Changing the industry mindset: History, influences and inspiration
It’s hardly commonplace for an event in the housing and mortgage industry to be built upon an academic or intellectual foundation. Then again, this is part and parcel of what differentiates AMERICATALYST (and its predecessors: EUROCATALYST and EUROPESERVICING) from the other events out there. Below, AmeriCatalyst founder and CEO, Toni Moss, explains the intellectual inspirations behind the event, and where some of its unique qualities came from. Along the way, she provides key insights into the historical development of the industry, and details how these insights allowed her to anticipate the market failures responsible for the unprecedented circumstances shaping our present and future.
THE REITH LECTURES ON “RUNAWAY WORLD”. In 1999, Professor Anthony Giddens, director of the London School of Economics (and largely considered the world’s most prolific sociologist), presented a stunning series of lectures which rocked the academic world: how a newly defined force called globalization was rapidly reshaping our lives. The five-part presentation series, titled “Runaway World”, was featured in The Reith Lectures on BBC Radio 4. To illustrate the widespread impact of globalization, each of these lectures was delivered from a different city across the globe, including: Globalisation: London, Risk: Hong Kong; Tradition: Delhi; Family: Washington DC, and ended with Democracy: London. These broadcasts were just the beginning of the international conversation on the interconnected forces swiftly transforming our cultural environment.
...and its influence. I got hooked on the phenomenon of globalization after reading Kenichi Ohmae’s book The Borderless World in a political science class during college; since then it has become one of my life pursuits to understand its impact on the housing ecosystem. By 2000, “globalization” was a pervasive “buzzword,” yet no one could fully define what it was. What differentiated Giddens’ approach was the way in which he defined it as a synchronous set of forces (social, cultural, political and economic) as opposed to one dimensional change (economics or internationalization). In his series, Giddens describes how these forces change every aspect of our lives from the micro level (our families, ourselves, our identity) to the macro level (multinational corporations, nation-states, and the economy). In this way, globalization has created a world so complex that it is beyond our control and understanding.
Based on my previous career in housing finance and my work in 18 (by that time) European markets, Giddens’ lectures led me to recognize that housing--and the finance of it--has the same ubiquitous micro-to-macro weight on a singular and social level. Notwithstanding the universal need for shelter, for most aspiring homeowners a mortgage is the largest amount of money they will ever borrow, for the longest period of time. Not only is It the axis of their overall financial portfolio, they will spend the majority of their working lives paying it off. At a societal level, mortgages have long been the anchor product for all financial institutions throughout the world. At national economic levels, outstanding mortgage debt typically exceeds at least 60% of the GDP of every Western country in the world. And at the global macroeconomic level, mortgages and real estate were, by 2001, the single largest asset class in global capital markets.
But changes were occurring on all these levels far earlier than this time. By the mid-'90s, securitization had become a global (as opposed to purely U.S.) endeavor, and countless financial institutions began commodifying and leveraging their mortgage assets in order to access global capital markets. The more these products were embraced by the global investor community, the more complex and obtuse the issuance structures became. As mortgage-related investments and house prices around the world significantly increased, it appeared to me that mortgage markets were becoming, in essence, the epicenter of the global economic faultline.
As the forces of globalization continued to accelerate the linkages between financial institutions, it also magnified the systemic risk of over-leverage in a single asset class which would inevitably rupture. Were that to happen, I believed that it would be a global phenomenon that would profoundly change the world, and that we should get all industry constituents together in one place to take a closer look.
Because globalization is ultimately unstoppable, this is why it continues to be the context of of our event and why our program is focused on how its forces are reshaping the housing ecosystem.
So, we adapted Giddens’ idea to hold his lectures in different cities, and began a mobile event to address the reshaping at hand. We moved our forums to a different country each year to show how globalization (and the not-so-invisible hand of Wall Street) was driving change in all housing markets around the world. Our initial event, in 2002, was held in Madrid because I believed that Spain would get hit worst were the implosion to occur. EUROCATALYST 2003 was held in Lisbon, as Portugal was the largest issuer of MBS in Europe that year. EUROCATALYST 2004 was held in Berlin to highlight (much to their chagrin) the implosion of German banks that year.
