First, I'm struck with how many times in the early presentation Perry refers to Indymac stock as "my stock." This particular sickness seemed to afflict other bigshots at large sleazeball morgtage companies like his buddy Angelo over in Thousand Oaks. I get queasy when I hear CEOs repeatedly refer to the company, the stock, the employees, the corporate jet, and all the other stuff as being "mine." No. Sorry, that's not the way it works. When you decided to go public, it stopped being yours and became "the shareholders'."

I generally don't like to own stocks of companies whose CEOs think this way. There are pros and cons to being a public company and one of the cons (from the founder/CEO's perspective anyway) is often that it's not theirs to do with as they wish. Doesn't matter if it's Angelo Mozillo, Mike Perry, Patrick Byrne or (more recently) Dick Fuld. If you don't like the fact that public markets aren't specifically designed to reward you first, then don't participate in them. And don't expect me to participate in your stock, at least not on the long side.

The other thing I note is how many times Perry jokes about the whole subprime meltdown being "my fault," and feigning responsibility while using virtually every other minute of his speech to explain why it was really out of his hands. How investors demanded assets to buy and they had no choice but to create exotic financial products regardless of the soundness behind them. How 80-20 piggybacks were really a great thing until... oops... a whole bunch of speculators actually lied about their actual residence status to obtain loans that they didn't qualify for and... ooops... somebody never actually checked. But he never says that is his fault. After all, the market forced him to do it.

But I digress. And get ahead of myself.

At 2:20 into the video (and please, I may be a few seconds off, if you can't deal, GYOFB):

The mortgage industry is clearly a boom and bust business.

Now, I can argue the point and suggest that if it weren't juiced by endless liquidity pumped out by politicians and quasi-politicians (like Greenie and Bernake) that the booms wouldn't be very pronounced and the busts wouldn't be so painful. Be that as it may, the fact that this is apparently the case would tend to suggest prudence, careful risk management and avoidance of questionable lines of business would be necessary. It's one thing to take some risky bets if you have a stable cash cow on your hands. It's another entirely when you live in a boom and bust world where you can get killed during the bust periods. Oh, but it would probably not be so good for "my stock" when things are booming and everybody else tosses prudence and risk management out the window. Which I suspect is really the root cause of all of this.

Then at 3:50 he backs up and give a little background about Indymac. He tells the that for the first month of the company's existence he didn't actually write any loans. He was busy with such apparently unimportant things as a business plan, infrastructure, systems etc. He was rebuked by the Chairman at the time, David Loeb, who essentially told him to start lending or be fired. And Perry's response:

I will fund some loans!

So, from month one the die was cast. Having a plan, systems, risk management procedures, in fact just about anything was secondary to writing loans. The company existed to write loans come hell or high water. Prudence? Risk management? Fiduciary responsibility to shareholders? Forget them. Just write loans. And Indymac did. The founder/CEO pretty much admits it.

At 5:55 into the video Perry discusses the bank's first bust, during the Asian crisis in 1998. He goes on to note about the current crisis that:

It's amazing to me that memories are so short... They didn't learn the lesson that in this business you need to have strong funding and liquity is king... Liquidity is never important until you need it... It only took me one time to learn that lesson.

Guess he didn't learn it all that well, no matter what he said nine months ago.

Around 12:15 in, he sort of blames Greenspan, all the while joking about being responsible himself. Of course, he's right on both counts. He notes that after Greenspan made his now-infamous comment about innovative financial products being beneficial, mortgage brokers around the country frequently used that simple quote to justify and push ARM loans to customers. Implied, but not stated, is that people like him and his counterparts at Countrywide, Ditech and all the rest were quite aware of how nicely the Federal Reserve was doing in helping them to sell crappy loans to people who couldn't afford them, yet they continued writing them with a wink and a nod, not allowing those truths to get in the way. After all, as noted at the top, the objective was to fund loans. Prudence be damned. Long term shareholder interest be damned. After all, Greenspan said it was OK, so who could question the practice?

At 12:50 we get another lame excuse:

In an unfettered market, things go too far.

Actually, no. In a truly unfettered market, one in which the government doesn't guarantee your crappy products and doesn't shove liquidity down your throat, where your own money is on the line and you can actually lose everything if you're not prudent, things don't go that far. Things went that far because Perry and his ilk thought that ultimately, they'd be bailed out of any problems. And they constructed models and statistical edifices that "proved" that something as minor as a 3% decline in home values was a "six sigma event," that would happen only once or twice in the history of the universe. And eventually they believed their own hype and rationalizations so long as "my stock" was doing fine.

At 15:15:

Goldman Sachs is forecasting that we're going to see home prices decline 7% both in 2007 and 2008. I probably think that's a little pessimistic.

