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Michael Burry Demolishes The Fed's Self-Perceived Infalliblity, Discusses The Cost Of "Extend And Pretend"
Submitted by Tyler Durden on 04/04/2010 11:56 -0500 The recently (in)famous Michael Burry, writes a blistering op-ed for the NYT, in which he implicitly asks one simple question: just how dumb are Alan Greenspan and Ben Bernanke? The man who foresaw it all, subprime crisis, banking system collapse, counterparty risk, CDS scapegoating and emerged from the second coming of Great Depression 2.0 a much wealthier man, has so far had exactly zero invitations to share his insight with Washington's Wall Street proxy legislators, and, in addition, has had his forecasting skills called a "statistical illusion" by the very same Greenspan who took the economy to the brink, and whose successor is now doing just that in the second doomed great reflation experiment. At this point one has to be an immaculate idiot (read Chairman of the Fed) not to see, that what the Fed is doing with the pursuit of the same catastrophic monetary policy which failed the first time around, and will fail now, is pushing us straight into the abyss, from where America just barely managed to crawl out in 2009 via $3 trillion in additional public debt issuance to date (a number which will likely hit $10 trillion within the next 5 years, to result in a debt-GDP ratio of approximately 200% when including the GSEs). It has gotten so bad that even Fed governors are begging Bernanke to stop the madness before it is too late: a first sign of internal mutiny. Alas, just like when everyone ignored Michael Burry, who laughed into the face of conventional groupthink in the mid-2000's (which by definition is always wrong, and will be this time around as well), so will Wall Street and its proxy, Washington D.C., ignore that which is all too obvious until it is once again too late. Hopefully by then intelligent and very rich life on Mars will be discovered, cause there will be no one left to bail out not just the US, but the world.
Some of Burry's more poignant insights from his Op-Ed:
I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.
Hmm, didn't Goldman explicitly say it was always demanding collateral settlement from AIG? Is there yet another lie in Goldman's recollection of the events? We will never know, or at least not until the Fed discloses to Darrell Issa all there is to be disclosed about the Fed's involvement in bailing out Goldman Sachs et al (yes, we went there).
On flying in the face of uniform stupidity:
During 2007, under constant pressure from my investors, I liquidated most of our credit default swaps at a substantial profit. By early 2008, I feared the effects of government intervention and exited all our remaining credit default positions — by auctioning them to the many Wall Street banks that were themselves by then desperate to buy protection against default. This was well in advance of the government bailouts. Because I had been operating in the face of strong opposition from both my investors and the Wall Street community, it took everything I had to see these trades through to completion. Disheartened on many fronts, I shut down Scion Capital in 2008.
No surprise there: those who are right wait the longest for their thesis to be validated. However, we have gotten to the terminal thesis unravelling: when those (few) who have correctly been calling this market the biggest ponzi scheme in the history of the world, are finally proven correct, there will be no windfall, as the outcome will be the default of the US, the debasement of all currencies, and the economic collapse of the world. Unfortunately, with consumers relevering once again, however not into yielding assets but into the dumbest trinkets like electronic books (when was the last time anyone complained America reads too much?), the liquidation value of the American economy is getting lower and lower. And once the great resolution comes, when credit is discovered to, surprise, not be equal to money, then the only question left is whether the other great "money equivalency" test will be validated: that of gold.
On the intolerable stupidity of Fed Chairmen:
I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins..
Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.
How Greenspan not only did not mitigate the imminent collapse of the bubble, but trumpeted every new excess-leverage permitting gimmick:
Observing these trends in April 2005, Mr. Greenspan trumpeted the expansion of the subprime mortgage market. “Where once more-marginal applicants would simply have been denied credit,” he said, “lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”
On the lack of lessons from the past, and how even as we reflate precisely the same asset, credit and housing bubbles, nobody dares to point out that the Emperor is once again walking around completely naked. Why else does Tim Geithner's blood pressure double every time someone mentions that New Century redux in the face of Fannie and Freddie - the biggest dumping ground for every worthless US mortgage is now borne not by private investors, but by the taxpayer, at a cost of about 50% of GDP. How this continues to be permitted, one would need to ask Barney Frank and Chris Dodd, both of whom for some reason are still in office.
our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool — the epic and unfair taxpayer-financed bailouts. Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.
Mr. Burry's conclusion, which has been repeated so many times on the pages of Zero Hedge it has left even us numb to its implications: we have learned exactly nothing from what happened then. With institutional memories stretching for exactly so long as the prior red P&L day, we are repeating every single mistake that was done in the first round of the Great Bubble Implosion. We are now in the latter days of the second one. This time, everyone is all in. And everyone will lose.
It did not have to be this way. And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis. Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat. If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.
The real core of the problem is, and has always been, the Federal Reserve: this committee of a ten myopic, conflicted and Wall Street-friendly economists (whose vice Chairman comes directly from Goldman Sachs), who all live with the flawed perception that Keynes is correct, has now achieved centralized power to an extent that would make the Soviet CK blush. As fiscal stimulus options are now essentially eliminated, monetary policy now dictates all: the stock market, bond prices, inflation, consumer savings, right down to the most basic daily activities by Americans (which lately tend to be waiting in line for an extended period of time, for an object that will be used a few times then cast away). And those who dictate monetary policy, and the rapidly deteriorating fate of America, are a few people who are accountable to no one except their Wall Street overlords, working with cooked books, which are open to nobody, and making decisions in the secrecy of what can objectively be called a cabal. Yet even with all this, at least 70% of the Senate still regularly reconfirms the biggest dictator in the history of what may once have been a democracy. This is the kind of communism that Lenin, Stalin, Marx and Engels could only dream of.
rally is following the market action during the Panic of 1907 to an eerie extent. If the current environment were to closely follow that environment we would likely be in store for a near-term 10% rally before capping the final leg of the bull move higher. Ultimately, the market rallied 90% from the bottom before the wheels came off again and the market fell nearly 30% over the following 18 months. This is an obvious case of data-mining, but as Barry says, it’s also an interesting study in how psychology often rhymes:
