Odd Lots - Episode 7: How One Woman Tried To Sound Housing Crash Alarm

Episode Date: December 21, 2015

The film “The Big Short” has sparked lots of attention about the origins of the financial crisis and the people who saw it coming. While lot of attention is being paid to a few men who made a fortune on the housing collapse, this week Tracy and Joe talk to the editor of the blog “Calculated Risk” about Doris Dungey, an early blogger and whistleblower who tried to warn the world about brewing problems in the mortgage market. Between 2006 and 2008, Dungey, who wrote under the pseudonym “Tanta,” became an influential must-read for her prescient, good-humored writing and analysis.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to the December 21st edition of Oddlots. I'm Joe Wisenthal, managing editor at Bloomberg Markets. And I'm Tracy Allaway, executive editor of Bloomberg Markets. So last week was pretty momentous with the Federal Reserve raising interest rates, getting off zero exactly seven years to the day that the Fed, cut its rates to zero. I feel like it's a real bookend to a certain chapter of the financial crisis. Yeah, I think you're definitely right. It's a new era for both of us because I think we both kind of started our careers right when the financial crisis was picking up and interest rates were at rock bottom. So neither you nor I have ever covered financial markets above the zero bound.

And so we have no idea what we're going to cover anymore. We were just talking about this issue. What do we talk about now? Because everything that we've been writing about and talking about for years has to some extent been tied into the financial crisis, the housing crash and its aftermath, whether it's the Fed, the slow economy, the Eurozone crisis. Everything has basically been about this one thing. Absolutely correct. We've been dealing with the fallout of all those issues for years and years and years and years. And it's time to enter a new chapter. But before we enter that new chapter, We're going to bookend the old one, right? Right. It's just sort of a perfect time for a little nostalgia trip because right now, the big short is in theater, the film based on the book about one of the hedge fund managers that made a fortune betting that the entire system of housing finance was going to collapse long before most people saw it.

That's right. So Michael Lewis wrote that amazing book that basically set out exactly what happened in the subprime crisis and the guys who saw it coming. And the group of those guys were all usually hedge fund managers, analysts, you know, guys like Steve Eisman, hedge fund manager, Michael Burry, also a hedge fund manager. And so I think the reality is when people think about who saw the crisis coming, they usually think about smart money guys like that. But there were some other people who were really smart about this issue. That's exactly right. Like there were some of these hedge fund managers that absolutely made a force.

fortune and there were some of these general doomsayers that were always warning about something. But one of the, you know, speaking of journalism and speaking of our careers, both of us in the early years of our careers were reading the blog calculated risk. And it was one of the first financial blogs I started off blogging. And it was one of the first sites that sort of really chronicled the economic data in a very detailed way. And early on was warning, hey, something isn't exactly right here with the way housing works in the U.S. these days. Right. So that is exactly right. I remember being a baby financial blogger reading calculated risk, which was then and still is an incredibly influential blog when it comes to the housing market. They were amazing on the housing crash.

It's been great on the recovery ever since. Yeah, I think that's a key point, too, about how good calculated risk has been on the recovery, because a lot of people could say, oh, I saw it coming This is the guy who called the crash. But a lot of those people, their track records since the crisis, they haven't really done anything that extraordinary. Calculated Risk has really chronicled the recovery, too, in a very clear way. And while the main author of Calculated Risk, this guy, Bill McBride, will be joining us today. In the early days, he had a co-blogger, a woman named Doris Dungey, a mortgage industry professional. She went under the Norm de Blogue, Tanta, and everybody was obsessed with her writings because she could write about the mortgage industry from the perspective and insider better than anyone.

Oh, she was amazing. She knew the ins and outs like no one else. Sadly, Doris Dungy died in November 2008. No one knew who she was except under her pen name until then. Yeah. But today we're going to talk to Bill McBride, who's still writing calculated risk, about those early years and about Tanta's legacy and why people loved her writing so much. Right. So I think for those of you listening, if you get one thing out of this, it should be when you go to see the big short in movie theaters and you're watching Christian Bale and whoever else on the screen, shorting the subprime market and they're the smart guys that

saw it all coming, remember that there were some really, really intelligent bloggers who were out there saying the exact same thing at the exact same time. We are joined now by the Calculated Risk founder, Bill McBride. Bill, thank you for joining us. Well, thank you. So, Bill, I've been reading Calculated Risk for years, watching you Chronicle, the housing collapse, the economic crisis, and then the subsequent recovery. How did you start calculated risk and why?