We moved EUROCATALYST to Rome in 2005, the year in which Italian issuance and debt reached its highest level. Fearing the worst, that year we also launched an additional event, EUROPESERVICING, to bring attention to the urgent need to improve the servicing operations of European banks and market players.
By 2006, we decided not to hold EUROCATALYST at all and instead dedicate our efforts to servicing, emphasizing the need for default servicing. We held EUROPESERVICING 2006 in London at the British Academy of Film and Television Arts, and themed all sessions to film titles. Our closing session was “Crash: When Wall Street meets High Street in The City, which way do you turn?”
In 2007, EUROCATALYST was held a final time in Europe, back in Madrid - one month after the liquidity crisis of August 2007 that led to what everyone still calls “the crisis”. The problem with calling it a crisis is that it implies a beginning and an end. There is no “end” to this. It was not “the perfect storm” as most analysts referred to at the time. It was climate change.
THE BURNING MAN PROJECT. The Burning Man Project is a highly participatory annual gathering in Nevada’s Black Rock desert which celebrates the creation of a temporary city in which its members engage in radical self-expression and self reliance. The event is a dynamic and collaborative laboratory that changes every year in its themes, massive temporary installations, and villages. At the end of each event, a massive wooden effigy (“the Man”), along with practically the entire city, is burned to the ground.
...and its influence.
While no one runs around naked and sand-covered at our event, the participatory collaboration of Burning Man lays the intellectual foundation for the experiential focus of our event. In this foundation lies the greatest influence from the festival, its motto: “Not every experiment works, but we’ll never know if we don’t try.”
As I began putting the event together in 2000/2001, the Euro had just been launched as an electronic currency (January 1, 1999) and the Euro banknote was about to be introduced as legal tender (January 1, 2002). The world stood puzzled at what would happen as twelve European states ceded their sovereign destiny to a central bank with no political infrastructure to support it.
It struck me as the greatest social experiment in our lifetime, but one whose procedures appeared backwards: were they attempting to build a roof to a house who had no foundation? To me, the lack of calculation showed the extent to which globalization demanded urgent economic integration among smaller countries to compete in a globalized world.
Of course, not every experiment works (take, for instance, Brexit), but we’ll never know if we don’t try.
Burning Man also influenced my choice in playing “Burning Down the House” as the opening song for the event each year. It is a deliberate editorial commentary on the myopia of the housing finance industry in particular, and corporate behavior overall. It is also a warning about globalization and the havoc that it would (and continues) to wreak on an industry entirely largely unaware of--and therefore unprepared for--it. And, after all, our event is one featuring “talking heads”. At this point, you’ll recognize the editorial references:
“BURNING DOWN THE HOUSE” by The Talking Heads
Watch out, you might get what you're after
Cool babies, strange but not a stranger
I'm an ordinary guy
Burning down the house
Wait 'til the party's over
We're in for nasty weather
There has got to be a way
Burning down the house
Here's your ticket pack your bags
Time for jumpin' overboard
The transportation is here
Close enough but not too far,
Maybe you know where you are
Fightin' fire with fire
All wet, hey, you might need a raincoat
Shakedown, dreams walking in broad daylight
Three hundred sixty five degrees
Burning down the house
It was once upon a place,
Sometimes I listen to myself
Gonna come in first place
People on their way to work,
Baby, what did you expect?
Gonna burst into flame
My house is out of the ordinary
Don't want to hurt nobody
Some things sure can sweep me off my feet
Burning down the house
No visible means of support
And you have not seen nothin' yet
Everything's stuck together
And I don't know what you expect
Staring into the TV set
Fighting fire with fire
© Warner/Chappell Music, Inc.
ESTHER DYSON. The career and work of the renowned visionary and futurist Esther Dyson had an enormous impact on me. Most influential was her self-styled PC (Platforms for Communication) Forum: held from 1997 to 2006, the event featured the most important individuals and burgeoning ideas in the technology industry. Esther was, in fact, the primary catalyst for bringing Silicon Valley together, and continues to be the primary catalyst for gatherings in whichever sector she directs her interest.
As a friend and mentor to me, when I could not convince the IMF or World Economic Forum to do this event, Esther urged me to do it myself. She even participated in our first Madrid event in 2002 as our keynote speaker. Today, Esther is a leading angel investor focused on breakthrough efficacy in healthcare, government transparency, digital technology, biotechnology, and commercial space travel.
