Former CEO of Washington Mutual - Kerry Killinger | PBD Podcast | Ep. 185
FaceTime or Ask Patrick any questions on https://minnect.com/
PBD Podcast Episode 185. In this episode, Patrick Bet-David is joined by Former Washington Mutual CEO Kerry Killinger and Adam Sosnick.
Today's sponsor is the DNA company. Check out our exclusive discount by following the link: https://thednacompany.com/VT50 which will be applied at checkout.
Join the channel to get exclusive access to perks: https://bit.ly/3Q9rSQL
Download the podcasts on all your favorite platforms https://bit.ly/3sFAW4N
Text: PODCAST to 310.340.1132 to get added to the distribution list
Patrick Bet-David is the founder and CEO of Valuetainment Media. He is the author of the #1 Wall Street Journal bestseller Your Next Five Moves (Simon & Schuster) and a father of 2 boys and 2 girls. He currently resides in Ft. Lauderdale, Florida.
Why would you bet on Joliet when we got bet David?
Value payment, giving values contagious.
This world of entrepreneurs, we can't no value to hated.
I didn't run, homie, look what I become.
I'm the one.
Okay, so look, today's podcast, some of you may not know who the guest that I have on today, but here's what I will tell you.
If you are in the mortgage business, in the real estate business, if you're somebody that's currently a homeowner, if you're thinking about buying a home, if you're currently in the industry, having to do with anything to do with title, escrow, refi, new purchases, whatever it may be, you're going to not only want to watch this, but you're going to share this with your offices, all your LOs, all your senior LOs, all your realtors, everybody.
And here's why.
For the last three months to six months, I've been wanting to bring CEOs of major banks that were around in 2007, 2008.
I had a conversation with somebody very close to Angelo Mozilla.
We were trying to bring him out.
We had conversations with multiple other people about having them on a podcast.
But today, we have somebody that can probably give us more insight on what happened in 2000.
Maybe even better than a lot of other people out there that were experts, news, all that's probably better than any of those guys.
There's, I would say only five other people that have as much insider insight information, insightful information on this topic as you do.
And here's who it is.
Our guest today is Kerry Killinger.
This is episode number 185.
Killinger joined WAMU in 1983.
If you remember WAMU, I used to bank with WAMU.
I loved WAMU.
I was hoping WAMU would take out B of A.
I was rooting for WAMU to take out Wells.
There was a very different spirit and culture in WAMU.
It was felt the moment you walked into every one of their branches.
And if you're one of them, you're going to find out why this is a very important guest.
So he joins WAMU in 83 when it acquired Murphy's Far.
Then he was named executive vice president, promoted in 1986 to senior vice president, and then to director in 88.
He was named president of the company that same year in 88.
In 1990, he becomes the CEO of WAMU.
Now stay with me here and chairman in 1991.
American Banker names him the 2001 banker of the year.
During his tenure as a CEO, from 1990 till 2008-ish, WAMU grew from 30 branches.
None of you knew who WAMU was in 1990, by the way.
From 30 branches and $7 billion of assets to 2,000 branches, $330 billion, if I'm not mistaken, I read in a Fortune magazine back in 006, it was when they were at 330, 320, 320, $330 billion company.
However, however, WAMU was also one of the leaders in No Income, No Assets.
WAMU was also one of the leaders in Negams that was taking place, a negative amortization loan, which we'll get into as well.
And I was in this, you know, my friends were in it.
They were working with New Century.
They were working with, you know, countrywide.
I can name all of them.
We were all, these were all our friends.
And I lived in LA.
I was in LA while this was happening.
And WAMU goes from $330 billion company to being scooped up by Chase for $1.9 billion from $330 for being picked up to $1.9 billion.
And then later on, Kerry wrote a book called Nothing is Too Big to Fail.
And today we're going to talk about why nothing is too big to fail.
No institution, no government, no country is too big to fail.
But we have to do this by learning from our past mistakes and taking action to ensure our country's business and government officials maintain proper fiscal responsibility so we can return to our country's economic system and in turn our democracy to one that is secure.
Having said that, Kerry, thank you so much for being a guest on PBD Podcast.
Thank you very much, Patrick.
It was really a pleasure to be here and I love what you do.
I follow your podcast and follow your career and congratulate you.
I appreciate that.
Thank you so much for that.
And, you know, for me, when I tell you I was a fan of WAMU, till today, I have checks that I've kept that says WAMU on there, you know.
And there's some funny stories I have with WAMU, but it was different.
You'd go to B of A, and there was that thick three-inch glass, you know, where you're like, man, I feel like I'm a criminal almost going to these banks because they're worried about what you're going to do.
And WAMU says, no, no, come on in.
He would set up these, you know, like almost like bar tops.
You know, you would go to them.
How can I help you?
How can I help you?
And my chief reputation officer today, Moral Keshishi and Becky, and I have to say that last name correctly, both her and her husband were working at WAMU, and he used to work at B of A while they were dating.
They're married now.
They have two beautiful kids, Dante and Daniel.
But she was the one I would wait to deposit all my accounts.
And later on, I ended up recruited away from WAMU.
And she came to, she's been with us for 12 years now, 11 years now.
But, you know, one of the husband was working at B of A at one point.
And he says so many customers would come to us and would say, why can't you guys be like WAMU?
Why can't you guys be like WAMU?
I feel like I'm so welcomed at WAMU.
This class is making me feel uncomfortable.
It makes me feel like you don't trust me.
So if you don't mind taking a minute and sharing your background, because it's not like you were at B of A and you got recruited to go to WAMU to be a CEO.
It's not like you were at Wells and you went there.
Your story is from 1980, you know, the three that we're talking about joining WAMO all the way to 2008.
So if there's anybody that can tell the history of it, it's you.
But I want to kind of start from the beginning, your story of coming out as a first-time employee with them to eventually become the CEO.
Oh, thanks, Patrick.
Let me try to be brief on it, but I initially grew up in the Midwest, so kind of had some of those Midwest values and always was interested in finance and being an entrepreneur.
And got started in college buying homes, flipping them to build some capital because I figured out over the long run, we all want to try to generate some capital to do what we can do and go from there.
Fortunately, I started that process while I was working, learned how to invest in the markets and stocks and all those things.
Became familiar with Warren Buffett back in the early 70s.
I was in the Midwest.
And then got recruited out to Spokane, Washington to manage a group of mutual funds.
Took a little 50-person company.
And over about six years, we grew that dramatically.
Then came up with the idea that in about 1981 or so, that if we could put that culture of entrepreneurism together with the bank, we could really create something special.
And I searched around a little bit and found a failing, near-failing thrift in the Seattle area called Washington Mutual.
It was losing $30 million a year.
The FDIC said it had 18 months left before.
But I said, I think this is something we could do something with.
So we put the companies together.
I was able to roll all of my stock that I had.
Remember, I took those houses, created that capital, put that into, it was actually Murphy Favor is the name.
And we rolled that then into Washington Mutual.
And so we ended up becoming significant equity holders in Washington Mutual.
And it was still a mutual company.
And we said, you know what?
Let's take it public, which we did.
I remember because I had a cost basis of the stock, about 40 cents a share.
And we took the company public and ultimately grew the market cap to about $40 billion.
So it was a pretty interesting deal.
But from the consumer side, what we wanted to do is put together a broad product line, including the things the securities and insurance industries have, together with the bank and have a little more customer-focused look at things.
And we grew that customer base pretty dramatically up to about 11 million customers.
And in the early 2000s, we were growing right at a million customers per year and had built the branching system up to 2,200 and was earning about $4 billion a year.
So it was a pretty good deal.
As you said, we received every award you can imagine about best quality of service, best products, because we always tried to give the consumer the best deal out there, either in terms of pricing, better service.
We tried to have our employees both engaged, but trying to be a little higher on the customer service front.
So we got all the J.D. Powers award as the best customer service and all those things.
Anyway, that was all the good stuff.
And that turned out to be part of our Achilles heel.
Because as it turns out, the moneyed politicians and East Coast people really felt threatened.
Because we moved into New York.
We were taking huge market share from J.P. Morgan Chase, from Citigroup, from all those guys.
And the New York banking regulars didn't like us too much.
We weren't their kind of folk.
We weren't blue bloods from Harvard and East Coast schools.
We were trying to do stuff for the consumer.
And we can go more into depth if you want.
That turned out to be a problem for us when the financial crisis hit.
In what way?
So was it Main Street versus Wall Street where you were not in the circle of Wall Street and you were kind of rubbing them the wrong way?
Were they not fans of yours?
Absolutely.
In fact, in our book, we used, and in some testimony I did when we were talking to Congress and all that, I coined a phrase, we were not too clubby to fail.
And just saying that, look, there's an East Coast club.
It's a pay-to-play game.
There was a direct correlation of who benefited from who gave the most political money to the guys down there.
And I think they were a little threatened by this growth of this West Coast outfit that was kind of eating their lunch.
And then when the financial crisis hit, we saw politicians, regulators, everybody was panicked, went outside of any normal protocols they have of what they're supposed to do and the like.
And they, you know, I feel very strongly that they just inequitably and unfairly treated Washington Mutual and tried to find any excuse they could to give them a sweetheart deal and give it over to J.P. Morgan Chase.
So it's kind of strange.
Okay, so who, just to be fair, who was doing, for the audience that doesn't know what a NAGAM loan is, okay, I heard it came from Australia.
I don't know where the idea came from, but the NAGAM loan was based on what I remember, was built for those who were affluent, those who had money.
It wasn't necessarily a product that was made for Main Street.
It wasn't made for originally.
The original people that designed the product wasn't for the regular person to go out there and get a loan like that.
It was for guys that had money.
Where it got broken is when it was abused too much.
If you don't mind taking a quick moment and sharing one of the products, which I think you ended up stopping that product later on, nine months after the crash, I think two products you guys stopped selling.
But if you don't mind, just take a moment and explain to the audience what a NAGAM loan was.
Sure.
There were loans predominantly on the West Coast at that time, and they've been done for decades, actually.
And I think one of the real leaders was a company called Golden West Financial, which ultimately was merged into Wachovia, and then that ended up getting picked up by Wells Fargo.
And a couple of the acquisitions we did in California when we entered that market were very large in that product.
So that became an important product for us.
And what it basically did is allowed customers a choice of what they did on a monthly payment.
They could either make a payment that was a full amortizing on a loan, or if it was a tighter month form, they could make a lesser payment.
There was always a minimum payment they had to do.
And if they made that minimum payment and it wasn't enough to cover all the interest that was earning on the loan, then that would be called negative amortization or it would increase the loan balance sum.
Now, what we found is that over the cycle, including going into the financial crisis of 2008, that customers would not use that negative amortization feature to a big amount.
And I noticed that our entire loan portfolio, the balance that was negative amortization, was less than 1% of the total.