Well, you know, I started, I've always been interested in housing, and probably in late 2003, 2004, I started really noticing, I mean, obviously, house prices were really taking off, but I was talking to somebody at the gym, a young woman who was working in an accounting department. She told me she just bought a condo for $400,000. She made $40,000 a year and put no money down. And I said, how did that work? So that got me really interested. And then I was busy in 2004, but at the end of 2004, in January 2005, I started really digging into it.

I started the blog. Did you actually have a mortgage background? I did not have a mortgage background. I have an economics background, not a mortgage background. And that actually, I'm sure we're going to talk about Tanta, but Tanta was an absolute mortgage banker expert. Yeah, tell us about her. How did you find her? She was a mortgage professional, and then she ended up being one of the great bloggers, financial writers, whistleblowers in covering five. How did that happen? How did you make it up and how did she become such a great writer? Well, this is what happens. You know, I started writing about really the economics of housing. You know, I saw speculation. I saw, you know, the price appreciation.

There's a blogger down in San Diego, economics professor, Jim Hamilton, who writes e-com browsers. And one day he said to me, he goes, you know, Bill, you're making a really plausible argument that there's a big bubble. But why would people make these loans that they're not going to get repaid on? And so I started really digging into the mortgages. That's a great question. That was the question. And one of the readers of my blog was Tanta, real name Doris Dungey. And she started, whenever I would talk about mortgages on my blog, if I got any little detail wrong, she would send me a little comment.

Well, actually, it works kind of, if you're close, but it works kind of like this. And so I kept wanting her to come and, you know, write a little bit. maybe write something for the blog, and then she disappeared. And at the end of 2005, reappeared in the middle of 2006, and sadly, she sent me a little note that she had been diagnosed to stage 4 ovarian cancer. So she didn't know if she was going to be around, and she had, you know, left her job. And so as she recovered, when we discussed it, she decided, I think she started in December 2006, she came and started writing for the blog.

And her entire focus was on the mortgage industry, how it worked. You know, originations, mortgage servicing, you know, how mortgage-backed securities worked. You know, foreclosures, everything that you want to know about mortgages. So you two really became a sort of dynamic duo of the housing market because you covered it from an economics perspective. And Tanta, of course, covered it from the sort of ins and outs of the industry. Yeah, it was a lot. of fun and it really put all the pieces together for me. I mean, who is an outstanding writer. Everybody should read what she wrote. And, you know, she really clarified why people would make

loans that they're not going to get repaid on. Now, of course, nobody would intentionally do that and no individual. But, you know, she made it clear that they had moved away from a system where you used to lend to the three Cs, and, you know, you would have credit and capacity and collateral. And they just moved to credit. And so, you know, people weren't paying attention to collateral and capacity to pay the loans anymore. And so, you know, what was happening is you were, you know, if people had a good score, credit score, they'd do them as much as they want. Bill, there's a series of posts that Tanta wrote called The Complete Uber Nerd, and she had a definition of what an Uber nerd was. What were these posts and what did she mean to convey by saying, you know, this idea of the complete,

Uber nerd. Well, I actually, I have part of it. She was trying to explain to people in detail how things were. I have a little quote for you. She said the complete Ubernerd was intended for someone who was compelled to understand how things work in grim detail, even if things in question are tedious in the extreme. And so what you would do is just go into every fine detail of mortgage servicing or mortgage insurance. And by the way, she's a very funny writer, and she has a undergrad. degree in literature, so she had, she was very entertaining, too. So even though she said it's tedious to the extreme, it was great. What were some of the more outrageous things that you remember from that era of blogging, things that really made you think this is getting out of hand? Well, I think one of the most outrageous things for me personally, this is pre-tanta, was in 2005, one of the things I was doing was calling regulators, and I was talking to senior field examiners at the FDIC, I was talking to state regulators, and I was going, what's going on? Why aren't you guys doing anything?