Note: The bio on her own website linked above characteristically downplays Esther’s achievements. For a more robust history of Esther’s accomplishments, see Wikipedia. One of the best articles about the power and influence of Esther Dyson in technology can be found in this 1993 Wired magazine article, Release
THE LONG NOW FOUNDATION. Established in 1996 by the most influential “digerati” in science, culture, and technology, The Long Now foundation strives to promote long-term thinking in today’s fast accelerating culture. As a counterpoint to what they see as the “pathologically short attention span” of civilization, the Foundation has established a 10,000-year clock as an icon for public discourse. In 2003, they established a series of Seminars with a narrative of long-term perspective, hoping to help make such thinking common and automatic rather than rare and difficult. With some of the most fascinating discussions amongst the most brilliant minds in the world, The Long Now Foundation is an extraordinary opportunity for anyone who wishes to participate. Participation is open to anyone who wishes to join, and I highly recommend doing so.
...and its influence. I am very proud to be Member 724 of the Foundation, and was introduced to it by Esther Dyson in 2007. The premise, activities and ideas have been instrumental in changing the way that I view the housing industry and its comprehensive viability and sustainability. For an industry that extends credit thirty years into the future, it is shocking that we possess no long-term planning committees or organizations. For this reason, in 2012, I established the 501c(3) non-profit AmeriCatalyst Idea Lab. While the organization carries many goals, the primary intention of the Idea Lab is to establish a long-term thinking committee focused on the viability, sustainability and balance in the housing ecosystem.
JOSEPH STIGLITZ. In his 2001 Nobel prizewinning work on asymmetry of information, economist Joseph Stiglitz (and his colleagues Akerlof and Spence) focused on imperfections of information, and how pervasive imperfections in information can lead to pervasive failures in the market. According to Stiglitz, one cause of these imperfections can be stated very simply but often goes overlooked: different people in a market know different things.
In applying this theory to mortgage markets, as early as 2001 it was already clear that the sellers, structurers and arrangers of mortgage-backed securities (and later, CDOs) knew more about the performance and characteristics of their portfolios than the investors who were buying them. The pace of deal flow led most investors to rely exclusively on ratings instead of performing their own due diligence - despite the fact that every single industry-wide MBS conference had sessions with both rating agencies and investors complaining incessantly about the lack of transparency and information in MBS transactions. (This also occurred at EUROCATALYST from 2002 up to 2006, and we have the video footage to prove it).
It is absolutely true that broker-dealers heavily engaged in “ratings arbitrage”--a strategy entailing the exploitation of competitive and profit-driven rating agencies by driving business to the agency willing to assign the highest rating to each deal. I explicitly called out the practice in the funding session description in our 2003 Lisbon program. We subsequently lost financial support from rating agencies (with the exception of FitchRatings) for the indiscretion of exposing it in black and white. Despite knowledge of this explicitly implicit practice, as well as increasing complaints about the opacity of MBS issuances, issuers rode shotgun up the LTV curve and down the credit curve around the world. Investors continued to buy, and investment banks forged ahead in building vertically integrated machinery for more mortgage product and volume around the world. Ultimately, investor pursuit of higher yields trumped the paucity of information and in 2007, Stiglitz’s theory was proven
GEORGE SOROS. The concept of “reflexivity” in social science was developed by the philosopher Karl Popper, illustrated in the work of Giddens, and applied to economic theory by George Soros. Reflexivity is a very dense topic, and difficult to summarize in this editorial. Suffice it to say that it is a way of understanding causes and effects in which the relationship between the two does not flow in just one direction; rather, the agents in any event affect each other bi-directionally (both the apparent causes and effects create each other’s existence). That is, perhaps neither what appears to be a cause or what appears to be an effect can really be understood so simply when investigated under the microscope of a critical mind.
Let us apply this to the changes we’ve undergone in real estate. In a real estate bubble, the precipitating trend has been cheaper and more available credit. What turns this trend into a bubble is the misperception that the value of the collateral is independent from the value of credit. In fact, they are not independent--their relationship is reflexive. The relationship flows both directions in that the more available the credit, the greater the increase in property transactions and the rise in house prices. The same is true for equity leveraging. Et voila: The bubble driven by cheap housing credit, the over-leverage of homeowners and financial institutions, and the globalization-driven interconnectedness of those financial institutions led to an implosion of the global economy.
