Neurotic
Let me know if I can help you in any way. I find that I have the most rewarding experiences with neurotic and obsessive entrepreneurs who also have a sophistication about venture capital.
- Allan Young, University Venture Fund
Market Musings
First a couple of random musings
“Live life, don’t just live it!” - Kara
“I don’t want hillary clinton as President because women are moody” - Arlene
Now here is my long term idea for the mortgage market that will never work. The problem with the market is not the homeowners, it’s not the hedgies, it’s not the ibanks, it is whomever was stupid enough to let everyone leverage their asses off which leads to liquidity which is the true problem. Anything that is not liquid is essentially worthless if you need raise immediate cash.
Now the major problem with MBS & CDO’s (both are also known as POS) is that they are derivatives. In theory derivatives are great - they allow people to shift risk / align risk. However the secondary issue with derivatives is the one issue that everyone overlooks - they are illiquid. Why so? Because the only people that buy them are a small coterie of sophisticated (haha) investors. So lets assume for a second that there is some issue with this security class - since all of these investors know each other - it is not hard to assume that they would all stop buying them together and thus no market. The great thing about the stock market is that anyone can buy a stock - it’s simple. The great thing about buying a home is that in almost any market you can liquidate a home (maybe at a loss) but when you have very few market participants it is fake liquidity since there is no default buyers. The underlying assets supporting these MBS and CDO (POS) are not horrible - they are homes just like yours. These are great assets, even in the case of a default, it is still a real asset. Because of securitization - so many layers are added to the middle that it is almost impossible to smoothly liquidate an MBS security and therein lies the problem. If you can’t cleanly liquidate then your security is really nothing but a bet on greater fools theory. Eventually the market runs out of fools.
So what would a solution be? Create a true exchange where each home loan itself is put up to auction on the market. Investors can put in preset loan characteristic for the loans they want to buy and then it would automatically create a bidding war for those loans among interested buyers. Investors would then own an actual mortgage without the need for any fancy securities - very simple. No more tranches, no more confusion finance, no more gobbly gook. If you want leverage - borrow money to buy the loans. The greatest reason for failure and total collapse are margin calls - not devaluation of their underlying security. Using this model, we will not need any credit agencies to fraudulently give their stamp of fauxproval. Instead, default risk and late payment risk would be public record with statistical tables - available from the exchange so you can determine your own risk level. If need be to satisfy investment requirements - we can put general ratings depending on loan characteristic (ie: 70% LTV, FICO 700 = AAA, 98% ltv, fico 550 = b- rating or whatever - even though the ratings will be a waste of both time and money)
Then the question is how if you are an outside investor can you service your loan and forclose? Simple, the same way it’s done now by having a mortgage servicer do it for you. And if a loan goes to forclosure, it would automatically go onto nationwide MLS listings and of course be available for purchase by anyone in the exchange. So perhaps a pension fund also sets its presets to acquire any foreclosed property as long as they don’t pay more than 70% of appraised value. And then we can allow local RE agents to be secondary participants to resell foreclosed property for investors at a profit.
What is the end result? We have a true exchange with real liquidity based on real assets and involving no hocus pocus finance. The whole loans will be individually sold & traded instead of pools of them. Or even pools will be traded however they will not be fully packaged and will be easy to take apart peicemeal should they need to be liquidated. Also, they would be valued because we would have ongoing real time statistics on default/collections, which would then be factored into valuation mechanisms that each investor determines.
The final product is a 100% liquid market that will never run dry as long as there is a market for real estate.
Yes i also admit there is a demand for swaps to align borrowing & lending types. (fixed v variable) and for certain situations. Yes, swaps could still exist in this market but it would be a loan for loan swap - with realistic chance of liquidation should something go to hell. Swaps would work automatically the same way loans are sold. Also there would be no reason to hold (season) loans anymore since they can go right into the market (unless your loan just sucks). We just eliminated mortgage banking risk as well as liquidity risk and what I will dub Idiots Risk (being stupid enough to buy something that you don’t fully understand.
Musings
Some additional musings
A snippet from a conversation between me and a friend.
Him: I think you would really enjoy being a hard ass prick of a lawyer. It would be a profession where growing up would be distinct disadvantage. You could make everything about “taking things too far”. I like you better as a hopped up crazy creative entrepreneur.
Me: I would be. I would love to be a ADA, A US or Trial Lawyer. I love calling people on their bullshit and catching them lying. it’s also great strategy. i would just never want to actually got to 3 years of school nor do i want to do any legal research and i’d be bored of being a lawyer in about 2 years i think.
for now, i’ll stick to being a crazy over the top entrepreneur and see where it takes me. This way i can be crazy and actually help people instead of screw people.