So individuals would do it from month to month, but customers over any period of time would ultimately pay those loans down so they didn't end up in something that was a real problem.
Now, what happened is when the crisis hit, everyone wanted to point a finger at a product.
And so that's one that they got pointed at.
I would suggest that the major problem is that when housing prices fall 30 and in some parts of California up to 40 percent, it doesn't matter if it's a 30-year amortizing loan, a standard one, or if it was a negative AM.
They all had delinquency rates much, much higher than what you'd normally have.
Now, one of the things that we showed throughout that period is that even when that hit, our loan losses were about half of what the industries were.
So it really wasn't an issue that the loans were just an unusual amount of those and that it went into a major problem.
Our problem, as it turned out, was when the times got tough, we just underestimated how the response of the regulators and the government would be to trying to squash out these West Coast kind of institutions.
And they basically all left that were doing amortization or those kinds of loans or real estate-centric companies really have all kind of gone away.
They really wanted to have the industry merged into Wall Street.
Like a nationalized system, so we're going through a handful of banks.
But I have a hard time believing that.
And please push back.
I want you to push back as much as possible because this is your world and I'm going to push back and I'm trying to get smarter here myself because you have to know sincerely when I tell you this, I did not want WAMO to go out of business.
Okay.
And you were the guy that was there.
You were not like, you know how AIG was going out of business.
Last minute they called the guy who saved MetLife, Bob Ben Moshe, and he comes out of Prousha Dubrovnik to come to AIG.
And I'm at the dinner with him and David Herzog, who was their CFO, who was used to be American general CFO, and then Herzog becomes a CFO.
And they call and they get $183 billion.
And then, you know, they pay it back with $21 billion of interest.
But they brought Bob Ben-Moshe to save AIG from going out of business.
And he did, right?
So it's not like you came to save the company.
You were there for a minute, and you were the CEO for a long time.
So a job, you know, our job as CEOs, which is a very, very annoying job, and yours at a level where you have the level of scrutiny you're dealing with Congress, you're dealing with everybody.
Not an easy job job, not something everybody wants to do.
It is not a job for the average person who wants to wake up and say, I'd love to be the CEO of WAMA.
You probably don't want to be the COVID.
It's not the most glamorous job because you're constantly getting judged on things.
But how does a company go from 330, give or take, billion valuation to two years later being bought for $1.9 billion?
And you're saying less than 1% was negam.
But the market looked at you.
And now you may say less than 1% and negam.
That could be prior in the last 20 years of all the loans if we combine were negam versus what percentage of the loans you were selling per year were negam.
Those could be two different data points if we look at, right?
Because I understand if it's over 30 years, okay, fine.
Of course, I'm assuming less than 1% is going to be negam.
But you have to say that it was gradually more and more and more and more.
You have four payments.
For the average person that doesn't, I think it was four payments.
It's the 15-year loan, which was the highest payment.
Then it's the 30-year, then it's interest only, then it's the nagam.
If you paid the nagam, your loan amount would get bigger.
So if your loan amount was $400,000 and you pay the negam payment, your loan would go from $400,000 to, let's just say, $400,500.
Next month, it would go to $400, $1,000.
That's kind of what the Nagam concept was.
So the average person was like, I don't care.
The real estate's going up so much.
I'm going to buy this house for $400,000.
My uncle bought a house for $300,000, sold it for $600,000.
He made $300,000.
Who cares what payment I'm making?
I'm going to make the money anyways.
So I'm going to just pay the Nagam because my uncle told me to just pay the Nagam.
So there was a part of that going on.
So as much as I want to say, great, that's phenomenal, I want to push back a little bit because if that's not the case, then what caused a $330 billion company to be bought for $1.9 billion?
Well, let me make a comment around the loans again.
So when we make a, and again, I'm just going to do the whole portfolio and then we can go from there.
Just to give you a couple of numbers, if you take all the, we called them option arm loans that we had made, they had a loan-to-value ratio that averaged about 70%.
And that was the entire portfolio, including the new originations and the like.
Again, think about making a loan that's 70% loan to value, and with negative amortization for the entire portfolio, it took it up to maybe 71%.
So still should have been a very conservative loan to value ratio.
And what really hit everything is a couple of things.
One is housing prices, when they started falling, fell so fast and so quickly that that caused people's behavior to make payments the like start to change too.
Because if you drop housing prices 30 or 40 percent, guess what?
People just stop making their mortgage payments because they don't have any equity in their home anymore.
So that's factor number one.
The second that's really that really changed that product in a negative way was the government.
And what happened is that product was started, as I said, by companies like Golden West and then a couple of companies that we acquired, three companies we acquired in California, which were Great Western, HF Amundsen, and American Savings, were all large option arm originators.
And that's how we became a major player in that.
Those were good products when they were all originated for portfolio.
So we all kind of knew and underwrote them to be careful.
Now, what happened beginning in about 2000, 2001, the government said, that's such a good deal.
We want Fannie Mae and Freddie Mac to start purchasing these.
So they started setting the underwriting standards nationally for that product.
And then as soon as they did that, then that brought a bunch of mortgage bankers in, brokers like countrywide, who was not doing them for portfolio.
And they're just going to underwrite to whatever standards Fannie and Freddie did.
And the quality of that product plummeted.
Now, we recognize that as a problem.
So I cut our loan originations from 19 or from 2003 to 2007 by 74%.
Imagine running your business and one of your key things, and we became very concerned about housing, about what was happening to that product.
So I cut our product lines by 74% of all residential lending, which got criticized like heck from Wall Street saying, how can you run a business cutting a key product by 74%?
You know, you're going to cut, you know, that's not the right thing to do for a growth company.
I said, we're going to try to, you know, we got to, because we think the product's getting riskier.
And you're right.
So it ended up blowing up more than it ever should have.
And I think that a key part of that was that product becoming nationalized with Fannie and Freddie setting the underwriting standards.
And that product was always designed to be a product for portfolio.
Okay.
So that's, I appreciate the answer you gave.
But I guess to go a little bit deeper there with the product, so 74%, you're lowering it.
So on the back end, because let's see the parties that were involved in this thing here, the whole big short concept, the movie Big Short, right?
You've seen the movie or you've read the book and millions have as well.
And the other day I said there's two movies everybody needs to watch today.
One of them is Big Short.
The other one is Margin Call.
I think got 30 million views on TikTok.
It blew up one day just to watch those two movies because the market's going through stuff that it's going through and people got to be educated.
So we have few parties involved.
We have the banks, like yourself, right, involved.
We have the consumer that get a little bit of the blame for not being educated and just saying yes.
At the end of the day, we're signing.
We have to be educated on the product that we're buying.
The first car I financed was from a company called FMAC in Clarksville, Tennessee.
And my interest rates for my Mitsubishi Eclipse Turbo was 33%.
And I was 18 years old.
And guess what?
We can blame FMAC, but I'm the dummy that agreed to it because I signed the contract and I knew it was 33%.
So, okay.
So we have you, the banks.
We have the consumers.
We have the rating agencies.
Oh, you're AAA.
And behind closed doors, they're getting funded for certain things.
Oh, you're AAA.
What AAA?
The paper sucks that they're buying.
Then Wall Street that's buying the paper.
Then you got Fed that's getting involved.
And you can throw the government in there that's, you know, picking and choosing who they want because they want to kind of have as much control over this as possible.
2008, I'm actually curious to know what your answer is going to be to this.
Who would you put as the top to blame for the crash that we had in 2008?
Direct answer to your question, at the top of the list, and I'll explain, in my opinion, is the Federal Reserve.
But I'm going to put shared responsibility for the financial crisis on the parties of the federal government, on the regulators, on the rating agencies, a bit on investors, certainly on bankers, certainly on the government-sponsored enterprises, Fannie Mae and Freddie Mac, and definitely politicians.
And it's a very shared responsibility.
No lenders are on your own.
I said bankers.
I meant lenders.
I'm sorry.
Originators, guys.
Origin.
And bankers.
I think we all made a mistake of varying degrees.
But the party that had the best ability to prevent a financial crisis and then fueled the flames was the Fed.
And let me tell you what happened.
In the early 2000s, they helped cause the whole housing bubble because they kept interest rates below the rate of inflation for a period of time.
That caused people to go naturally, which they always do, to go out and buy more homes.
And in that case, take on more and more debt.
And because that caused these housing prices to go too high in the short run.
And I was back at that time telling the chair of the Fed.
Was that Alan Greenspan at the time?
I was with Alan, but at that time it was kind of morphing into Bernanke.
Bernanke, yeah, Bernanke.
And as a side point, I think Alan Greenspan, I served on the Thrift Advisory Council with him.
I think he got it.
I think he was a really smart chair of the Fed, understood the capital markets and all that.
In my opinion, Ben Bernanke was like putting a scholar, a scholarly somebody out of academia in charge of something that is very dynamic.
He just didn't understand the dynamics of markets as well, in my opinion, of what he should have.
So I think the Fed helped inflate the housing market.
And then when things needed to be cooled down, they started raising rates too fast, too far, and then that started a downturn.
And I started counseling them at the time.
Again, I was on a council there and met with him quarterly.
I said, there's a problem creating here.
I said, I'm going to cut our lending dramatically, which I said we did 74% during those four years leading up to that.
But he said, no, we don't see housing as going to be a problem at all.
And they basically rose rates.
It turned out to be too much and then did not inject liquidity to stabilize the system.
And what we should have had was a normal downturn in housing.
It would have been painful for everybody.
Yeah, housing prices should have fallen 10%, 15%, whatever.
But instead, they let the capital markets totally freeze.
And I think they made a fatal mistake, again, in my opinion, of letting Lehman Brothers fail.
Because that put total panic into the entire financial system.
And by the time that that happened— You said they made a mistake letting Lehman Brothers— Lehman Brothers— In my opinion.
But you're also the guy that wrote the book, Nothing Is Too Big to Fail, Though.
Shouldn't we allow those guys to fail?
I'm saying that just from a practical side, when they let Lehman fail in that circumstance at that time, that caused a downward spiral that cost this country trillions of dollars and millions of people their jobs and caused housing prices to fall much further, not only housing, but the stock market, housing prices, and other things more than they could have.
I'm not saying they shouldn't have found a way to deal with Lehman over a period of time or something, but the way it was handled put a total shock and panic into the system.
And they all reacted, they in terms of the regulators and for that matter, Congress and others, in very reactive, haphazard kind of ways that I don't think served our country very well at that time.
You were going to say something?
Yeah, you mentioned portfolio.
And loans can go one of two places, right?
You hold it for about a month and then you sell it.
And then they get assimilated into bonds and the bonds are traded.
And then there's banks that keep a fairly robust percentage that's their own portfolio.
What was WAMU holding in terms of portfolio versus selling?
Was that higher than other banks?