And on the record, I would report that on my blog, what they would say, oh, we're trying to write a new guidance for non-traditional mortgages and things like that. Off the record, they were all saying the same thing. They're terrified, and that they've never seen such risk concentration in their lives, anytime anyone wrote a memo that would move up the chain, the appointees at the top of each of the organizations, the FDIC, et cetera, would just slam it down. And so, you know, to me that was one of the most shocking things, just how much the political

appointees were blocking any attempt to stop the nonsense. That is shocking because one of the narratives we hear nowadays about the subprime crisis is that not a lot of people saw it coming and the people who did see it. coming are glorified in books like Michael Lewis's Big Short. Yeah, but you know, if you look at the time frame, we were writing about it long before that. Plenty of people saw it coming, especially from my perspective, the economics perspective. Tante had that unique perspective because she was, you know, she's an absolute expert in

mortgages. And people would write to me from the mortgage industry and go, I know who Tante has to be. Who else could it be? You know, and they go, but, you know, I'd love it. her and her secret safe with me. And the reason she was writing under a pseudonym is she wanted to go back to work. She was afraid she was giving away too much of what the mortgage industry did. Yeah, I wanted to ask about that because, you know, nowadays, a lot of people who blog, blung under their real names, but 10 years ago, a lot of blogging was done under pseudonyms. I didn't know your name for a long time.

Obviously, Tanta blogged under a pseudonym for a long time. But talk to us about the influence she had. of people were reaching out back in those early days and saying, oh, my God, what is such an incredible wealth of knowledge you're bringing here? Well, you know, as Tanta in a Federal Reserve paper in 2007, you know, Paul Krugman mentioned her several times. He thought that was, one of the greatest things about blogging was, I think he wrote about her, was that an absolute expert in its area can come out when you need her, him or her, and you learn this incredible thing about this industry that you didn't know. I'm going to be experts in every industry.

So that to me was amazing. And let me add this, too, is that Conta changed the world of blogging. Every single blogger out there owes her something because she started writing for my blog in 2006. In 2007, she kept

calling him and goes, Bill, New York Times just stole one of your stories. Bill, the Wall Street Journal, just stole one of your stories. And frequently, that it wasn't quite true because I was talking to a journal at every major place, financial times, everywhere. And they weren't really stealing our stories, but what they were doing, they're telling me their editor wouldn't let a pension.

They got it from a blog. And so Tonto wrote this piece that she just said, but we mentioned your name, we link to your stories, we excerpt, brief, we excerpt, we send you readers, and you won't mention our site. And in that week, the Wall Street Journal Financial Times, New York Times, all mentioned documents a risk. I remember that happening, and I'm sure Joe does as well.

This was a very, very special time in the financial blogosphere. This was really when it took off. And part of the reason was because everything was moving so fast, the blogs were in an excellent, excellent position to get there before the sort of traditional media. Yeah, and the blogging also brought out some experts like Conquer. And experts in other areas, too. It really helped, I think. And I think some of the best journalists got a lot.

of their, you know, they work with us and other bloggers to build, you know, great stories. There were some awesome stories in the major media. Did a... Let me add just one thing there, though. The downside is that, and if Tonto was here, I think she would agree with me, is that now garbage sites get credit in the media. Yeah, I mean, there's definitely been a big proliferation of all kinds of quality since then. Yeah.

Did you have people working in finance and in Wall Street wanting to, you know, you know, asking, you know, learning from Tanta, and, you know, you mentioned the sort of influence she had on journalists, but what about the influence she had on people working in the industry? Yeah, well, a number of hedge fund managers would email me or call me and ask me, you know, Tanta didn't want to be available to them, so I would pass their emails onto her, and then she might send something back to me that I could respond back. But a number of people in New York were writing to me in the financial industry. Did you ever get frustrated that regulators or the financial industry didn't take some of the things you were writing about more seriously and take some of your warnings to heart?

Well, you know, I think that the majority of the people who actually work as regulators, they were on board right away. They were all terrified. And I still talk to some of those people. that, you know, if the political point is at the top of the agencies are blocking everything they're trying to do, what can they do? You know, now we have a much better regulator. As a matter of fact, I don't know if you saw that, but the FDIC and the Federal Reserve, and they all came out and put out a statement on commercial real estate lending. And this isn't saying that commercial real estate lending is in dangerous of any sort,

but they're reminding people not to have too much risk calculation of concentration. and to keep their underwriting standards, you know, intact. And that's the right way to do it. You know, they're getting in front of the problem instead of, you know, we don't want another commercial real estate bus. Speaking of getting in front of the problem, it's always, you know, the next crisis is never going to be the same as the last crisis, but they're obviously going to be similarities and echoes of past crises.

