Cry Babies

Who likes to lose money? The answer is, nobody! But I am getting a little bored by the cry babies who bemoan the fact that they are losing money. WAAAHHHH! Usually it is retail investors, who whine about losing, but lately I’ve been hearing the wails from the banks and the folks who borrowed the ultra-cheap money made available. Poor babies!

Let’s remember what happened here: in 2003, Federal Reserve Chairman
Alan “Easy Al” Greenspan reduced interest rates to one percent, a level not seen in 40 years, and kept them there until mid-2004. Historically low rates combined with an unexpected influx of foreign money, particularly from emerging nations, into U.S. Treasury bonds, kept the US financial system awash in liquidity. If you think that nature abhors a void, you ought to see how fast an economic system can put cheap money to work!

It did not take long for some to realize that borrowing cheap money and investing it in an asset class that thrives on leverage (real estate) would reap great rewards. A speculative real-estate boom quickly developed, which led the wizards of Wall Street to create new-fangled ways to securitize mortgages, wringing the risk out of the process. Of course we now know that there could never be reward without risk.

There certainly were some players, who were able to sell at the top (mid-2006), but most were content to let it ride—after all, the real estate market was on FIRE! It took a while for the geniuses to realize that as soon as the housing market tanked, many borrowers would not be able to make their mortgage payments and ultimately, without that cash flow, it was nearly impossible to get out of a position where no secondary market exists. The scene was akin to when the passengers on the Titanic realized that there were not enough lifeboats available to save all of their lives. That’s usually the moment when panic ensues.

This most recent financial panic caused the bankruptcy of hundreds of mortgage lenders; the collapse of hedge funds; massive losses at some the world’s largest banks; and the foreclosure of thousands of homes. All of this has led to lots of crying. I have heard some very smart people say that the problems were contained to “one bad trader” (note to big investment banks: you may want some new folks in your risk departments if that’s the case!) or homeowners who said that they “never would have taken the loan if we knew that the house would drop in value!” In other words: I never would have taken the risk if I knew that I could actually lose.

Instead, the big guys enjoyed their earnings and paid themselves handsomely. Similarly, homeowners were busy extracting cash from their homes as if they were big ATM machines, or even worse, refinancing their beautiful fixed rate mortgages with adjustable ones. Most were not “tricked” into these crazy products—if that were the case then they would not have lied on their mortgage applications. The vast majority of people who are being punished for assuming too much risk actually deserve it.

As Warren Buffet recently noted, "It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end…What has happened is a re-pricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago." Those who made the dumb money are now among the biggest cry babies of all and I think that we can all agree that there is no crying in investing.