And so you were more exposed when it all came down?
Yeah, I think a couple of things.
One, Washington Mutual's charter required it to have two-thirds of its assets in basically real estate-backed instruments.
So you had to hold to that level per your charter rather than just selling them out and brokering them like I would get a loan from B of A, and then two months later I find out that I'm with North American Mutual of Burlington, Vermont, and my loan has been sold and then it stays that way for years.
So you had the higher percentage of if I went with WAMU, I stayed with WAMU because your charter was you had to hold that much.
Yeah, basically what we would do is originate a full range of products and actually about 70% On average, and sometimes it would be much higher, were actually fixed-rate conforming loans that we would sell to Fannie Mae or Freddie Mac or sometimes to Wall Street for securitizations.
And then the things that we would keep in portfolio would tend to be originally the option arms and the kind of things that where the interest rates would adjust over time, which was better for us, in part because the bank, the thrift industry almost went broke in the 80s because they held too many fixed-rate loans.
And when interest rates rose, they all got stuck with those and to put them in there.
So the regulators really would not allow us to even retain very many of the fixed-rate loans.
So as a general rule, I'd say we sold nearly all of the fixed rates that we did.
We'd keep most of the adjustable rate loans that we had originated.
But our whole strategy during that period was to try to reduce that residential originations and portfolio holdings as much as we could.
Our remixing of the balance sheet was really all into small business loans, commercial loans, apartment loans, and credit card.
We bought a credit card company to try to help that.
And we actually shrank our residential lending portfolio for the three or four years leading up to the financial crisis.
So would it be fair to say that because your charter, you were holding that, and a lot of those were the more risky products.
So you've got this large balance sheet of risk.
And then when mark-to-market happens and the interest rates go up, that was a two-sided advice, and it basically is what killed Wall Street Mutual.
Is that fair?
I'd say certainly mark-to-market accounting was a major crisis or problem for the whole industry, particularly Wall Street banks, because they held all these things in portfolio or securities.
Sure, the securitized bonds got crushed.
They got crushed.
And what happens in crisis is that prices, market prices of things, fall to unrealistic levels because there's just no buyers.
Liquidity is gone.
Who in the world wants to step up and take a chance on buying what may be a perfectly good asset?
So there's no price.
So if you have to mark to market, sometimes you mark them down way below their intrinsic value.
And that's why, you know, coming out, what happened is we all had to take both increases in loan loss reserves and we had to write these things down to market at a stressed time.
And then guess what?
Within a year or two, those asset prices were all back up.
And so you created this short-term problem.
And that's what kind of fed this whole crisis going into and led to the Wall Street companies having dramatic problems.
And companies like Washington Mutual reporting some losses where we typically would report about $4 billion a year of profitability.
It's one to a negative.
But within a couple of years, it would have snapped back dramatically.
So I heard you say that, hey, we weren't part of the Blue Blood Club.
So when everything went down, we didn't have a seat at the table of getting fixed.
When did you know with your charter and all of this, you said, oh, damn, we're in trouble unless we get help and we don't have a seat at that table?
Well, I think we knew through that whole period that the emphasis that we had in real estate lending, because that charter would make us more susceptible to a downturn in housing than others.
That's why we cut our residential lending so much.
That's why we sold off as much of the portfolio as I could.
And we raised $11 billion of new capital.
And every indication we thought, and we did all these stress test analysis, that from a pure financial standpoint, that would be plenty of capital to get us through the worst downturn that we could imagine.
And that was financially the case.
Again, I stress test everything to very punitive increases or decreases in housing prices, and we were fine financially going through it.
What we didn't fully anticipate is that when they let Lehman brothers fail, that there would be such a liquidity crisis in the whole capital markets that we'd have a run on deposits.
So deposits flew out of us as they did out of most non-Wall Street banks.
And instead of helping us out with that liquidity of saying, okay, here's some additional short-term liquidity to be sure we get through this panic time, they gave all those new benefits to Wall Street guys.
So they opened them up to the Federal Reserve borrowing window and kind of let them bail out.
And you put in all these bailout measures, do you recall that we adopted to relieve some of those challenges?
But basically the way the timing worked out, none of those were provided to Washington Mutual.
So we were caught in a liquidity squeeze.
But even with that, our liquidity was starting to was now stabilized, was starting to improve again.
And then they quickly swooped in and made that transaction to sell it to Chase without the bank knowing about it, basically.
This is the oldest bank that went out of business, 1889.
Wambu wasn't like a newer bank.
We've never had a bank this size go out of business.
So it was a shocker to a lot of people.
When I asked you a question about the reasons on what happened in 2008, you said Federal Reserve at the top and all this other stuff.
And he said, bankers, did you include yourself in that?
Absolutely.
Okay, so what could you have done?
Like if we were to look back case study-wise today, we're going to talk about a lot of the issues I got.
I want to go through that are more today issues to see what your feedback is going to be on this.
But I want to make sure the audience knows who we're talking to to know that you're fully qualified to give this feedback.
Two weeks ago, we had an event, a week and a half ago, we had an event at the diplomat called The Vault.
And one of the keynote speakers I brought was Andy Fastow.
And I had Andy get up and speak for an hour.
And Andy, you know who Andy is.
He's the former CFO of Enron.
100,000 employees to him goes out of business.
And he's telling the story of, you know, where, you know, he is who he is the day before.
I'm the CFO of the year.
The next year, this is my prison card and all the stuff that he's going through.
And he said he's in jail.
And one day he gets an opportunity to have a counselor, no, not counselor, somebody from the somebody to come and speak to him.
I want to say from the rabbi?
A rabbi to come and speak with us.
Regarding the Torah and the Talmud.
And he would speak to him.
He says, I'm not really much of a believer, but, you know, whatever, if I can talk to somebody.
And then the rabbi tells him the 600.
Would you mind sharing this with him on?
Yeah, apparently there is some, I'm not Jewish, and I hope people in the comments understand that I'm going from memory here of what Andy said.
The Talmud is about 613 laws.
Some of them are negatives, like do not do this, do not do that.
Some of them are positives.
Do this, do that.
But there's one other law in there that simply says, do the right thing in the eyes of God or have the right heart.
And he said that last one he looked at and he goes, well, that's me.
Because I kind of knew at my core that I was following the law.
I was following the regulation.
I was doing what my lawyer said was right.
But that last one, Andy said, struck him and said, deep in my heart, I knew what I was doing wasn't right.
So was there ever a moment for yourself while you're going through?
Because I've been in the insurance industry for 20 years, right?
So when I'm selling a lot of policies and then I'm noticing chargebacks, I'm sitting there saying, ooh, selling policies to people under 25, that's not a good idea, guys.
We've got to stop selling policies to people under 25.
Not sustainable.
Why is there a need?
Yeah, some people do probably need it.
We experienced a few that exercise their policies.
You're going to get it for a cheap price, but it's too many chargebacks.
And I'm noticing a trend.
Okay, when you're selling a policy to somebody that makes over six figures that is a homeowner, that's married with kids, don't stay on the books.
Well, let's target that audience because that's more of a serious audience.
You sell a policy to an unemployed person that doesn't have this income, they're going to cancel it six months later.
So insurance is all about persistency, placement, all this stuff.
Similar to mortgage.
I mean, you can look at payments and say, well, people are not making the payments on the NAGAM loans, but on the 30-year fix and the 15-year fix, we have not a high cancellation or what's the word where people don't make the payment in your world.
There's a language for default.
They don't have a default rate.
So, okay, maybe we should focus on these guys instead of this.
As a CEO at the helm who was there for nearly 30 years and you were the CEO for 18 years until the day went out of business and not went out of business that was bought by Chase, what could you have done differently as the leader of the helm?
Obviously, that's a question I think about a lot.
About, you know, as I said, first, we did a lot of things trying to prepare for this thing.
Again, fortunately, you know, I knew housing looked overvalued and that we ought to get prepared for it and the like.
The things that we could have done that we didn't were probably along the line of getting out of lending three or four years ahead of that 100%.
You know, we had made a lot of commitments on low and affordable home lending to help people and the like.
And I just couldn't bring myself to saying we're just going to cut it off totally.
And in hindsight, we would have been better off if you had just dropped out of it.
I do think that in hindsight, I was looking back, I think some of the products, and these would be the things like were covered in the movie, The Big Short.
Those were not option arms.
They were really focused on the products that the subprime lenders were doing.
And those were, what, 228s and 327s, where basically the interest rate was fixed for two or three years.
And with the idea that you'd give subprime borrowers the ability to have two or three years to improve their credit, and then the interest rate jumps up on them.
Well, over time, those worked okay, but it never felt like a very good product because people would hit payment shocks and the like.
And we did not offer that product initially.
And we bought a company, a very small company called Long Beach Mortgage that was in that.
And so we had some of those.
But the more I looked at that, I said, boy, and we eventually closed that product down.
But in hindsight, I wish I'd never even gotten near it.
And sometimes people confuse that product with option arms.
And again, I don't want to be a big champion of option arms because they are riskier than fixed rate.
They worked well for years and years, but they did have higher losses than traditional fixed rate.
But they were nowhere near the problems of these 228 and 327 kind of loans.
So I wish we would never even have seen that subprime market.
The other point I should have made earlier, too, is that in our case, the option arms only went to prime borrowers.
That was not a subprime product.
It only went to people with prime FICA scores.
So the product was originally designed okay, but I think when Fannie Mae and Freddie Matt got involved in it, they lowered underwriting standards and that product started getting put into the hands of subprime people too.
And that was inappropriate in looking back in at time.
But I felt good that we, on that raw ethics question, that we always had that at the forefront.
I mean, absolute honesty, integrity, and fairness were right at the top of our values.
And we led the industry in things like adopting responsible lending principles.
We wouldn't do a lot of those products that others would, even though they could make money on them.
And it tried to do that, tried to be as conservative as we could on that front.
But I think in hindsight, We also had a mission to gradually move our charter away from a thrift charter to a full banking charter so we could diversify away from real estate more.
And I just didn't have time.
I should have, again, if I'm in hindsight, we would have pushed that higher on the agenda and got it done immediately.
But we started on a plan in the early 2000s.
It helped with buying a credit card company.
It helped with growing our small business and commercial lending and the like.
But I needed to make a large commercial bank acquisition to make it meaningful enough so that we could shrink the balance of residential assets.
And we didn't get that done.
At the peak, how many total employees did you guys have at your peak?
I think it was over 60,000.
Over 60,000 employees.
Okay.
And I remember, I can't tell you how many of the employees that were people I recruited to the insurance industry whom worked there.
To tell you they loved working for the company would be an understatement.
To tell you they loved working for the company.
When I'm telling you, like they loved it, I'm telling you they loved it.
And they were guys, like one of the things you guys were known for, the bank managers were actually making real money.
So people got paid actually pretty well.