From seeing the housing bubble and the housing crash, you know, having a front row seat to that and knowing the topic in such detail, what are the things you would want to look out for that to you scream bubble that to you you're always sort of have a radar for for the next potential crisis you know you know i think i think whenever you see a rapid increase in lending uh you see a decrease in underwriting standards those are things to look for i mean housing is the worst because it's the biggest market in the world you know or at least you know when you're talking about the u.s the commercial real estate's a much smaller lending world You know, I was one of those people in the late 90s arguing we had a big bubble in the spot market. And that, you know, the speculation there, you know, although it was rampant, was nothing. It was not as leveraged as the halvement market. So what would I look for? I just look for a fast increase in lending and decreasing underwriting standards.

Do you see bubbles today? No, I'm not really. I see none. I don't be put it that way. You know, you have to look for two things. One is the fundamentals have to seem like they're out of whack with normal. And two, you have to be looking for a lot of speculation. So people taking this lending and speculating hard.

I don't really see that today. So, you know, I'm not worried about much today. Going back to Tanta for a second, what would you say was the number one thing you learned from her in terms of how to analyze an industry? Are there lessons that you learn from her just and generally working alongside her that you still take with you today as you write and analyze the economy and the housing market? Well, she would, you know what she would always try to do is she'd like to look at it from one angle and then step back and try to look at it from another angle. And she was really good at that. As a matter of fact, I can't tell you that.

It happened over and over again. She'd say, well, what if we look at this from a different perspective here? And it really would help clarify what was happening. And I think that was part of the reason Tonto was way ahead of everybody else on, you know, predicting, you know, she was naming names, which mortgage companies were going to go under and which banks were going to go under. So that's why we couldn't be outshorting people. You know, the big short guys, they actually did something very different. What they did is not only they discovered this was going to happen, but they figured out a way to really make a lot of money from it, and that wasn't our goal at all. I mean, we were just trying to sound the alarm.

Yeah, just a slight difference there. So I got to ask, the Big Shore is out. Are you going to go see it? Oh, absolutely. Absolutely. Were you a fan of the book? I didn't read the book. I'll admit I haven't read it either. What? This is outrageous. Let me tell you why. I lived it. I wrote about it every day. I know, I know what these guys did, but I want to see the movie. Fair enough.

All right, well, thank you very much, Bill McBride. Absolutely fascinating discussion. Really appreciate you calling in. And we'll have to get back in touch with you to get your take on the movie. Or at least you should write about it. Okay, I will. Thanks so much. Thank you.

Well, Tracy, that was a fascinating conversation. What was your big takeaway from that? Well, I mean, it was kind of nostalgic for me since, as we discussed, we both sort of started our financial journalism careers around that time. But even more than that, I really like this idea that, you know, when you read the big short, when you go and see the movie, it makes it seem like there was this tiny group of incredibly smart men on Wall Street who saw it all coming and profited off of it, which wasn't strictly true. There were lots of other people like Bill McBride, like Tanta, who saw the warning signs there and weren't necessarily listened to. You're absolutely right. And on the nostalgia point that you made, like, that really hit home for me because I started off my career just blogging, like Bill McBride, my first blog, the stalwart, it was just kind of pseudonymous. I didn't really have my name attached to it. And I had totally forgotten, but I love the point that it wasn't standard. Like, now if like a blog breaks news, then most news organizations are pretty good at crediting them and citing them. But I forgot how rare that was and how rare it was for anyone to acknowledge that there was good.

information coming out of new media. And the idea that Tanta was one of the people that really pushed and said, no, like, we're doing all this great stuff. Like, newspapers should give us credit and this idea that that turned out to be an influential thing beyond just financial bloggers, I thought was a really cool point, and I had never, I had no idea about that, or I hadn't thought about it. Yeah. All right. Well, that's it for today's odd lots. I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. And I'm Tracy Allaway. I'm on Twitter at Tracy Allaway. Thanks for listening. I are very proud of our new podcast Oddlots, but we are also very proud of Bloomberg's other growing suite of original podcasts, all designed to help you navigate the complexities of business, financial markets, and the global economy.

So in addition to our own podcast, please don't miss Benchmark with Dan Moss, Tori Stillwell, and Aki Ito, an informative, jargon-free look at the inner workings of the global economy. Then there's Deal of the Week with our M&A reporter, Alex Sherman, which is a break. of the biggest M&A deals and gives you an inside peek at corporate boardrooms. All three shows are available on iTunes, SoundCloud, Pocketcast for Android, Bloomberg.com, and of course, the Bloomberg Terminal. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews. all the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations

about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you.

Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts.