranger wasn't the biggest sign of looming trouble. There were long warning signs that things were not going to be alright. Hopefully she and her bf were able to ride out the crash.
Premiums kill you on the short side, it's true. It's tough being anti-asset.
> I'd like to think I'd have had the foresight to see what was coming if someone was pitching it to me like this.
Well, you can test yourself, short ideas are abound in these uncertain market conditions. It's surprisingly hard to have clarity while things are happening, even if they are obvious in hindsight. For example, do you believe you should
1. Short restaurant equipment suppliers because up to 15% of restaurants could go out of business? https://www.presciencepoint.com/research/research-archives/m...
2. Short Chinese tech companies claiming to have exponential growth numbers in the wake of "The China Hustle" and Luckin Coffee? https://citronresearch.com/wp-content/uploads/2020/04/GSX-Te...
3. Short tangentially related healthcare companies trying to cash in on COVID test kits? https://hindenburgresearch.com/scworx-evidence-points-to-its...
I believe at least one of these things will appear extremely obvious in hindsight ("duh, restaurants going out of business was a no-brainer").
Well, you can test yourself, short ideas are abound in these uncertain market conditions. It's surprisingly hard to have clarity while things are happening, even if they are obvious in hindsight. For example, do you believe you should
1. Short restaurant equipment suppliers because up to 15% of restaurants could go out of business? https://www.presciencepoint.com/research/research-archives/m...
2. Short Chinese tech companies claiming to have exponential growth numbers in the wake of "The China Hustle" and Luckin Coffee? https://citronresearch.com/wp-content/uploads/2020/04/GSX-Te...
3. Short tangentially related healthcare companies trying to cash in on COVID test kits? https://hindenburgresearch.com/scworx-evidence-points-to-its...
I believe at least one of these things will appear extremely obvious in hindsight ("duh, restaurants going out of business was a no-brainer").
Just a random comment on your 3rd short - 5 days ago Medicare doubled the reimbursement it will pay for COVID tests. It used to be $51 and is now $100.[1]
Although we're testing more than before, there are still millions (tens of millions?) of people that will need to be tested and a significant fraction will be seniors on Medicare.
That's a lot of money being dangled in front of physicians, laboratories and test manufacturers. When I saw that news the first things I thought was "someone is going to try to get a piece of that any way they can".
[1]https://www.cms.gov/newsroom/press-releases/cms-increases-me...
Although we're testing more than before, there are still millions (tens of millions?) of people that will need to be tested and a significant fraction will be seniors on Medicare.
That's a lot of money being dangled in front of physicians, laboratories and test manufacturers. When I saw that news the first things I thought was "someone is going to try to get a piece of that any way they can".
[1]https://www.cms.gov/newsroom/press-releases/cms-increases-me...
I feel like one of the biggest opportunities in the 2007/8 housing market short was the speed at which it developed.
More specifically: glacially.
Up until the credit markets froze up, all the information was available, with time to digest and for anyone to act on it.
That's the most interesting thing about this presentation. I'm assuming this or similar was the one dramatized in The Big Short?
It's simply saying that something doesn't add up. Then laying out its case for the numbers that were added.
At a macro level, there isn't much complexity:
(1) Home price appreciation is strongly inversely correlated with default rate.
(2) CDO are created with sharp risk cliffs related to systemic default rate.
(3) Current home price appreciation + observed default rate + CDO pricing does not add up. Ergo, one of those things must be wrong.
More specifically: glacially.
Up until the credit markets froze up, all the information was available, with time to digest and for anyone to act on it.
That's the most interesting thing about this presentation. I'm assuming this or similar was the one dramatized in The Big Short?
It's simply saying that something doesn't add up. Then laying out its case for the numbers that were added.
At a macro level, there isn't much complexity:
(1) Home price appreciation is strongly inversely correlated with default rate.
(2) CDO are created with sharp risk cliffs related to systemic default rate.
(3) Current home price appreciation + observed default rate + CDO pricing does not add up. Ergo, one of those things must be wrong.
Timing is everything, but doubly so when you're trying to take a short position. My favorite quote from that movie is when Burry get's confronted by one of his major investors who comes in demanding his money back:
"I'm not wrong, I'm just early"... "IT'S THE SAME THING!"
The story obviously works out well for them in the end. But all it would have taken was the market to hold out just a little longer or investors wanting enough of their money back just a little earlier and they would have all taken a bath.
