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More Mortgage Meltdown: 6 Ways to Profit in These Bad Times

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I as a Value Investor have known Whitney Tilson for couple of years now. I was eagerly waiting for this book, not to read but to store a copy for my best of best collection, reason being Whitney was very generous in sharing this state of art work through his newsletter (weekly emails) way back in Feb 2008. He has shared his views on the mortgage crisis long before anyone I know thought about it. Even if very few talked, no one shared a 60+ page presentation to general public without fees. I was very lucky to steer clearly away from the mortgage meltdown just because of the forewarnings generated by Whitney's email in Feb 2008. In this highly secretive hedge fund industry where manager's left hand doesn't know what his right hand is going to do, Whitney comes out as a selfless person who wants to give back to the society. He organizes a Value Investing Congress which I recommend every Value Investor to attend as it's very rare that so many great minds come together and share lots of good investment opportunities.

There are many books in the market which looks back in time and tell us the story of what has happened. This book is rare in the sense that the authors accurately predicted the crisis and made the presentation of mortgage meltdown (when the crisis was in its second innings) and issued a note that the crisis will need a full fledged Government intervention (when the word bailout was not heard off) to get through it. And later when the crisis was midway, wrote a book out of their original presentation. So not only the authors know about the mortgage crisis but they also knows about the accurate timing, magnitude, financial & emotional damage it has caused and many more things. This book accurately describes the fact that there is lot more to come and provide investors several key ways in which not only they can survive this meltdown but also thrive from it. The book touches every aspect of mortgage industry, cause and effects along with good investment tips. I don't want to be a spoiler to the new readers so will not say more about the book material but to recommend every stock investor to read the book at least once and take advantage of the great tips given by the authors. Book will be a good read for people who are still trying to understand how bundle of mortgages can bring down the entire world economy to its knees. Book is very simple, straightforward and has enough charts, tables and examples to make it easy to understand even for casual readers. All in all, great value for money and time and a must read!

This book is a great analysis of how we got ourselves into the mess that tipped the entire world into the recession. The authors have lots of supporting data to prove their points. The reader not only finds out the causes the mortgage meltdown, but also learns how to profit going forward. The authors present a case study of the following companies: American Express, Resource America, Long Beach Mortgage Loan Trust, MBIA Inc, and Wells Fargo. I highly recommend this book.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

The first half was an excellent analysis of the mess we are in and how it will only get worse. Second 1/2 advice was fair, but not why to buy the book. Should have had more evaluation of what happens as a consequence of this problem, rather than his case studies. Worth the first 1/2 but a bit disappointing after that. Read it, then HS Dent's "The Great Depression Ahead" and you will have a real game plan.

Whitney Tilson & Glenn Tongue "More Mortgage Mess-6 Ways to Profit in these bad times" (John Wiley & Sons, 2009)



"Why sometimes I've believed as many as 6 impossible things before breakfast." -Alice in Wonderland



This past decade has seen a massive, national collective hallucination take place in real estate and related industries that has infected the world financial systems and which will have lasting, if not permanent effects that are now unwinding slowly and with great pain.

Tilson & Tongue dissect this situation with insight, depth, mathematical skill and many original ideas in their new book. They are not timid and dole out giant scoops of blame to myriad guilty parties: the government (who repealed or loosened many laws and regulations), banks, the Fed (who kept interest rates artificially low, allowing real estate prices to bubble ever upward), the GSEs (Fannie Mae & Freddie Mac, who were allowed to speculate wildly), the ratings agencies (Moody's, S & P,), real estate agents & appraisers, and finally greedy homeowners.

Charles Mackay, in his classic 1840's Extraordinary Popular Delusions & The Madness of Crowds, a study of various scams, bubbles and manias including the South Sea bubble, the Dutch tulip mania, and the crusades, makes the point that the most dangerous phrase is always "it's different this time." Yet hope springs eternal and many folks spend their whole lives searching for the greater fool, very easily found in the USA of late.

Of the two T's, Tilson has been the more public figure, starting his first hedge fund in 1999, writing for various web sites, Kiplinger's, Forbes, and Marketwatch. Tongue has been co-manager of T-2 since 2004, having previously run DLJDirect, an online brokerage.

Split into two sections, "What Happened and Why" on mortgages and the wide variety of still worsening effects and "Profiting from the Meltdown,"which talks about stocks, bonds, and provides in-depth analysis of some major holdings at T-2 Partners, including Warren Buffett's Berkshire Hathaway, Wells Fargo, American Express, and a few smaller, lesser known stocks.


Inspiration and a lot of the information in their book comes from Amherst Securities' Sean Dobson, who taught the T-2 principles from his massive proprietary mortgage and related securities data bases.

"The US housing market had experienced a bubble of enormous proportions, and countless mortgages were defaulting at unprecedented, catastrophic rates," T-2 explains.

Pretty much any boom time in the USA (or the world, for that matter) is at least partly driven by some sort of scam, especially when uninformed people arrive late to a party already drunk.


Alan Greenspan's Fed, instead of "removing the punch bowl," as former Fed Chairman William Mc Chesney Martin described the chairman's job as being, dumped bottle after bottle of Ever clear into the bowl, resulting in a drunk, clueless populace who kept muttering their ever hopeful mantra, "real estate always goes up, if even a little..."

Then, if that wasn't bad enough, Wall Street, got involved: packaging mortgages, many written to sub-prime and no documentation clients that would never have qualified for loans in eras with more conservative lending standards, often driven by congressional and Presidential quotas to "get more people into houses," usually with no regard for the viability of the loans.

These were sold to individuals, mutual funds, institutions, and sovereign wealth funds around the world, rubber-stamped by ratings agencies as AAA, super-safe ratings that bore no relationship to actual risk assessment and cost them their previously sterling reputations.

Regarding options ARM loans, T-2 writes, "If one were to design a loan that would blow up the maximum number of homeowners the moment home prices stopped rising, an option ARM would be it." In their perverse, self-defeating styles, the states of California and Florid had by far the most ARM loans written.



"Florida has always been susceptible to the Wild West mentality. If it's too good to be true, we're going to be involved in it." -Florida state treasurer Alex Sink in George Packer's "The Ponzi State," The New Yorker 2/9/2009

This book is so dense with information, synopsizing is daunting but are two major points:


* After a decade of using their wildly overvalued houses as ATMs, extracting about $3 trillion (about 25% of the aggregate value of residential US housing), Americans, by 2007, had more debt (10.6 trillion) than equity (8.5 trillion) in their houses for the first time ever

* The collapse of lending standards, loaning more and more money to people with ever lower down payments wildly increased the risk of home owners who are underwater on their homes, losing their jobs and or unable to sell their homes, just walking away from their debts.

* As you may recall from the tech/internet/NASDAQ debacle, when bubbles burst, prices often crash well below the trend line and far well below fair value, which indicates real estate prices still have a long ways to fall, even without factoring in the eventual rise of interest rates, further foreclosures, rising unemployment and other negative factors that will contribute to their fall.


Which banks fail may well be a factor of clumping, luck, and randomness more than skill, in that the banks that survive are in a race to outrun their foreclosure and loan losses.

Tilson & Tongue dissect their holdings in Wells Fargo in depth and point out that we are "in the fifth inning" with there are many shoes left to drop (to mix metaphors) including commercial real estate defaults, as commercial is 40% of WFC's loan book. Wells' acquired sub-prime exposure via the acquisition of Wachovia, more lay offs in areas like Michigan, California, and Florida are also big factors. Wells Fargo sounds like both a great bargain, trading at 3 or 4 times normalized earnings and the next Citibank or Bank of America, a prime bankrputcy candidate.

T-2's math is very pro and can be a bit overwhelming in this book for the non-CPA but it is clearly stated and does become clearer on a second or third more careful reading. The reader is walked, hand in hand through the often intentionally muddy fields of accounting and corporate balance sheets. As Tilson & Tongue write, non in the least hyperbolically, "Wells Fargo is currently in a race for its life, trying to earn its way out. If big (loan) losses materialize quickly but profits are weaker than we expect, WFC will be in big trouble."

REITS (real estate investment trusts) are in even worse shape than banks, yet this isn't mentioned much in T-2's book but it brings up the question regarding both banks and REITS: can vital, much needed industrys fail in aggregate? US airlines and auto makers suggest it's quite plausible and what that means for the country is pretty much open for endless discussion but I doubt it can be good.