Guess he drank his own Kool Aid.

At 18:39, discussing the 160 or so mortgage originators that had already failed and were documented on the Mortgage Lender Implode-O-Meter:

I liken it to, like, a nuclear bomb. They got killed by the bomb because they didn't have the proper funding source which is liquidity...

Nope. You lose. A "funding source" isn't the liquidity you need when tough times hit. You need cash or other verifiable assets. "Funding sources" tend to dry up when things go bad. Which is why huge leverage and no real assets is a bad idea. It's a bad idea to depend on financial guarantees and loans when you're a consumer, and just as bad an idea when you're a fiancial institution.

Now the question is, is anybody going to be killed by the radiation which is the credit losses that are coming to the home lenders that did the loans.

The fact that this was being posed as a question by the CEO of a top home lender just nine months ago is just further proof of how far into the sand (or into other orifices) some heads got stuck. Of course some of the home lenders, along with many who made big leveraged bets on the quality of the loans, were going to get killed! The question should have been, "what do we do right now to shore up our balance sheet, get rid of the worst of this stuff while we still can, and remain solvent, even if barely. Maybe if Perry had been asking the right question, he would still be the CEO of a troubled, but surviving bank, not the ex-CEO of what is now the ward of the FDIC.

At 20:20 Perry trots out the We Are Here slide, which I seem to recall he failed to correctly attribute, but I may be wrong. He notes:

I don't think this is going to be as big an issue [as some other people]...

He justifies his position saying that banks are more than happy to drop interest rates for people who are in financial distress, that if they just pick up the phone, they're going to get things worked out to keep them in their homes, because that's the best possible outcome for everybody. Of course, the truth of that matter was known even then, and is even more painfully obvious today: It's impossible to figure out who owns these loans, so just dropping the interest rate isn't always possible. And often there's a second mortgage and maybe a HELOC, all from different institutions with different levels of interest in a workout depending on their position in line to be repaid.

While the reality is that customers who pick up the phone can do far better than those who don't, the flip side to that reality is that for many of them it's a worthless exercise. Option ARMs recasting or hitting the maximum negative amortization, causing doubling and tripling of the payment can't be solved by lowering the rate by a small amount. And if you're cash-strapped with negative equity, it can be tough to justify sticking around at all.

This piece of the speech reveals either complete obliviousness to the reality of what was going on or an outright lie in an attempt to reassure the world that all was good. I'm not sure which, but in either case it was, in my opinion, practically criminal to make such self-serving and untrue statements. Where is the SEC when this guy spreads false upside rumors about his own company and business?

At 22:15:

Four million of them [new homeowners] came about due to product innovation... Now they've got a possibility to succeed... or fail... if they succeed at a 95% rate [ie only 1 in 20 defaults] over 30 years at a 4% appreciation rate... those four million create $1.9 trillion in home equity...

Now I really want to puke. I recall wanting to rush the stage and throttle the guy.

First, long term appreciation after-inflation, after expenses, after taxes, after depreciation rate is nowhere near 4%. Second, he fails in his "quick economic analysis" to account for the fact that for most of those new buyers in recent years, there is a 20-50% "haircut" off the top that has to be overcome slowly when the downturn ends and appreciation returns to normal. As any good trader knows, opportunities are easier to make up than losses. The losses that are being suffered by virtually all the new homeowners in shaky loans in shaky housing developments will overwhelm the next 10-15 years of those earnings that Perry blithely assumes will continue unabated.

And of course, any of them who are forced for reasons of work, family or other changes to sell in the coming years may find themselves shut out of homeownership for a long, long time. The same forces that greatly magnify the upside potential resulting from those "innovative products" also greatly magnify the losses. Whatever else happens going forward, we're not going to see $1.9 trillion in equity generated from those transactions over the coming years. Most of them will probably go back to being renters, which is probably what they should have been in the first place.

This is nothing but real estate industry propaganda. Effectively telling you that you're a bad person if you rent, and an even worse one if you only buy what you can afford with 20% down.

But according to Perry, the $1.9 trillion in "projected" home equity created is "the story that isn't told." Perhaps it's not being told because that $1.9 trillion came from exactly the same place as Enron's "mark to market accounting" profits, which is the same place I think Perry's head was probably stuck.

At 27:50

We got into these 80-20 piggybacks where they were designed to make up for the fact that FHA limits weren't keeping up in markets like Southern California and you were providing jumbo financing at almost 100% to first-time homebuyers... What happened was speculators came into that and lied about their occupancy status and were just in there flipping homes... Angelo Mozillo was telling me he said he sees a lot of thirtysomething... uh, kids and they're in there doing it like they're betting on stocks...