The markets are littered with stories of things that don't make sense, I semi-regularly get motivated to actually put my money where my mouth is. And in the vast majority of cases I end up getting the timing wrong by a month or two, which in the end is still just getting it wrong. There's no reward for being just a little bit wrong. It's also not realistic to look back at historical events and think you'd have been able to predict the timing with the required accuracy if only you had the data.
"I'm not wrong, I'm just early"... "IT'S THE SAME THING!"
The story obviously works out well for them in the end. But all it would have taken was the market to hold out just a little longer or investors wanting enough of their money back just a little earlier and they would have all taken a bath.
The markets are littered with stories of things that don't make sense, I semi-regularly get motivated to actually put my money where my mouth is. And in the vast majority of cases I end up getting the timing wrong by a month or two, which in the end is still just getting it wrong. There's no reward for being just a little bit wrong. It's also not realistic to look back at historical events and think you'd have been able to predict the timing with the required accuracy if only you had the data.
Yeah, I think people knew it would eventually play out because of the marco, but for traders its important to figure out how to get the cheapest exposure to the short until it happens.
Even in the big short, they show the routes different traders took to get short exposure and all took various amounts of heat until it payed off.
Same is true now wrt to corporate bonds (or I should say was true, way more expensive now to short than it was say during the entire time of 2019), one know's they will go tits up, but getting the cheapest exposure will enable to either build the position with minimal/fixed draw down or sweat every bps move against you.
Even in the big short, they show the routes different traders took to get short exposure and all took various amounts of heat until it payed off.
Same is true now wrt to corporate bonds (or I should say was true, way more expensive now to short than it was say during the entire time of 2019), one know's they will go tits up, but getting the cheapest exposure will enable to either build the position with minimal/fixed draw down or sweat every bps move against you.
The Big Short covers it fairly well, but doesn't give Burry enough credit / blame. His crowning achievement wasn't in deducing the bonds were overvalued/fraudulent, it was in finding suckers to take the other side of the bet. This is alluded to in the casino with the Cornwall Capital guys, but was a real thing. Plenty of people wanted to make the moves they did, but had trouble finding outs.
I worked as a software developer for a subprime prop trading desk at a big bank from 2006 to 2009. Our two main RMBS traders were short from about 2005. They would get beat up every week in capital committee meetings, and were told “what is wrong with you guys, the guys on the dealer side are crushing it with this stuff”.
Finally in 2008, these guys booked like $100 million in profits. But it didn’t matter at all cause the dealer side lost $50 billion.
Finally in 2008, these guys booked like $100 million in profits. But it didn’t matter at all cause the dealer side lost $50 billion.
> His crowning achievement wasn't in deducing the bonds were overvalued/fraudulent, it was in finding suckers to take the other side of the bet.
I thought that was one of the most interesting / exciting parts of the book.
The fact that they literally had to go and find people who would sell them insurance on the mortgage backed securities.
I thought that was one of the most interesting / exciting parts of the book.
The fact that they literally had to go and find people who would sell them insurance on the mortgage backed securities.
A giant risk you have if you are short the housing market in that situation is that bureaucracy changes underneath your feat; YIMBYism wins out or somehow housing otherwise trends sideways / slightly deflates. You are still correct that the asset in question is overvalued, but you're getting killed on premiums on the swaps or the options you are carrying.
Restaurant equipment is durable goods, as in they don't buy it every year, and once all those restaurants go bust, there is going to be a new wave of restaurants to replace them, and they will actually buy replacement equipment. I'd go long the manufacturers and suppliers.
Find a way short the loans originated by financing companies to pay for restaurant equipment, but ones that that won't be bought by the fed.
It's a Matthew effect. Think of a pareto distribution with a 45deg line bisecting the curve. Everyone on the left hand side grows, and everyone on the tail side is fucked. Only question for a stock is, which side of the curve is it on? The fed is bailing out the banks and the credit markets that have almost all of the exposure to that tail, so don't fight the fed by shorting banks. Auto companies turn low interest rates into higher interest loan collateral with depreciating value, major airlines operate as a corporate welfare programs, so neither of these would be easy choices.
On a normal scale of legitimacy, there is still probably %15 of companies in the market that at varying degrees are based on outright fraud. Find and short that instead of taking flyers.
Find a way short the loans originated by financing companies to pay for restaurant equipment, but ones that that won't be bought by the fed.
It's a Matthew effect. Think of a pareto distribution with a 45deg line bisecting the curve. Everyone on the left hand side grows, and everyone on the tail side is fucked. Only question for a stock is, which side of the curve is it on? The fed is bailing out the banks and the credit markets that have almost all of the exposure to that tail, so don't fight the fed by shorting banks. Auto companies turn low interest rates into higher interest loan collateral with depreciating value, major airlines operate as a corporate welfare programs, so neither of these would be easy choices.
