Thursday, March 26, 2009

Is 'Experienced Mortgage Expert' an Oxymoron?

This week's Treasury plan notes 5 criteria for new investors in the PPIF, including this one:

2) Demonstrated experience investing in Elgible Assets, including through[sic] performance track records


Now, if there were investors with experience in mortgage backed securities (the Elgible Assets) with a thorough track record, what are the odds they were drinking the Kool-Aid about mortgage innovations? No money down, 'outdated' underwriting criteria, record increases in housing prices, etc., and nothing sounded an alarm. These are the guys we want to save us?

Most of us can comfort ourselves that we weren't in the business of looking at mortgages. The mortgage crisis caught us by surprise but we had no reason to really examine mortgages or housing price data carefully, other than to note anecdotally stories about housing prices. I think it is wrong to assume, with hindsight, this was an easy bubble to call. More likely, savvy people looking at this figured something did not seem right, so merely choose a different field because in general it does not pay well to be short, either as an investor, or attitudinally within an long-oriented organization or group. I imagine most who thoughtfully examined the trends merely weren't in the business of buying MBS as opposed to shorting them. But if this was your full time job, you have demonstrated a very large error in your analytics, because you were almost certainly a bull throughout. Surely a small portion got out, or went short, but of those who match the other Treasury Criteria (eg, you have $10B under management, and can fill out paperwork by April 10) and whose stock rose dramatically anticipating a huge government subsidy (eg, FIG, BKCC, JNS, EPHC, BX), they were the guys who screwed up!

Like a Sovietologist circa 1990, a Y2K expert in 2001, or an Internet Fund in 2003, there are times when your profession showed a complete lack of ability to capture the Most Important Thing in the subject of their expertise. If you were not considered a screwball renegade before events made things obvious, you are a fool, fraud or dup whose experience is damning. An expert would more likely be someone in a related asset class, not the class in question.

2 comments:

Plamen said...

The only expert that comes to mind is John Paulson, really.

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