It's not like people weren't getting paid.
You paid better than some of the other guys did, and you took care of your guys.
And they were evangelists going around talking about how great WAMU was to the point where they believed in you and the company so much that they put 100% of their 401k stocks into WAMU.
They were all like, I'm just doing WAMU because this thing's going.
I'm going to bank on this long term.
Many of them did.
Not all of them, but a lot of them did.
And by the way, there is, you know, that's a sign of believing in the company you're a part of.
There's a lot of people that put all their eggs in one basket.
Many people who became wealthy did it that way.
Now, sometimes if it doesn't go your way, that's also the story that we read about.
But for me, when I'm going through this and I'm hearing these stories with, you know, where you were at, is there ever where you feel like as the CEO at the top, you know, the balance between, because look, capitalism is runoff of greed and not greed in a negative way.
Milton Friedman was on Phil Donahue and he says, well, don't you think you guys are driven by capitalism?
Capitalism.
And I said, what, Phil, you think you're not greedy?
You think I'm the only one greedy?
You don't think people in the government are greedy?
Like, what makes you think the saint out there that's not driven by greed?
Like, introduce me to that person.
He's talking about Ralph Nader at the time.
This was 40 years ago, one of the best interviews I saw.
But all of us want a little bit more.
We want to win, right?
We want to go out there and win.
And we're all capitalists here.
We're big proponents of capitalism.
Myself, I escaped Iran to come here because capitalism changed my life.
However, what do you think is the right balance between the drive factor, the, hey, we can do more, we can do more.
Let's get one more billion customers.
Let's get 10 million more customers.
Let's do this.
And then regulation to balance both and then having a leader that's able to see some trends to say, guys, we're kind of going in the deep end here that we can kind of screw this thing up.
What do you think is the balance between us, the doers, the entrepreneurs, the creators, the disruptors, the competitors, versus the regulators that are out there saying, maybe we need a little bit of regulation with this product here.
Maybe we need to kind of take a look at this.
What role do you think these two play?
Well, I think, of course, in banking, it's a pretty highly regulated business.
And I think we had for decades really good relationships with the regulators.
And we would have those discussions every meeting about where is that balance between trying to hit financial objectives that we thought were good and at the same time maintaining a safe profile.
And one of the things I did is we had the regulators attend every one of our quarterly meetings where we would lay out the entire strategic plan, what the balance was between growth and what it was for risk management and the like, and they bought off on all those.
And again, the bank had always been, in banking, you have a numerical rating of one to five, called a camel's rating.
And we were for years and years and years a solid two rating.
And leading into the financial crisis, they even gave us a in 2007 their exam findings to the board, I'll remember the meeting, they said, you know, you are a two rating again this year, but we're going to really tell you it's a two-plus rating.
It's the best you've ever been.
And we're increasing your liquidity rating to a one, which is the highest in the industry.
Well, 12 months later, the financial crisis hits because of all those things like that.
And all of a sudden, they are all panicked.
And liquidity is what ultimately was the major challenge for Washington Mutual.
So you go from being a number one rated to saying, gosh, this is the most vulnerable part of what we have.
But I think just getting back to it, I think that having a good balanced dialogue, we always tried to have it.
You know, in a normal course of business, we would typically grow, I'll say roughly 10% a year, sometimes a little less than that.
Our major growth beyond that just came when there were some very opportunistic acquisitions, like when we entered California and were able to become a major player there and were able to get some acquisitions on great terms and great, you know, that were encouraged to us by the regulators, in fact.
So we did have that very strong long-term growth, but we were mostly interested in being sure we had a balanced scorecard.
So everybody got paid on a balanced scorecard.
It was never just on commissions.
It was always balanced out with the loan quality.
It was balanced out with efficiency ratios, all that kind of stuff to try to be sure you're growing a great business for the long term.
Can I ask with that lens?
That sounds like a very noble lens.
But a few minutes ago, you talked about the acquisition of Long Beach.
And Long Beach was out there with New Century.
We had all that.
You couldn't drive through Orange County without seeing those black New Century buildings.
DITECH was all over the place down there.
And then there was Long Beach.
There's this little coterie of really risky dudes.
What was the, through the lens of what you just said, what was the thinking of buying Long Beach then?
With all these things and your camel rating and all, you mean, the buck stops with you on authorizing an acquisition, right?
It did.
I think the, as I mentioned earlier, I think that was, again, one of the regrets.
I would not have acquired the company in hindsight.
The logic we used buying it was, firstly, very small.
It was only a $300 million acquisition or $300 million of total assets out of, at the time, we probably had $200 billion.
So it was a very small company.
And our idea is that we wanted to help change the subprime market.
I said there are borrowers that need funds, and it should be a good market.
But I thought the lenders were charging too much.
I thought the cultures were kind of slippery.
And I thought if we could buy a company and kind of change that and help lead the industry to become better and better for the customer, better products, all that kind of stuff, maybe we could have a positive impact on the country.
As it turns out, again, we tried two or three times to improve that, get it to a better shape.
It just never seemed to quite get there.
And then the industry just kept growing faster and faster and got riskier and riskier.
And I said we decided we just had to close it down.
I want to read this article if you can go to this article.
So zoom in a little, refresh, because for whatever reason it just got blurry.
Okay, there you go.
Where WAMU went wrong.
Okay, and this is the Seattle Times.
Yeah, Seattle Times.
So if you can zoom in a little bit, zoom in, a little bit more, a little bit more, a little bit more.
So a few reasons why WAMUMU, what WAMU went wrong.
WAMU aggressively stepped up its lending in some of the riskiest loan types, short-term adjustable rate mortgages, especially so-called option arm, home equity loans and line of credit and some prime loans.
Over the past four years, more than half of the real estate loans WAMU made were in one of these higher risk categories.
That's a massive number.
WAMU made billions of dollars worth of loans with only limited documentation of borrowers' income, net worth or credit history such as often called liar loans.
I've never heard of that before, but ninja loans I've heard many times.
No income, no job, no assets.
Okay, that's what we call it, Nina.
Make up of three quarters of the $59 billion option arm.
Then next one, complaints from appraisers and investigation by New York Attorney General said WAMU leaned on appraisers to inflate property value to support bigger mortgages.
Okay.
That's pretty deep for you to even know that because I don't even know how you're going to control that part.
So, okay, fine.
Let's just say that's part of it.
Whoever may be the guy that's writing it, speculating a little bit too much.
In August 2004, WAMU loosened the standard for fronting money to third-party mortgage brokers, allowing brokers with heavier debt loads to make more loans.
Would this be best described as correspondence?
Is that the correspondence like the way they're describing it?
It sounds like it.
Okay, so in correspondence, do you know how correspondence works or no?
No, I don't.
Guys were making money on correspondence.
So guys were making $300,000, $500,000 a month in LA.
They were getting paid behind.
So say you're getting your 2% or 3% or 4%.
They maxed it.
They capped it at 2%.
Many of these banks, it's not just WAMU, many people were doing it on the back end.
You could get another half a point or a point or point and a half correspondence on a lot of money.
That's a lot of money.
These are mortgage brokers, you're saying.
This is when guys had four, you know, you know, phantoms for no reason, and they could afford to have four phantoms.
But keep going down.
There's a part I want to read.
Keep going a little lower.
Here you go.
That's the part right there.
As a result, at the end of the last year, more than 56%, this is my concern.
Carrie here, 56% of WAMU's loan portfolio, that's $138.4 billion, consisted of option arms, home equity loans and subprimes.
One analyst estimates that largely due to such loans, more than $16 billion in future losses are embedded in WAMU's book.
So when I see a number like 56% WAMU loan portfolio is an option arm, that is, I mean, I understand being, this is again my concern.
I understand being aggressive, but this is like, you know, we're going for it.
When you see an article like this being written with this kind of data, I mean, you know this.
You saw this article.
That was 14 years ago.
It's not like you're not aware of this article that was written.
But when you see numbers like this, what do you think now 14 years later?
Well, again, I think that, first of all, there are several parts of the article I would disagree with just factually.
But remember, Washington Mutual was required to have about two-thirds of its assets and residential-based.
As I mentioned earlier, it was very difficult, if not impossible, to hold fixed-rate loans in portfolio.
basically would have to sell those because you couldn't take on the risk of the impact on the portfolio of rising interest rates of holding a fixed rate.
So we held most of the option arms.
Remember that product was only sold to prime customers.
It had a loan to value ratio of about 70%, did not have significant negative amortization in it.
The other products such as home equity loans were predominantly to prime customers as well.
And they're basically home equity loans that nobody used.
HELOCs.
Yeah, HELOX, basically.
Fine.
I can understand that one.
But subprime and option arm, that's 56%.
That's a big number.
If I look at that right now, like Riverside County, you remember Riverside County, what it was like?
I mean, I had an office in Riverside.
So I used to go to Riverside all the time.
64% were in flick.
You're walking through.
You're like, what the hell is going on here?
And most of these people bought, I'm not saying they bought it from you.
They bought it from Countrywide.
They bought it from New Century.
bought it from there's a bunch of these guys but but 56 percent is is here's here's my other concern While you guys are selling this, Wall Street's buying it on the back end?
Are they buying the paper from you or you're sitting on the paper?
Well, again, we would sell option arms as well as fixed rate loans to both Fannie Mae, Freddie Mac, and Wall Street.
So you have those percentages that were indicated.
But during that period, we were decreasing that portfolio fairly significantly.
So a lot of that was from things that were in the past.
Now, remember, it would not be unusual for the thrift, like the thrifts we acquired in California, they probably had 80 to 90 percent of their assets would be in residential loans.
And most, if not all of that, would be option arms.
I mean, that was the principal product in California.
Now, again, that product, I won't disagree.
I mean, it was slightly riskier than fixed rate.
And so we knew that, but you were getting paid to take on that some additional risk.
But again, you tried to mitigate that with only going to prime customers.
Yeah, I guess what I'm asking is, if you're giving these loans out on the back end, Freddie and Fanny are buying it.
Why would you stop giving these loans out?
And what month was it when they said, okay, we're not buying it?
Because I remember the month.
Like the month I remember when shit hit the fan.
I know they don't say shit hit the fan on Fox and CNN when you're on it, but we kind of say it every once in a while.
So the month where shit hit the fan was November of 07 is when I remember.
November of 07, the guy in LA, we used to all work at Valley Total Fitness.
It's a crazy story because there was five killers.
When I say killers, I know a Middle Eastern, I just mean killers like we were all very competitive in sports.
Non-mobile related to the world.
Yeah, this is nothing to know you've seen some random people.
Strong, young salespeople driven.
There were five of us that were super, super competitive guys.
And we're sitting there and we're working at Valley's.
We're making $2,500 a month, $3,000 a month.
But when you're working at a gym, when you're working at a gym, you know everybody at the club.
