1/ The Greatest Trade Ever (Gregory Zuckerman)

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"Did investment banks and financial pros truly believe that housing was in an inexorable climb?

"Why did the very bankers who created toxic mortgages get hurt the most by them?" (p. 3)

https://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0385529910/
2/ "Paulson could lose his entire investment if he was too early in anticipating the collapse of what he saw as a bubble or if he didn't implement the trade properly.

"Investors from Jesse Livermore to George Soros had failed to navigate bubbles, costing them dearly." (p. 7)
3/ "Libert showed Paulson a chart mapping the impressive growth of housing prices. But when Libert included inflation, the annual gains turned out to be a puny 1.5%.

"Short of purchasing for less than replacement cost, real estate wasn't a very attractive investment." (p. 23)
4/ "There seemed to be a limit to how much money Paulson could make at a large firm like Bear Stearns, especially since most of its profit came from charging customers fees rather than undertaking deals with huge upside. Yet those were the ones he pined for." (p. 29)
5/ "The dangers of borrowing were brought home in the Great Depression. In the 1950s, >half of U.S. households had no mortgage debt, and almost half had no debt at all. Homeowners celebrated paying off loans with mortgage-burning parties; the practice continued into the 1970s.
6/ "Until the second half of the twentieth century, borrowing for anything other than big-ticket items was unusual. Even then, home buyers generally needed at least a 20% down payment, and thus a degree of financial well-being, before owning a home." (p. 40)
7/ "Head-turning growth at Ameriquest, New Century Financial, and other firms focused on subprime borrowers put pressure on traditional lenders to offer more flexible products of their own." (p. 43)
8/ "As profits rolled in, New Century treated its sales force to chartered cruises in the Bahamas. Later, it held a bash in a train station in Barcelona and offered top mortgage producers trips to a Porsche driving school. A culture of excess was created." (p. 44)
9/ "By 2005, almost 30% of New Century's loans were interest-only, exposing borrowers to drastic payment hikes when principal came due. Moreover, more than 40% of New Century's mortgages were stated-income, with no documentation required." (p. 44)
10/ " 'It got to a point where I literally got sick to my stomach,' Karen Waheed recalls. 'Every day, I got home and would think to myself, I helped set someone up for failure.'
11/ "By 2005, 'nonprime' mortgages made up nearly 25% of loans in the country, up for 1% a decade earlier. One-third of new mortgages and home equity loans were interest-only, up from less than 1% in 2000, while 43% of first-time home buyers put no money down at all." (p. 45)
12/ "The Fed chose not to crack down on the growing subprime lending industry, even as some home loans were signed on the hoods of cars.

"Several years later, Greenspan said, 'I did not forecast a significant decline b/c we had never had a significant decline in prices." (p. 45)
13/ "After New Century issued a mortgage, it was bundled with other mortgages and sold to firms like Merrill Lynch, Morgan Stanley, and Lehman Brothers. New Century used the money to run its operations and make new loan commitments.
14/ "The quasi-government companies Fannie Mae and Freddie Mac, pushing for growth, also became hungry for the high-interest mortgages from New Century and others, egged on by politicians pushing for wider home ownership." (p. 45)
15/ "By selling loans off, companies like New Century didn't need to worry much if they sometimes handed out mortgages that might now be repaid. Like playing hot potato, they quickly got them off their books. Checks and balances were almost nonexistent.
16/ "Home appraisers placed inflated values on homes, knowing if they didn't play along, their competitors would.

"Banks like Lehman Brothers were eager to buy as many mortgages as they could because the game of hot potato didn't stop with them.
17/ "Wall Street used the mortgages as raw material for a slew of securitized investments that were sold to Japanese pension plans, Swiss banks, British hedge funds, U.S. insurance companies, and others around the globe." (p. 46)
18/ "Surging prices created an illusion of wealth, encouraging homeowners to spend more than they were making.

"Borrowers often asked for loans much larger than they could afford, sometimes exaggerating their salaries and other financial information to qualify." (p. 49)
19/ "Bulls were convinced that prices would continue to trend, noting that home prices hadn't fallen on a national basis in generations: a flattening was as bad as it had gotten since the 1930s. Many experts at most conceded that there were bubbles in some local markets." (p. 50)
20/ "A number traders saw a real estate bubble forming, but few bet that it would burst. Traders bucking the bullish consensus risked ruining their careers if they were wrong. Any profits likely would be offset by losses elsewhere at their firms, limiting their paychecks.
21/ "Radical moves didn't lead to long careers at Wall Street. So even the bears sat on their hands, letting the bulls run wild.

"Shockingly few pros bothered to predict where home prices were going. Most analysts didn't even have basic data about levels of foreclosures." (p.52)
22/ "A friend who had purchased forty-five acres of land from a farmer for $3 million flipped it for $9 million. He watched it quickly sell for $25 million.

"Paulson warned friends about their real estate investments, but they ignored him." (p. 59)
23/ "Consumers, investment banks, and financial firms were heavy borrowers and might have difficulties handling a rise in rates. Some had more than $25 of assets for each $1 of equity they held.

"He started looking into buying protection for his firm.
24/ "S&P 500 puts had become too expensive. Paulson had examined shorting shares of financial service companies, but some had recently received takeover offers, sending the stocks racing higher and burning short sellers.

"Was there any better insurance?" (p. 71)
25/ "The fund made its first purchase of CDS protection on a company called MBIA, Inc., which insured all those mortgage bonds backed by aggressive loans. The annual cost of insuring $100 million of MBIA's debt was a puny $500,000. It seemed like a no-brainer to Paulson." (p. 72)
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