They also offer an in-depth look at Berkshire Hathaway, which they describe as "an unusual company and possibly the most talked-about yet least understood business in the world." Tilson has long understood Buffett's giant free cash generation machine and its proprietary advantages, penning his classic "The Last Bull on Berkshire" a decade ago when he & Alice Schroeder, then an analyst, were the only people in the mainstream press to get Berkshire. He and Tongue still do, and as they advise the reader, betting against Warren Buffett & Charlie Munger has never been a good idea.

They also advise buying beaten-down, super solid blue chips such as Wal-Mart, Exxon, Mc Donalds and Altria. There's a good section on shorting (T-2 say "most people should avoid it, to which I add an "amen.)

In conclusion, they offer a fine selection of worthwhile web sites and an exhaustive reading list well worth persuing.

This book is a rare and valuable exception. Most of the books written about historical events are published well after the events have unfolded and the outcome is known. As such, they might offer a great deal of knowledge from which to learn but not on which to act. "More Mortgage Meltdown" on the other hand, comes out in the midst of the housing bust and financial meltdown. As such, it not only does a wonderful job of educating readers on the factors that led to the problems we face, but also allows for the direct and timely application of that knowledge. Furthermore, its authors were able to gather, organize and synthesize massive amounts of data into clearly written and simple to understand thesis. It might very well go down as one of the seminal works on this chapter of American history, while simultaneously serving as a guide for investors of all types in what is surely a very challenging environment.

The authors have done an outstanding job when discussing the housing bubble and the resulting mortgage melt down. The graphs are particularly illustrative of the amazing future exposure the nation faces to defaults and foreclosures. The authors have made the graphs available in PDF form for downloading which I recommend..they tell the whole story graphically with succinct commentary.

Part two which purportedly deals with actions to take to take advantage of the mortgage meltdown is really not particularly helpful. The authors manage value hedge and mutual funds and spend the last chapters describing some of their investments (e.g. American Express, Berkshire Hathaway). Frankly, while I found part 2 interesting, it seemed more like a promotion for their funds and advisary letters. In a sense, I thought part 2 somewhat demeaned the scholarship and objectivity evident in part 1.

Notwithstanding my reservations about part 2, I recommend the book not just for those who are interested in the history of the burst bubble but for those who can see the opportunities and pitfalls the accelerating foreclosure pandemic presents.

I have just read the first part of the book and it is hard to put it down!! sounds so much more convincing and informative when a lot of detailed graphs, pie charts and tables are presented to explain subprime, Alt A, jumbo, option ARM, home equity, second lien and how everything have come together to create this financial meltdown.
And unlike the book "Dollar crisis- causes, consequences and cure" that is also very informative with graphs and tables but dry at some points, in this book there are plenty of extracts from interviews and newspaper stories in between the charts which makes it a lot more interesting. It shows you behind all these numbers and graphs how ordinary folks and the whole system with its distorted incentives have created such massive bubble in housing market.

The second part talks about value investing and how investors can profit from the current crisis- detail case studies on Berkshire, Amercian express, Resource America, Long Beach Mortgage loan, MBIA and Wells Fargo --- p/149-265 haven't read yet but for less than $6 (at this moment from $28 originally) this book is def. worth buying (even just for the 1st part!!) esp. if you are value investor cos it's at nearly 80% discount!

A large portion of this book is devoted to the history and reasoning why we got to where we are. Granted good lessons can be learned from studying the causes and effect of history. But I'd say the title of the book is misleading in that you would think the majority of the book would talk about various strategies for investing going forward. It does this to some extent but they are case studies on individual companies. A lot can be skipped in this book in my opinion if you are not that interested in the reasons for the mortgage meltdown and more interested in investing strategies going forward.

Mr. Tilson's work is excellent. This type of work is not normally available to everyday investors. This is high end, hedge fund work without the 2/20 hedge fund price. The second half of the book stock selections are old since he wrote it in March when American Express was 9.00 not 23.00. However, In my opinion, this is the best explanation of the mortgage crisis and WHAT TO EXPECT IN THE FUTURE..in graphs and charts that make it easy to understand than any other book available. I read them all. This is outstanding.

If you need to understand what is going to happen to the U.S. housing market over the next two years, then you need to read part 1 of this book. The charts and concise analysis give you an excellent overview of what happened and why during the housing boom and bust over the last five years. The conclusions covering implications for 2009 and 2010 are sound and are more pessimistic than the current concensus views.

There are drawbacks to the book to be sure: Parts 2 and 3 are not as relevant to the mortgage situation and won't be of interest to many readers.