On a normal scale of legitimacy, there is still probably %15 of companies in the market that at varying degrees are based on outright fraud. Find and short that instead of taking flyers.
>> but ones that that won't be bought by the fed
And this is the real danger, isn't it :)
Gambling against the Fed is tough. Reality can be one thing, but the Fed acts on their own.
And this is the real danger, isn't it :)
Gambling against the Fed is tough. Reality can be one thing, but the Fed acts on their own.
>"duh, restaurants going out of business was a no-brainer"
Obviously yes.
> Short restaurant equipment suppliers because up to 15% of restaurants could go out of business?
Well, maybe not.
Lots of restaurants will go out of business, but if the demand for dining is still there the surviving restaurants will expand absorb it. They will not necessarily reuse old equipment from bankrupt restaurants, they might instead buy new equipment e.g. to make it uniform with the equipment they already have.
As a matter of fact, if the demand persist the increased turmoil in the restaurant businesses can only mean more equipment sales, not less.
Obviously yes.
> Short restaurant equipment suppliers because up to 15% of restaurants could go out of business?
Well, maybe not.
Lots of restaurants will go out of business, but if the demand for dining is still there the surviving restaurants will expand absorb it. They will not necessarily reuse old equipment from bankrupt restaurants, they might instead buy new equipment e.g. to make it uniform with the equipment they already have.
As a matter of fact, if the demand persist the increased turmoil in the restaurant businesses can only mean more equipment sales, not less.
The problem with shorting is you need to get the timing right. Today, you need insight into how the government relief will work out as well as other factors.
Even if you’re right about the outcome, you can still be wiped out If your timing is off!
Even if you’re right about the outcome, you can still be wiped out If your timing is off!
Also this is like shorting TSLA. Yeah, no kidding, a lot of people think it is going to zero. The short pressure is massive, which causes huge bid-ask spreads in the put options, which makes it hard for you to get a price that might make sense based on your evaluations.
It's not enough to just be directionally right and even timed correctly - you have to get a good price, too.
It's not enough to just be directionally right and even timed correctly - you have to get a good price, too.
That industry seems pretty effective at buying used equipment though. There is a pretty liquid market for it, it doesn't need to be super pretty, and it's all pretty durable.
One factor in survival of those businesses may be how well they exploit their fallen brethren for their own growth.
One factor in survival of those businesses may be how well they exploit their fallen brethren for their own growth.
I would have if I had the equity to spare. I was expecting it from ~2006 onward. Check out https://www.piggington.com/frequently_asked_questions - I was a pretty avid reader at the time.
Allow me to comfort you then, as someone who exited the property market in 2006 because I felt it was way over heated and about to crash: it cost me a significant amount and was a terrible decision. Be glad you couldn't act on that in 2006 ;)
Oh I wouldn't have exited anything, I was still living in an apartment. I would have shorted REITs etc.
What about now? What if someone told you housing was grossly overvalued and would collapse in part due to COVID-19? That could be true.
I was involved with similar trades at JPMorgan and Citi. Investment bankers gave these presentations to hedge funds to convince them to short the housing market. Then, they created a CDO, called the hedge fund the "manager" and tried to dump the bonds on Asian and Middle Eastern investors.
> tried to dump the bonds
How did that go?
How did that go?
Not sure if you are being sarcastic, but some (Goldman Sachs) were more successful than others (Morgan Stanley).
Pretty good, in actuality. Europe got it way worse than the United States.
More details about this, if you can?
Ctrl+F "Dusseldorf"
http://www.peterfrase.com/2011/08/the-big-short-germany-and-...
http://www.peterfrase.com/2011/08/the-big-short-germany-and-...
Thanks!
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On your site you have the brk reports back to 1965, but I think all are availalbe from public sources.
Here is 57 though 2012. If I'm mistaken and this looks like its from one of the books let me know and I'll take it down.
https://send.firefox.com/download/9a64844c1321c00c/#aKJwkyJh...
Thanks for the share that is the subject of the post.
Edit for clarity: Early ones are Buffett Partnership, NOT brk.
Here is 57 though 2012. If I'm mistaken and this looks like its from one of the books let me know and I'll take it down.
https://send.firefox.com/download/9a64844c1321c00c/#aKJwkyJh...
Thanks for the share that is the subject of the post.
Edit for clarity: Early ones are Buffett Partnership, NOT brk.