So you don't pay at the clubs.
You don't pay at the bar.
You don't pay because you know everybody.
That's kind of the benefit of being broke, working at a gym, you know everybody.
Okay, so it's like concierge to the town, right?
One day we're sitting there saying, hey, boys, what are we going to do?
And there was one girl that was, she was a boss as well.
But we're sitting there, we're like, what are we going to do?
And then everyone left, and most of them went into mortgages.
I went to insurance.
I got lucky.
I went into insurance because insurance was the least attractive one.
Mortgage real estate was the sexy one.
One of the guys opened up a 30,000 square foot.
He took over the floor and he was getting his leads from a lead company in Canada and he was blowing up.
When I say blowing up, he's having $500,000 a month every month, net to him.
Good-looking guy, model-looking guy.
Another guy was doing very well for himself.
And then all of a sudden, I get the message.
Hey, come see the office.
So I go to see the office.
Everybody's gone.
And it was November of 2007.
And the word was when from back end, they said, we're no longer buying the paper.
You had to say, if you're no longer buying the paper, we're no longer proving negam pickup payment loans anymore.
And then that was felt on loan officers.
And then that was felt by realtors.
And then that was felt by homeowners.
They felt a dip in the value.
So when was it when you kind of found out where these guys are no longer willing to buy this paper?
Do you remember?
Well, I mean, clearly the markets became more and more difficult in the second half of 2007.
And I think that really started to show up when liquidity crisis hit countrywide.
They had to sell everything.
They didn't have any capital to hold in portfolio.
So all of a sudden, they found themselves in a real lurch and had to go out and get some emergency capital and different things.
But clearly, market conditions were getting more difficult.
To say we started several years before that, three, maybe four years before that, cutting back both originations and selling off as much of the portfolios as we could.
Again, if I had it to do over again, maybe you tried to sell 100% because the principal problem, as I come back to, was not the nature of an option arm product.
That may have been, I don't want to throw a number out, but maybe 10% or whatever the problem.
The biggest problem is when housing prices fall as fast as they were falling in that period, we saw delinquencies rise everywhere.
Didn't matter if it was a home equity loan, if it was a 30-year fixed rate loan, or if it was an intermediate loan, or if it was an option arm.
And option arms, yes, they suffered a little more.
As it turns out, over the cycle, they came back to best too.
But clearly, it became a very difficult period.
But if housing had not fallen that far, that fast, that was the major catalyst of it all.
I would tell you this.
I think Option Arm is an incredible product for 5% of America.
I think Option Arm is an incredible.
If it was available today, everything I own, I would put it on Option Arm.
If it was available today for me to get it the way it was back in the days, I would have it on everything that I own because it was fantastic.
You'd get the statement, you had boom, pick and choose.
$1,530 interest only, negam.
And you know, okay, this month I'm going to do this.
So $4,000 a month, $3,000 a month, $2,000 a month, $1200 a month, pick and choose.
It was a great way of, I mean, can you imagine you got four payments to make for your mortgage, for your house?
It's a fantastic, if you think about product-wise, it's fantastic.
But the part I respect about Buffett, you know, is there's a lot of things to respect about Buffett.
But the one thing that I respect about Buffett is the following.
Specific to his philosophy.
I'm not talking politics or anything.
Some people disagree with his politics.
I'm talking to the business side of things.
When all of a sudden everybody was going into tech, he's like, yeah, no, we're not going in.
What are you talking about?
Everyone's doing Comcast.
I'm good.
Everyone's, no, I'm good.
Man, he's lost his touch.
He's in his 70s.
He's lost his touch.
He's in his 60s.
He's in his 80s.
He's lost his touch.
He's like, yeah, okay, cool.
You guys have been saying this for the last 40 years.
I've lost my touch.
And I keep losing my touch, and I'll be worth $100 billion.
And you guys keep saying, I lost my touch?
Okay, yeah, crypto.
I'm not going to go crypto.
This guy's clueless.
He's lost his touch.
He's lost his touch.
And he keeps saying this and saying this and saying this.
I guess the hardest thing to do is how hard is it to say, I don't care if Freddie and Fanny is buying our paper.
I don't think this is sustainable long term.
And we got to get away from it.
How hard in that moment is it to do that?
You understand what question I'm asking, right?
Because you're like, okay, who is safer than Freddie and Fanny?
I was in the military.
When you get out of the military, what do they say?
You know, you can buy zero financing if you're a vet, right?
You have this loan that you can get.
VA loans.
You have VA loans.
Hey, Freddie Fanny.
Hey, Freddie Fanny.
I work at Freddie.
I work at Fannie.
Oh, Fanny.
Freddie and Fanny are going bankrupt.
What?
Freddie and Fanny are going, how is that even possible?
So how hard is it to know that Freddie and Fanny or others are buying the paper for you to say, I'm still not going to sell this paper because I don't think this makes sense long term for the company?
I totally agree with that.
And again, no other major institution cut their lending 74% three years leading up, up before the financial crisis.
Nobody sold off as many of their loans to try to prepare it.
I thought the housing market was very vulnerable.
We tried to do what we could.
And we cut our market share.
Think about nationally, we cut our market share in half.
And very difficult running a business, a large business national, and to know that you're going to not be funding loans, know that you're not going to provide employment opportunities.
You're going to cut back 74%.
We laid off 15,000 people out of the mortgage area over that period.
What was that period?
Give us some month to month.
Well, this was 2003 to 2007.
We actually cut our lending by 74%.
You laid off 15%.
From 2003 to 2007.
And that's where the 15,000 jobs went in that same window.
How much of that 15,000 layoffs was in 07?
What percentage of it was in 07?
I don't have the numbers in front of me.
It clearly accelerated as we just kept getting out of more and more of the businesses.
You got out of the riskier part of wholesale lending and those things.
And it was a continuation process.
What do you think about the way Angelo Mozilla?
How different did Mozillo, like, what was their business model?
How different were they than you countrywide?
I think the major difference is, again, Countrywide was originating all for sale to Fannie, Freddie, and Wall Street.
And I think their attitude was much more about if somebody will buy the product, we're going to originate it.
And they increased their market share considerably over those four-year periods while we cut ours in half.
In fact, if you go back to 2003, Wells Fargo, Washington Mutual, and Countrywide all had about the same market shares.
They were the leaders in the country.
And those guys kind of kept growing, and we just shrunk ours away.
I got criticized badly by Wall Street.
We lost tons of people to Countrywide because they wanted to ramp up and we were trying to pull back.
Again, 74% in hindsight wasn't enough, I guess.
But that's a pretty major business call.
How did you feel about it during that time, say in 05?
Who was Angelo Mozzillo to you in 05?
Not today, in 05.
I'll take it before, in 2003, I viewed him as a, first of all, I knew him very well, and it was probably our fiercest competitor in the mortgage space.
And I think the guy was very knowledgeable, very deep, and very committed for it, and a fierce competitor.
I think as time went on, I became more and more concerned that they were going down that attitude of selling a broader and broader product line as long as somebody would buy the product.
And since we just kind of just became less comfortable with many of those products and what was happening in real estate and kind of went the other way.
When you say someone would buy the product, you're not talking about the consumer, am I correct?
You're talking about the securitization.
That's right.
So that Angelo was basically just selling the stack into Wall Street and he could keep his foot on the accelerator longer.
You had a charter.
And so that's the point you're making.
Am I right?
Yeah.
Again, we tried to not just take the attitude that if somebody would buy it from us, you know, for securitization, that we would originate and sell it to them.
We kind of said these are getting riskier, riskier.
We got to be careful.
We're probably going to hold a lot of these products in portfolio, particularly the adjustable rate ones.
And we just took a more conservative point of view.
And again, I think our view was correct.
But in hindsight, again, nobody, including ourselves, anticipated a 40% reduction in housing prices.
I thought a correction of 10 to 20% was appropriate and very likely.
I did not anticipate that the Fed would, in my opinion, screw up so much to cause a full panic to cause what turned out to be a 40% decrease in housing prices.
So you were self-securitized, if I could invent that phrase, because you're selling from your left pocket to your right pocket because of portfolio.
You're not just selling into Wall Street.
That's right.
I mean, yeah, I mean, we didn't quite think in those terms, but it was really we're just going to originate a certain amount of loans for a portfolio.
And like home equity loans, we predominantly do those all into portfolio because they were our core customer relationships and we wanted to be able to take care of all of someone's banking needs.
After 08, did you and Angelo at all get together?
Like, have you guys had dinner?
Have you guys spoken?
Have you guys had a meeting?
No.
Not at all.
No.
That would be pretty interesting if the two of you guys spoke.
I would be curious to know what that would be like because I think if Angelo's watching this, if somebody can get this, I talked to one of Angelo's daughter-in-law on a Monday night I called.
She picked up.
I was trying to look for his number.
I found, I think both of his sons are in real estate or mortgage or something like that.
And I would love to see the two of you guys have a sit down and go allow others from the real estate and mortgage industry to learn from what's going on today to that time.
I think that would be a niche meeting, but it'd be a meeting that a lot of people in America who are in that field would love to learn from.
So having said that, let's go into some of the stuff that's going on right now in the marketplace.
I appreciate you again for taking all these questions.
I know it's very annoying sometimes because it's been so long for you to rehash it again to say, listen, I've already done this.
I've already answered these questions.
I don't want to freaking go through this again, but thank you for being a good sport on it.
I think we win and the audience wins and we learn.
By the way, if you got any other questions you want to ask him, anybody that's over his $20 Super Chat, I'll bring it up.
And we do have a sponsor that I'm going to go through here in a minute.
But I want to cover some of the stuff that's going on today and what similarities we have today versus 08 and what trends we ought to be paying close attention to with the similarities.
You know, you hear the stories of how 49 out of Fortune 500 companies in 1955.
So only 49 out of 500 companies, Fortune 500 companies in 1955 are in business today.
That means 90 plus percent didn't make it.
Okay, they're gone.
Less than 10 percent are in.
If we take the Fortune 500 companies today, that's 2022, and saying that by 2090, 2080, 90% of them would be out of business.
People would say, that's not even possible.
You're out of your mind.
So, like you said, nothing is too big to fail with the book that you wrote.
And then we see interest rates.
We see, you know, what's going on with real estate right now.
This last week, you know, market's going to be fine.
Inflation is going to be fine.
And then, oh, shoot, they're going to increase the rates again.
Market reacts, sell-offs, whatever the day was.
The sell-off that we had.
So before I get into these questions, Tyler, I'd like to give a shout out to our sponsors today before we get into this.
And the sponsor today, guys, it's a special sponsor.
Here's why.
Myself and my wife, we look into a lot of products that health-driven products.
I'm at an age where, you know, with the amount of work and time that we're putting into business and life and we're going non-stop, health is very important.