I don't know where to start with this pile of drivel, but I'll start from the beginning:

• On what planet is giving a second loan on top of a maxed-out agency loan, with virtually no downpayment to a first homebuyer, considered good business? Oh yes, it's a planet on which you get paid for writing loans, and nothing matters except "my stock," right now.
• Speculators lied. Oh my god! How could that have happened? People actually lied! With all the talking about how things are all your fault, there seems to be lots of blame to go around. How about reminding us that it was your fault that you couldn't even be bothered to figure out where the person lived, if he had another home, or if maybe even he was running multiple blogs telling people about how much fun he was having in the real estate game.
• You needed to have a conversation with the orange-tinted one to be aware of the flipping phenomenon? Were you really that out of touch? Or did you just buy into your own hype because "my stock" was going up?

At 29:15 Perry explains quite clearly why there was no good disclosure.

If you scare the living heck out of them, they're not going to buy the home!

Damn straight. Which is why my grandfather didn't buy a home until his business was stable and he thought he could afford it. And even then my mom's family spent a couple off years living in what was a lightly-insulated house designed as a summer escape because of a business failure and they barely made it. He knew and understood that buying something that could only be paid for with years of income was not a decision to be made lightly, and the financing of such a purchase was something that could break him. He knew when to be scared and rightly so. He also never lost anything to foreclosure. Maybe that sort of fear is a good thing. Oh yeah, not if your goal is blindly funding loans so the transaction numbers look good and "my stock" goes up in the short term so you can sell it before anybody else catches on.

At 30:00 Perry takes on the ratings agencies:

That is the most incompetent group of people in the US in financial services, is the group at the rating agencies.

Wrong. They weren't incompetent, they were merely corrupt and Perry was the corrupter. For a guy who jokes about it all being his own fault, he sure is one to shove the blame at others. Despite the hype and the blame and the personal put-downs of anybody who worked at a ratings agency, Perry knows exactly what would have happened if one of those "incompetent" ratings agencies had given one of his securities offerings the junk-level rating it deserved. He would have simply found another ratings agency until one came along that wanted the fees badly enough to give him the AAA rating he wanted.

Starting at about 31:30 Perry decides to bebunk two of the "big myths" out there that he feels are being used to justify unrealistic fears about an ongoing collapse. His logic is so garbled that I won't quote it here, but I'll try to refute.

First, he tries to dispute the logic that median home prices should tend to move with median incomes. He uses Southern California as an example. Essentially, he says, everybody by the wealthy, whose incomes are rising most quickly, has been priced out of the Southern California market. So it's inaccurate to use the overall median income as the measure. When looking at the top 40%, he finds the median price increases to be reasonable. The others, he implies, simply can't afford to live here.

His logic (if you care to call it that) fails for a simple reason. The other 60% of people do live here. They rent. And the rent they pay is far, far lower than the payment they would need to make to purchase something equivalent. If that weren't the case, they'd buy something. Since those people are the ones closest to the edge and least tolerant of overpaying, they make the hard choice to remain renters. Only those with high incomes and lots of money to waste continue buying even though the buy/rent numbers are completely out of whack, as I noted during my local real estate tour with Nigel last month.

Nigel has noted that he's seeing transactions start to pick back up in those markets that have come down to the point where buying is once again competitive with renting. That will happen here too. Perry's tortuous logic can't change the simple fact that the reason prices went up faster than incomes is that people were willing to put more and more of their income into buying, using more and more exotic products, allowing them to pay more for a property that they could have rented for far less. They did this in part for the benefits of homeownership (some of which are real) and in part because of a perception that they couldn't lose. Now they're losing and they'll continue to lose until the selling prices come back into line with rental rates.

[And yes, some of the points Perry makes about a "barbell society" are true and to the point, but they don't change the basic math.]

Then for his final coup, Perry decides to go to extremes that should earn him a spot on Larry Kudlow's show for the rest of time. Hell, with an explaination like this, he should be a featured guest. In addressing savings rates, Perry goes on a Don Luskinish offensive that I quoted at the top:

Heck no they're not saving! Because their net worth is growing. If your net worth is growing, in financial assets and other assets, you can spend more than your annual income!

Funny thing about those "financial assets and other assets." Unlike savings (money in the bank or in treasuries), those assets can decrease in price just as they increase in price. When that happens, all the spending has to be cut back. Unfortunately, it's tough to do that, especially if the savings is going towards things that involve longer-term commitments like mortgages, college expenses, maintenance on vacation homes, car payments, etc. I guess once again Perry forgot the lesson that he claims to have learned the first time: Liquidity is never important until you need it. "Net worth" isn't liquidity, money in the bank is liquidity (OK, unless the bank in question is Indymac, in which case it better be below the FDIC limit of $100K or it's not liquidity either). There's a difference. Someday even Michael Perry will realize that.

-btc