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Housing Tornado Warnings Were an Exercise in Futility

Posted By Barry Ritholtz On February 5, 2012 @ 11:00 am In Corporate Management,Credit,Real Estate,Really, really bad calls | Comments Disabled

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There is a absurd yet fascinating article in the Sunday Times by Gretchen Morgenson, titled A Mortgage Tornado Warning, Unheeded [2]. It is is stirring and emotional.

What makes it fascinating is yet another story told about prescient warnings in advance not heeded about the coming mortgage crisis.

What makes it absurd is its complete lack of recognition of how large companies operate, how businesses interact with the public, how humans behave.

Consider the reality of how businesses operate in the world. No (bizarrely according to this column) huge corporations do not sift through an enormous volume of incoming communications, including emails, letters, and phone calls to pull out that one important warning from non-clients, and make major shifts in their business models and operations. This is not how firms whose goals are to profit maximize on behalf of their shareholders operate.

I speak from experience. I spent the better part of 2005-06 discussing the imminent housing collapse, warning about valuations, showing how the collapse would play out into the broader economy. These were with clients I had an existing relationship with, a good track record and an established degree of trust.

How did that work out? I ended up getting the following Hugh McLeod [3] line printed on the back of my business card: “I can’t take this shit anymore, he said, mistakenly.” Its now a print hanging [4] in my office.

They had their models, they thanked me for the color, but there was simply too much money to be made.

The thing to blame companies for is not that they ignored some outsider’s warnings; Rather, it is  that they themselves failed to recognize the many warning signs of the coming housing collapse. This is the true failure of the Mortgage Lenders, Wall Street Secritizers, GSEs, Real Estate Agents, Appraisers, and of course, Central Bankers. Their expertise should have alerted them to the obvious coming tornado. Or worse — and IMO criminally — they saw it all coming and went about running up risky exposure regardless. The massive smash and grab, break the bank, snatch huge IBGYBG bonuses [5], and split before anyone noticed was the order of the day.

It is not that they ignored the public warnings.  If the economy is dependent upon large companies recognizing broad warnings of economic danger coming from the public, we are all doomed. Rather, it is that they should have known better on their own. That was their massive failure.

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Previously:
Mistakenly [4] (April 7th, 2011)

More Ignored Warnings About Bad Mortgages circa 2003 [6] (October 11th, 2008)

Putting an end to Wall Street’s ‘I’ll be gone, you’ll be gone’ bonuses [7] (March 12, 2011)

Source:
A Mortgage Tornado Warning, Unheeded [2]
Gretchen Morgenson
NYT: February 4, 2012
http://www.nytimes.com/2012/02/05/business/mortgage-tornado-warning-unheeded.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/02/gretchen-morgensons-exercise-in-futility/

URLs in this post:

[1] Image: http://www.ritholtz.com/blog/wp-content/uploads/2012/02/05-FANNIE-sfSpan.jpg

[2] A Mortgage Tornado Warning, Unheeded: http://www.nytimes.com/2012/02/05/business/mortgage-tornado-warning-unheeded.html?_r=1&ref=business&pagewanted=all

[3] Hugh McLeod: http://gapingvoid.com/

[4] print hanging: http://www.ritholtz.com/blog/2011/04/mistakenly/

[5] IBGYBG bonuses: http://www.washingtonpost.com/wp-dyn/content/article/2011/03/12/AR2011031204299.html

[6] More Ignored Warnings About Bad Mortgages circa 2003: http://www.ritholtz.com/blog/2008/10/more-ignored-warnings-about-bad-mortgages-circa-2003/

[7] Putting an end to Wall Street’s ‘I’ll be gone, you’ll be gone’ bonuses: http://www.ritholtz.com/blog/2011/03/putting-an-end-to-wall-streets-ill-be-gone-youll-be-gone-bonuses/

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