I need to know more about my health.
So we were approached by this company and we took advantage of their product.
It's called the DNA Company.
And the DNA company, they said, you know, here's how it works.
It was referred to me by a friend, Greg.
And they say, hey, Pat, you got to do this test to see what your DNA is are going to tell you, what you should eat.
They're going to tell you.
I mean, to the point where too much cardio is not good for someone like me.
You know, my food I shouldn't take.
You know, a person that's constantly going non-stop, entrepreneur, CEO, these types of things on how to get better sleep, when to eat, what to eat, how to slim down.
It was such a comprehensive test that I took when I got the information back.
I said, everybody needs to know about this.
And they were, I believe, one of the sponsors at the vault and are now sponsor here.
So I'll read off a little bit about them.
The DNA company is an innovative provider of functional genomics.
By combining decades of world-class research in this with data from thousands of genetic samples and trillions of genetics data points, the DNA company has created an unparalleled personalized approach to preventative health and wellness.
Their functional insights help you understand the most intelligent way to address your health and wellness concerns by starting with the most unique thing about you, your DNA.
They teach you how to implement these insights through behavioral change techniques developed by award-winning scientists and researchers from Stanford University.
They are a privacy-first company that delivers personalized health and witness insights, wellness insights to elite athletes, Fortune 500 CEOs, professional organizations, and weekend warriors so that they can get optimized faster and stay healthier longer through a precision-based approach to health and wellness.
So we're going to put the link below if you want to take advantage.
We're going to put in the chat.
We're going to put in the description as well for you guys to learn more about it.
If you're a CEO, founder, top-tier peak performer, salesperson that's doing very, very well for yourself, I highly, highly, highly recommend you look into DNA company and take advantage of their services.
Okay, so thank you for that.
Having said that, let's go back into the podcast.
So how close would you say is what's going on today with the current market that we have to 2007, 2008?
What's different about it?
What similar trends do we see?
And what blind spots do we have that we're saying, ah, it's not a big deal.
We're not in recession.
It's not as bad as people make it out to be.
We're going to be okay.
How similar is it?
How different is it from 08?
Well, so over the last, really following the financial crisis, the Federal Reserve and Congress and the government had to stimulate the economy to get things stabilized, which they did.
And then things progressed.
However, what happened is the Fed got hooked on easy money monetary policy.
They kept interest rates way below the rate of inflation.
They flooded the money supply into the system so that everyone had plenty of cash, lots of liquidity.
Is that quantitative easing?
Is that what that is?
Well, quantitative easing on top of it.
And then they decided to go out and purchase originally about $4 or $5 trillion of treasuries and mortgages.
And what that did is it bit up the prices of those.
That drove down long-term interest rates and forced everybody into the stock market and real estate market.
So it caused those asset prices to go up dramatically.
So I think we are in the biggest bubble, risk of a bubble that I've seen in my career.
Bigger than what it was in 2006.
You've been living with that.
Absolutely.
If you look at what's happened in housing, and we may have hit the speculative peak now, I don't know.
But we try to go back and look and see what's a long-term trend line of what real estate should be doing nationally.
And in 2006, it became very concerned.
We were above trend line.
And it looked like it was inflated by about 10 to 20 percent higher than it should be.
And it appears to be more inflated today than what it was leading into that period.
So that causes me concern.
The difference today is that the stock market, similarly, increased in value much greater, faster than the rate of inflation or the rate of earnings growth or the growth in the economy.
So stock prices are much more inflated today than they were just prior to the financial crisis.
This time, we've also seen collectibles and other more exotic instruments escalate at prices that appear to be way above their incentive value.
When you say collect, like NFTs, collections, cars, paintings.
Yeah, crypto, a whole variety of things.
Now, it appears that that bubble peaked a year ago.
And so we've had some major corrections in a lot of them.
You see Bitcoin down two-thirds in value and a lot of other things I think are starting to self-correct itself.
Didn't you just say that the entire crypto market, the entire crypto market assets are now under a trillion?
Two years ago, just Bitcoin alone was a top of a trillion.
Just to put that in perspective, the entire crypto market is now under a trillion.
Two years ago, just Bitcoin alone was a trillion dollars.
Yeah, so the things that concern me, one is I think the Federal Reserve has been way too aggressive in easy money policy.
They kept interest rates too low too long.
They flooded the system with too much money.
And the quantitative easing of buying assets forced asset prices up all over the world.
And then the follow-through on that is every central bank in the world saw what they were doing and did the same thing.
So now we have the potential risk of a global asset bubble.
So this thing's not just a U.S. issue.
It's all over the country, including countries like China, where it's a whole different topic, but it may be the greatest real estate bubble in the history of the world is sitting there.
That's what this evergreen situation.
That's one reflection of it.
And so that concerns me a lot about what the Fed's done and how it's set us up for a major problem.
And then we have the federal government going off and incurring the last decade about $1.7 trillion a year of budget deficits.
Now, some things are necessary.
So coming out of the financial crisis, yes, of 2008, we needed to stabilize for a short period.
But they got hooked on it, and we've been budget deficits ever since.
Then we hit COVID.
And yes, I understand short-term measures, but I think we put too much stimulus for too long, and that's increased our debt to about $30 trillion for the country.
Well, when the Fed keeps interest rates too low, that also encourages everybody to go out and borrow.
So again, we were talking about all the borrowing that people went out to do on homes and stretched on homes and all that stuff.
Now it's across the board.
It's got consumers, businesses, and governments.
Our government in particular, but every government across the world.
So we have the greatest level of debt in the world's history.
We're at $300 and trillion dollars of outstanding debt now, which is the greatest percent of GDP in the history of the world.
So we have a system highly levered, built on the back of assets, which I think many key asset categories are inflated and maybe it bubbles status.
So that creates an enormous leverage risky system.
And if something comes into it to disrupt it, and we saw what COVID can do short term, but what will wars do?
What will cybersecurity things do?
What would political unrest or constitutional crisis in the United States or some of the civil unrest things that we have?
And we've also set up a country now where our inequality is the greatest it's been since right before the crisis of the stock market in the 20s.
We are approaching that kind of inequality status.
And so when you think about a country, it's not just about are we all going to do okay in the short run.
You've got to worry, are you setting yourself up where the very democracy that we're building on is at risk because there's such a large percent of the population that is being left behind and the like.
So I think there's a lot of risk out there.
Very difficult to project if and when that's going to happen.
But I found over decades of looking at it from an investment side that whenever everything gets way above trend lines, that's probably a good time to be pretty cautious.
And on the other side is you will have periods where everything is really attractively priced relative to those trend lines.
And that's when you really want to be aggressive on the buy side.
So if I'm just doing it right now, I say this is a good time to be cautious, keep your powder dry.
Still keep it dry.
I would still, personally, I would keep it dry, particularly in real estate, because look at the numbers don't work.
You can't have housing going to these record levels where affordability is now the poorest since the 80s.
And interest rates probably have to continue to go up because if you think inflation is going to be higher than about 2.5% or so, maybe 3% at the highest on a long-term basis, interest rates don't reflect that yet.
Interest rates have to go up more to, if that's where we end up stabilizing.
Well, breaking news, speaking of interest rates, this just came across my phone, Wall Street Journal, CNN.
Mortgage rates have officially topped 6% for the first time since 2008.
I know it was hovering at 5.99 for a while.
So mortgage rates have jumped again, surpassing the 6% mark and reaching the highest level since the fall of 2008, the 30-year fixed mortgage average 6.02 in the week ending September 15th this week.
That's up from 5.89, according to our friend Freddie Mac.
This is significantly higher than this time last year when it was at 2.86.
Wow.
That reminds me, because when we launched our book, my wife and I wrote our book, and we were doing our launching tour, and mortgage interest rates were below 3%.
And I put some charts on it.
You were doing your book, and when was that?
Just a little bit of the spring of last year.
And I said, interest rates below 3% make no sense.
More realistic at a 2% to 2.5% inflation, they should be about 6%.
And that's where we are now.
That's all happened within a 12-month period.
And now, I don't think we have created such an inflationary issue.
And again, I think the Fed is the party most responsible for causing inflation.
I realize there's a lot of other parties, but they're the ones by keeping interest rates way below the rate of inflation for too long, helps generate, and now it's so embedded into the system that the things they're going to have to do to bring inflation back under control, it looks like the probabilities of that leading to a slowdown in economic activity has to be pretty significant.
And Kerry, just to understand the metaphor you just used a little bit ago, you said, keep your powder dry.
All right, you got to keep our powder dry.
What does that mean in layman terms?
That means that if you have your, if you're thinking about buying, don't rush, be careful, don't overpay.
I think you will get a better opportunity in a lot of these assets sometime in the future.
It might be six months, might be 12, 18.
I don't know.
I mean, you can't get that precise, but this is not the time to say, man, I'm going to buy at all costs and go out and lever myself to the hill to this is not the time to be buying.
No, there are times when it's good times to buy and times when it's not a good time to buy.
I don't think this is the time.
You know how in the military it's like orange alert, yellow alert, red alert, right?
They're putting different levels of risk.
Where are you at right now in terms of buying real estate?
You know, I think it's at least an orange.
I don't know if it's a red.
In some markets, I think, you know, I'd be very cautious of some of the more speculative markets where prices have just where you have big auction situations with multiple buyers and waiving inspections on housing just to get it closed quickly and multiple offers and all that kind of thing.
I think that stuff is all going to slow down dramatically.
And I think you're going to be able to get better prices at some point.
I think it's probably orange-red right now.
Refinances are down almost 90%.
It's like 87% year over year.
And they say that the remaining refinance, the only refinance activity is really desperate homeowners that are trying to reduce the payment.
They'll take the bad interest rate if they can extend term and somehow get the payment down in the face of other expenses of life, which means that's not really refinancing.
That's desperation.
They're just trying to extend the loan so they can lessen the payment is what you're saying.
Yeah, at the new horrifying interest rates.
So the refi market is basically code red, as in non-existent, nothing's happening.
And they say mortgage originations are down 29% as inventory is starting to come up.
So the originations are down 29% year over year, which means people aren't buying the houses, getting the new mortgage.
But the inventory is ticking up, which means as people are sensing the pricing going down, they're like, maybe this is the ninth inning.
I'll put the house on the market and see if I can get it at this increased asset value.
And so when you look at all that, that just is normal economic forces saying, wouldn't you agree that the price of those assets is about to start accelerating, maybe not a crash overnight, but the discounting is about to start accelerating.
Do you read the market that way?
I do.
And one little simple rule of thumb I'd like to have you guys think about is most people buy homes and pay for a house based on their ability to make a mortgage payment.
And so it is directly tied to the interest rate that they're paying for their mortgage.
And as a rough rule of thumb is to keep the mortgage interest payment the same, if mortgage interest rates go up 1%, a house price has to go down about 10% to keep the mortgage payment the same.
Now think about it.
In the last 12 months, mortgage interest rates have risen 3%, roughly.
So 300, think about gone up 3%.
In a vacuum, that should lead to a housing price decrease of about 30% to keep the same payments for the same house.
Well, that hasn't happened.
Housing prices have gone up way above the rate of inflation in the face of that.
So, again, we kind of have a little chart that we follow against trend line, and it looks to me like a significant price correction is very possible.
And again, real estate is all local, so every market will be different and the like.
But on a national basis, that concerns me a lot.
In the housing crisis, it was the mark-to-market policies that didn't force the bond issuers and holders and traders to do anything about the underlying assets and the bonds.
Right now, the mark-to-market is the sellers haven't adjusted the asset values yet, which is the average American that's trying to sell their house right now, but they're about to be forced to because they have no line at the door for open houses the way they had 18 months ago.
I think that's the case.
And I should close the loop on one of the differences between this time and the 2007 and 2008 financial crisis is that this time there's not the same risk out in Wall Street and the securitizations.
Thank God.
So we don't have that one.
But what we don't know, and I want to circle back on this, is that there is the new type of, I'm going to call it derivative securities out there that have only been established during an up period in the markets.
And that's the phenomenal growth in ETFs, which have gone from virtually zero up to $7 or $8 trillion.
And these are non-regulated, and they're all properly, we think they're good design, but they've not been stress tests.
And so we don't know what all the leveraged impact of both the creation of debt and all of these securities and ETFs that may be tied to inverse floaters on this and that and this and that.
How does that really perform if we get into a chaotic market?
And just like we missed it in 2007 and 8 about how securitizations would perform and the house of cards that it had with credit default swaps with AIG and all this other stuff, that came tumbling down and everybody was kind of surprised.
I just have to remind everybody that the non-regulated financial services sector now is much, much greater and growing much faster than the regulated banks.
And so I don't see in the near term regulated banks being in a major problem.
They got good capital and I think they're going to weather just fine.
But the overall financial system of how these other products perform when, you know, if we start getting a piercing of some of these asset bubbles, nobody knows.
I'm kind of concerned about that.
So it means like CDOs by any other name?
Yeah, but yeah.
I mean, it's just, look, people learn how to slice and dice and do new products, and they all look really good when the markets are orderly.
And when you start taking away real orderly market prices, the ability of these products to perform well can be a real problem.
And we saw signs of that when COVID hit.
You know, in fact, on the good news, I mean, the Fed had to step in and guarantee a whole bunch of stuff.
You know, it started to step in and guaranteeing in stabilizing small business loans and municipality loans and just a much, much broader group of assets.
From a long-term policy side, I think there's a problem because all of a sudden the government's saying, yeah, we'll step in and guarantee things on a broad basis.
And that takes us down much more of a socialistic course than I think our country really wants.
But it did stave off a major problem.
And so the other difference I'd say today versus 2007 and 2008 is the Fed and the government know that they cannot withhold liquidity and create the same problem that they did back in that time.
So I think that we have learned from that one.
So I guess the question becomes how much of this is going to bleed into the stock market.
Because if you go to that article from Insider, U.S. stocks just suffered their biggest one-day decline since June of 2020.
Here's why an inflation surprise tanked the market.
So this is from Insider.
Dow slumped 3.9%.
SP 4.3%.
NASDAQ tumbled 5.2%.
Investors also sold bonds, oil, gold, cryptocurrencies in response to a bleaker economic outlook.
The frantic sell-off was sparked by the release of U.S. inflation data on Tuesday, which showed that in August, the CPI rose by 0.1% month on month, compared with the expectation of 0.1% drop.
In contrast, year-on-year inflation came in at 8.3% from 8.5% in July from the 40-year high of 9.1 in June.
Faster month-on-month inflation signaled to investors that the Fed was unlikely to curtail its rate hikes anytime soon.
It also fanned concerns that the central bank would approve a bumper rate of 0.75 basis points or over 100 basis points in September meeting, and interest rates might peak at a higher level than previously expected.
So Dow right now is at what?
Roughly 31,000, give or take, right?
I think it was at 30-something yesterday, right?
31,000, 30.
It's at 31 right now.
Okay, it's at 31 right now.
And this goes to both of you guys.
How bad can this thing get?
Okay, if you go to a five-year, go to a five-year, click on the five-year and go up a little bit so everybody can see it.
Five-year low is, take that out.
That doesn't count because that's the fear of COVID.
So 19.1.
Let's take that one out.
That's a real number right there in 2019, 22.4.
And then if you go to the last one, there is 22.2, right?
That's only five years ago.
So we can say 22 was the low in the last five years.
And the high that we hit was what?
36 and change, 36.5, something like that.
Okay.
So how low can this thing go from where it's at right now with 31.1?
If we keep getting reports like the one that came out a couple of days ago, how low can this thing go?
I'm over and under at 28.5 right now.
Just looking at it, that's my over and under right now.
What's your watermark?
What I've found is, again, we do a trend line about where we think reasonable value is and where are we in relation to that.
And that trend line reflects earnings, you know, where the earnings growth are, where's the earnings relative to the GDP of the country, where it is relative to cyclically adjusted earnings, all those kinds of things.
Those measures would say that we are about 30% above trend line, 20 to 30, somewhere in there, which might be consistent with what you indicated there.
And that's the problem and why I just don't know exactly what to put there with that answer to that question, is that when you get into a sell-off and you get into any kind of a crisis, that's caused by a shock of some kind.
And you often go well below a trend line.
Yep.
And I'm just trying to keep making the points on several of these asset categories, particularly residential, real estate, commercial real estate to a degree, a little less, but still.
And with stocks, all of those are well above their trend lines and are vulnerable and could easily have those kinds of 20, 30% corrections.
Can you go to MAX?
Go 10 years.
Go to MAX and see if we can do 10 years.
It's not letting you do 10 years.
What is 10 years ago?
I'm so curious.
So 20, okay, right there.
All right, 13,000.
10 years ago, that was at 13,000.
And it went all the way up.
And then the drop right there.
So it's been so the economic expansion started when go to 08 Economic started crisis.
Yeah, so from there, look what's happened.
It's just gone up.
And don't even look at that COVID thing.
That's fake.
That's not real.
That should be erased, right?
Because that's just the major dip.
No, that's not real.
That's fake.
That's the when you know.
So just fill it in.
It keeps so just keep going up.
That's not real.
So if you go back to go to 1994, go to 1990.
Okay, right there.
It's fine.
1994.
Okay, so what happens?
From 94, it's what?
36.
It goes up to what?
Keep going, It goes from right there.
It goes up to 10.7.
36 to 10.7 is what?
30.
10,000.
Yeah, it's 2,000.
Okay, but now look from 10.8 to go to 2007.
Go back a little bit, go back a little bit, go back a little bit?
Pretty flat.
It's flat for a decade.
If you look at that, that is flat for one decade.
And then all of a sudden, boom, it goes up from 10,60 to how high does it go?
13 or 15?
No, no, right before that.
Yeah, so 13, 3, 13, 14,000.
September of 7th.
And then it drops to how low right after 08?
7,700.
And it goes from 7,700 in 09.
Remember, that was 50% of the time.
But this is the part from $7,700 to $36,000 in 14 years.
I mean, the GDP, we haven't grown four times.
We haven't grown five times.
So I don't know.
I'm not here.
You know, this podcast changed a little bit.
People right now are probably going to having to go to the bathroom, but, you know, you might have a run on the bank.
Yeah, it may be like they're at their job.
They just drop their phone at their job and boss is tapping them on their back and saying, don't touch me, Johnny.
I'm an important podcast with the CEO of WAMU.
That's right.
It's not a COVID toilet paper shortage anymore.
It's a market toilet paper shortage.
But all I'm saying is, all I'm saying is for something to grow that much, okay, so from 11,000 to 36,000, 3.6 times, 3.5 times.
Have people's salary increased 3.5 times in 14 years?
No.
What was the average income in 2009?
Just go look up the average income, average U.S. median income in 2009.
Use median, not average.
Median income in 2009.
Let's actually see it.
Median income 2009.
Okay, which is $51,000.
What does it say?
Zoom in a little bit so we can see it.
$51,000.
Fine.
What is it?
That's household, though.
That's household.
Fine.
Go use that one.
Use the household.
Same exact comparison.
Bring it today.
So it was what?
Household was what?
50.
Yeah.
You can put in individuals and see what happens.
Okay, so 51, fine.
Go to 2022.
What does it say?
Yeah, their income didn't go to 118.9 million.
Median income.
Right there, hit that.
What does it say?
79.7.
That's an increase of 40%.
That's family income, though.
That's important.
That's a household income.
Which one's the household?
Yeah, that's exactly what we're comparing.
59 to 79 is a 40% growth.
Okay, 38% growth.
Fine.
Life around you.
Gone up 3.6.
This isn't real, guys.
This is fake.
You just have to understand.
This is not real.
Everything is financed.
It's not sustainable.
I mean, you know, so anyways, I don't know.
For me, when I sit there and some people ask you and say, how low can it go and how high can it go?
Are you able to afford a product that was a certain price 3.6 times more?
I don't know.
So when you look at this, we're having this conversation yesterday with Papa John was sitting here yesterday, former founder of Papa John, Billionaire.
Papa John was sitting in Schnatter and we were having this conversation.
And he's explaining, Calf, it goes to this place.
I'm getting paid high dividends.
If it goes to this, I'm getting this.
If it goes this slow, I'm buying this.
And he has this one thing that he would buy.
So data is not looking too good on what's going to happen with the marketplace the next six, 12, 18 months.
You said 6, 12, 18 months.
Obviously, nobody can predict it.
And to keep dry powder means things may be even more on sale the next 6, 12, 18 months.
And do we translate your 30% above trendline to apply it, say, to a market index?
So you would be looking at that 31 really at a 23?
Yeah.
Look at when, as I mentioned, I think the best way to look at the overall market is what is the market selling at in relation to the GDP of the country?
And what is it?
They call the buffet ratio, by the way, because he thinks historically that's been the most predictive way to look at it.
And another one, which we like a lot, is to compare it to cyclically adjusted earnings.
And that tells you is it growing along with winter?
And what's happened is with Federal Reserve keeping easy money, low interest rates, and there's quantitative easing, they've just bid the prices up.
So you're paying a lot more for earnings, a lot more for the GDP than you ever did before.
And that's just in the long run, that's hype.
So the translation is when you print a bunch of money, there's too much money, and you're actually devaluing the dollar, so therefore the asset price goes up.
Yeah, I mean, that's clearly it.
And I'll say on this side, by the way, we didn't get into it, but I think that one of the notions that has been disproven badly is that they called it modern monetary policy, which was a Ponzi scheme of saying it's okay for the federal government to go spend unlimited amounts of money because it can print unlimited amounts of money.