In the case of mortgage markets, the predominant “efficient market hypothesis”, which states that all relevant and available information is represented in market prices, was not only discredited, but disproven. While Soros’ reflexivity theory continues to receive criticism from economic standard-bearers, I would point out that Soros’ theory predicted the “crisis,” and preceded it.
On April 30, 2008, my EUROCATALYST business partner (and EUROCATALYST event producer) Shirley Jackson and I had just wrapped up our last European event, EUROPESERVICING 2008, which was held in London. At that time, the unthinkable collapse of housing markets was gaining momentum in the U.S. and its effects were already in full force across Europe. For me, it was time to sell my home in The Netherlands and return to the U.S. after 13 years abroad. Although I had written to both Joseph Stiglitz and George Soros to speak at the EUROCATALYST event each year starting in 2002, Soros graciously sent other speakers from his organization to the event in his stead, but he never spoke himself. As for Stiglitz, my annual (and lengthy) requests went unanswered. I knew from the outset that my efforts could never stop the inevitable; however, I did feel a certain degree of disappointment that EUROCATALYST did not make a dent in stemming the tide.
Furthermore, because my ideas and vision--in essence, my body of work--were incorporated into the event each year (rather than in high-profile papers or public editorials), and because our events were not open to media, the only awareness of them was among our alumni. In the continual process of research for each year’s program and reaching out to new speakers who are entirely unfamiliar with me, my own history or this event, they most often assume that I am nothing more than “a conference producer” and know little to nothing about the topics or content. One can only imagine the frustration.
In those moments of frustration, I remind myself that this extraordinary occurrence actually happened: When Shirley and I arrived uncharacteristically early at Heathrow Airport for our flight back to Amsterdam, we ran downstairs for coffee at the Starbucks in the Arrivals area. While there, I noticed a chauffeur holding a sign with the name JOSEPH STIGLITZ on it. I went over and asked the chauffeur when “Joe” would be arriving. The chauffeur told me that he was expected soon but didn’t know who he was or what he looked like so I volunteered to find him. I disappeared into the arriving crowd and found an exhausted Stiglitz, fresh off of a flight from South America. I seized the opportunity to introduce myself, and blurted out, “I’m the one who has written to you for six years asking you for help in applying your theory about asymmetries of information to mortgage markets at my conference and you never responded and now look at what has happened! Where were you?” Smooth, wasn’t I? Joe stared at me for a minute, then a glimmer of recognition appeared on his face as he said, “Yes. Toni Moss. EuroCatalyst. You know, you were right! I should have been there.” As he walked off with his chauffeur, I turned to Shirley and asked, “Did you hear that? Tell me you heard it.” She assured me that she did, in fact, hear the whole “episode”.
As we went up the escalator to departures, I told Shirley, “Now, if only I could meet George Soros, these past six years would be complete.” Shirley responded, “I guess Stiglitz wasn’t enough, huh?” Well...not really. But, while showing our passports to security in the unusually empty and private British Airways’ Fast Track security area, one other person miraculously appeared. It was, in fact, George Soros. When I introduced myself, Soros was a bit confused. The previous year, I was supposed to have played tennis with him in Dublin but was turned away at the reception desk when the local pro realized that “Toni Moss” was actually a woman. Soros never knew that I had been turned away, nor did he realize that while I had been a professional tennis player in my youth, I was the same person from EuroCatalyst that had been writing to him about reflexivity and asking him to speak at our event for the past six years. Once he realized that I was the same person, he said, “You know, you were absolutely right. We both saw it coming. I hope you made a fortune trading on it.” He then shook my hand again, and patted me on the shoulder. As I watched him walk off to catch his flight, I thought to myself, “Made a fortune trading on it? Hell no, I just produced a damn event about it.”
P.S.: Seriously. What are the odds of running into those two in one place within ten minutes of each other? It’s too bad that there were no iPhones in 2008, and all I had was a Blackberry. Otherwise, I would be posting the selfies.