A quote from my little sister: ” LIVE LIFE, Don’t Just live it. ”
Relaxation is the key to success. If you can be truly relaxed you can accomplish anything.
I have learned The Art of War. If you are truly a great positive manipulator then you never actually negotiate because you can set the tone and create the bands of negotiation and always come out ahead. Tactics are useless in the face of great strategy. A great strategist will have you check mated before you fired your first salvo.
The key to poker is relaxation - being able to feel the hand and read the hand. Many people think they can read people and find tells. Yes, they can find the tells of suckers but not of fellow rounders. Thus the only way to beat a rounder is to feel the hand, play intelligent and go with your gut because the second you think you’ve read him - he has beaten you. Yes it comes down to luck and feel and not math and skill.
The cover of MIT Tech Review this month sald something about 200 of the smartest people on wall street stuck in a room to solve the problem of subprime. To me that means there was really one person pulling the strings (who got them in the room) and 200 suckers.
The stock market is a sham. Here is why? You will never be able to access the earnings you are so dearly valuing - thus the P/E or growth rate doesn’t mean anything. Say Google earns $20billion dollars. What are the odds that they give a dividend to you the shareholder for all of it? About zero. Say they do give a dividend, it will not be 100% of cash flow. Therefore, what are you really investing in? Nothing but paper. So what does the P/E matter? You are investing in the fact that a bigger idiot than you is out there to pay more (Hope) or that someone will acquire the company for cash (luck) so you really are investing in a magic trick. This is true of any public company. The concept of liquidity is a farce. If in fact the market is tight - there is no liquidity - in fact i would rather be private because then my bankers won’t try to call in my debt nor will my investors revolt. Yes public valuations are great but they are full of shit. There is no way to justify any public valuation - if the p/e is 1 or 100000. And then of course there are people trading that actually can “skin” the market. So then what is a derivative - it is essentially a second generation of nothing. If you are an individual investor, save your money and buy a dvd of Seinfeld instead - at least then you can laugh about nothing instead of invest in it.
The stock market is like gambling on sports, unless you are on the inside, you always lose in the long run. Unless you tag along (on a good mutual fund), you have a good poker gut or you can spot trends (the best investment strategy i think - pure herd / momentum trading). If you choose to invest, it should be knowing you are investing in hope & luck. Fundamentals do not exist in public companies.
I love private equity. You take cash flow, layer debt and buy private companies using either debt or public valuation of private money. The PE guys that buy private companies as platforms and roll up are sharp as tacks. I personally think the Idea of huge LBO’s are dumb because there’s so much competition, I can’t see how it’s anything but a big bet. The guys that start small and build big i think can’t lose. After all they are underpaying, not overpaying for private (and not public) assets.
Random Musings
Here’s some random musings from today
1) i introduced 2 people - this is the intro email i sent
“Id like to introduce you two. You are both good people and in LA. Connect, you will get along well.” - now doesn’t this sound like a fortune cookie?
2) Had an amazing dinner tonight with friends, best dinner and conversation i can remember. you guys are all awesome. Its rare when you can have women and men together and talk about strip clubs, sex shops and women. 5 stars to neils: 5 things to know about guys - 5 stars to mia’s Hobbit
3) I came up with a new idea today for what would be the worlds’ most profitable slot machine, here’s the idea - its vegas at its truth - we call it the Slut Machines - they cost $20 per pull (old fashioned pull machine), theres only a handful of machiens in the casino - the casino advertisers that its the worst payout in the world - and it should be a horrible payout - but next to each machine is a showgirl - and one of the prizes you can win is a kiss from the showgirl - (alternatively a real hooker) - they would clean house (pun intended)
4) i love food at angelos in little italy
5) i love how people outside of nyc are impressed that you stand in the street to catch a cab
6) all big companies should offer employees sex therapy - if people knew how to fuck better / women knew how to please themselves better life would be more relaxed - work would be stress free - the world needs more sex and good sex - most problems are caused by people who dont get laid enough - they are usually sour people - also people are more productive when they are happy = keep people happy
7) someone once said Respect is great but fear is when you have power. I’d like to offer my own version. Respect is ok, fear works if you want people to work but if you want true productivity the best motivator is a mixture of greed and good environment - keep people happy and show them how they can make a fortune - and even encourage them to leave and they will want to stay forever and work their tales off (boiler room brokerage attitude is the best motivator of all)