And it did that for a little bit.
And that's part of the reason we justify these trillion-dollar-plus annual budget deficits.
Guess what?
Nobody, now they figured out that, oh, you do that very much.
Maybe you're going to have hyperinflation.
And hyperinflation is now hitting us right between the eyes.
And again, it isn't going to stay at 8%, that's for sure.
But do you think it's reasonable that it's going to stay above 2% or 3%?
Yeah, for a while.
I think it is.
I think it's getting very embedded now.
So don't expect interest rates to fall from here, guys.
I think it's going to have to keep going up.
And I think the Fed's job is going to be the toughest job that they've had in decades.
You think the right guy's in there right now?
Jerome Powell?
Yeah, look, I think if he keeps a backbone, look at the Fed was always supposed to be the party that showed responsible take the, you know, slow the thing down when it gets to when there's too much going on at the party.
You know, instead, the Fed over the last few years, particularly before Powell, spiked the punch rather than taking the punch bowl away.
And it's a better party when you spike the punch, though.
You know that.
Well, you're there.
How's it feel the next day?
Now you're talking my language, Carrie.
Now you're talking about who's woken up.
Don't just give me regular old punch at the party.
Yeah, well, see, but today we're waking up.
Where am I?
Where am I?
This is the next part.
Who are you?
These two girls in the middle.
Let me read this next one here.
If you want to pull it up right there, where it's a complete different story here.
I'm curious to know what he's going to say to it and what's your feedback going to be on this one, both of you guys.
Page four, where it says a crash of the U.S. housing market is very unlikely, even as mortgage rates surge to 14-year highs.
Markets insider, this is a story from yesterday, pandemic home buying hotspots like Sacramento and San Jose have thrived over the past few years.
But as fears of an economic recession spread, they are now most at risk of facing a housing downturn, according to Redfin.
The U.S. does enter a recession, we're unlikely to see a housing market crash like the Great Recession because the factors affecting the economy are different.
A senior economist at Redfin said in a housing report, but a recession or even a continued economic downturn that doesn't reach recession levels would impact some local housing markets more than others.
Redfin researchers looked at several indicators to rank cities on their chances of a housing market downturn in the case of U.S. recession.
The fear in this case is that as the broader economic tightens, some home values may decline, leaving homeowners holding a mortgage far more than the value of their investment.
Do you guys agree or disagree with this?
Go ahead.
It is a fact that if I don't sell my house and I've got some equity, but on my street the prices are going down, my available equity, if I go to any lending institution, just went down.
And so do I think it's going to be a crash?
I don't think it's going to be a crash, but we just talked about it already.
I think the scissor pinch is already coming.
And we're seeing it.
We're not speculating on it.
We're looking at real data.
And so crash like 08, no.
But are we about to see these prices go down?
And I want to know the motivation of the author here.
What point are you trying to make?
Because there's a conflict in there.
Because even if the prices go down a little bit, Pat, the guy with the equity now has less home equity to redo the kitchen and the bathrooms.
So you don't have to be in the market to be impacted by a diminution of values.
I think that's totally correct.
And I think, you know, back in 2007 and 208, Chair Fed Bernanke was very public in saying he did not see a problem in housing, even after it started going down, and made the note that not since the Great Depression had housing prices on a national basis ever fallen at all.
Because it hadn't.
The only time it fell nationally was in the Great Depression.
So that gave them a lot of comfort that housing was going to perform much, much better than what they ever thought.
And again, that turned out to be a mistake.
And I think housing should have fallen 10 to 20 percent nationally.
It was about that overvalued, in my opinion.
And it went more than twice that because they let the liquidity crisis come and they just went into free fall.
I don't think that latter risk is here this time.
But I do think that prices could easily correct in some of these markets by 10 to 20 percent, maybe a little bit more.
But I think the Fed and the government will avoid going into panic mode the way they did last time.
And I think they'll make better decisions and not cause that hyper falloff.
Hopefully you're right.
I mean, look, I do want to talk about rent because a lot of people are also right now going through the rent challenges.
So this is from reason.
Latest inflation numbers show that rent is too damn high.
Inflation continues to ravage America's paychecks, and it's increasingly shown up in rising rents.
The latest consumer price index by the Bureau of Labor Statistics shows that prices ticked up by another 0.1 percent for urban consumers in August for an annualized increase of 8.3 percent for the year.
The marginal increase in inflation comes in spite of fuel costs falling 10.3 percent last month.
Increases in the shelter, food, and medical care indexes were the largest of many contributors to the broad-based monthly all-items increase at the BLS and the news released today.
The latest CPI shows 0.7 percent increases.
And it continues to say spot rents reported by listing companies are growing at even a faster rate.
Apartment list reports a 7.2 percent increase in rental prices so far for the year.
That's moderate compared to the 17.6 percent increase in rents the company reported in 2021.
It's still well above pre-pandemic increases from 3.4 percent and 2.3 percent in 2018 and 2019.
Is this going to come back down or is this going to stay steady when it comes down to in regards to rents?
Well, rents are rising at a high level, but they still do not reflect what's going on in the pricing of overall housing.
Now, the rents haven't increased as fast as the price of housing nationally.
So you're going to have a catch up where rents are going to keep going up unless, you know, but if housing prices start to fall off, then you'll see a moderation in the rent.
And the other thing that's going on in our country is that individual homeowners are increasingly getting squeezed out of the markets.
So more and more of the housing units are getting purchased in bulk by investors.
And those are then in turn are being rented.
Now, that'll be interesting to see what kind of returns that is.
Maybe the guys doing that now are kind of buying at the peak and it may not work for them too well from that standpoint.
But as a country, if we start getting more and more of the units into rental and fewer and fewer people able to own homes over time, again, that ability to amass equity and the American dream and all the kind of things that housing has traditionally provided for average income people is going to go away.
And right now, again, affordability of housing is the worst in some decades.
So we're going to see immediately that fewer and fewer people can get in and actually afford and to buy houses and all that until these prices correct somewhat.
An insider just said, T.Z. Burton, he says, I'm a landlord, but I haven't increased my rents yet.
My costs have gone way up.
So some of these guys are also seeing their costs going up.
So they kind of have to pass down the rent to somebody else.
And I just looked at Blackstone.
I think you were referencing Blackstone when you're saying some of these guys are just picking up left and right what they're doing.
It's going to be interesting to see if their model works long term.
But for them to be where they're at and continuously grow the way they have, it's Larry Fink, right?
Is that who it is?
I know, Larry.
Yeah.
So they, again, one of the hardest things to see is when one keeps winning over and over and over and over and over again, how do you manage blind spots to make sure you don't think you're untouchable?
That's the stress test you explained.
Everyone's going to be stress tested the next six, 12, 24 months.
It's going to be so interesting to see what happens.
You know, how real estate is going to do, how insurance is going to do, how finance is going to do, how crypto is going to do, how media is going to do.
The stress test the next six, 12, 24 months will be fascinating to watch.
But look, we've come to the end of the podcast.
I want to give a shout out to a couple of the super chats here on what they did.
DL Saints, I really want to know podcast that he gave $100 outstanding content, brother.
I hope people are paying attention.
The Tate interview was legendary.
You are truly leading from the front.
Awesome.
Thank you, brother.
Appreciate you.
Also, Airborne.
And then we had another person talking about, I want to say, let me see if I even took a shot of that.
If I took a picture of that, if I didn't, maybe I didn't.
Here we go.
Paul said, why do most not see this?
I made more money selling my house last year than any bank that held a mortgage on it.
I'm a high school dropout and could see the massive debt and looming housing problem.
Why don't others?
That's a good question.
Why don't others see this happening?
Why are so many people optimistic saying it's not a big deal?
It's going to be fine.
Well, I just think it's human nature.
When things are going up, y'all get pretty generally feel really good, get excited, and that's what leads to cyclical peaks.
I think we've seen that peak now.
And I think we're going to start to see much more of a balanced commentary and people seeing the, you know, once things start leveling off and then heading down in some markets, if indeed that happens, I think you'll see kind of a groundswell of people seeing the emperor may not have his clothes.
I mean, that's all, I mean, I've seen that cycle after cycle that when you get on board and go either positive or negative, it's easy to just stay on that too long.
So you're saying buy a bigger rope for the emperor.
That's what we should do.
Just cover him up a little bit.
Cover him up a little more.
It's okay.
Fantastic.
Well, this was great.
And by the way, I think I made a comment earlier saying Larry Fink from, I said Blackstone.
I want to say it's Black Rock.
That's my apologies.
These Black Rocks and Blackstones.
I'm reading a book right now that I just finished, How to Invest by David Rubinstein.
I don't know if you've read it.
It just came out.
Fantastic look.
David's going to be on the podcast, I think, next month or the following month, but he's about to be on the podcast.
I love how Carrie has just gone.
Yeah, I know.
I know.
He's in the world.
He's in the world.
We used to see him over at Davos.
At Davos, of course.
I mean, listen, this is the CEO of top five banks.
You're not talking about like a regular bank.
WAMU was 330, 320.
So anyways, gang, again, I know it's a very weird week because this week, the guests we've had have been very confusing for many of you.
We started off with interviewing Richard Gage, who was talking about how 9-11, the building, there was, you know, demolition and explosive things in there.
Then in the afternoon was Andrew Tate.
And then the next day it was Papa John.
And then today we have Senior Wamu.
Very confusing.
But again, sometimes I talk about topics that interest me.
Today, this was a selfish topic.
It was purely for me.
I've heard you've been Wamu a billionaire.
I've been talking about him for a while.
I'm glad we were able to do this.
And by the way, I'm not even the real estate business or mortgage business, but if anybody is, I guarantee you, they're all saying that you see today's podcast, even though it's a niche community.
For sure.
This was a podcast that helped them out a lot.
So we don't have a podcast tomorrow.
No.
May have a very special podcast next week.
That's true.
May have a very special podcast next week.
People should be ready for it.
Oh, really?
Like that?
Look at the title.
Is that how you talk dirty to people?
Now it makes sense.
Why do you think the old lady likes you?
I got to show this afternoon Sauzkast.
We may have a special evening next week, baby.
The Tyler, the way he said, I'm like, what'd you say?
I got to show this afternoon.
He's going to be time in two weeks.
Really?
Adam is finally working.
This afternoon, he's got a podcast.
Well, we've been working hard at the vault.
We've been in Madrid with Tate.
Who you got today?
A bunch of lovely ladies.
We're going to talk about what the role of a woman is these days versus the role of a man.
Reaction to Andrew Tate's interview.
Tune into the SOSCAST.
There you go.
We are today, 4 o'clock Eastern.
It'd be spicy.
Okay.
All right, gang.
Tune in.
He's going to have his podcast going on later on today.
