The importance of context
Below, Toni Moss explains the intellectual foundation and influences on the original EUROCATALYST and current AMERICATALYST event and where some of its unique qualities derive from. Along the way, she provides key insights into the evolution of the global housing finance and residential real estate industries from 1996 to 2009, and details the early observations that led to her anticipation of the global mortgage market implosion of 2007/2008. As the full socioeconomic and political impact of those events continue to unfold, Moss warns that the housing finance industry in particular is entirely unprepared for dramatic upcoming changes in a world where the greatest change is the pace of it. This is why the AMERICATALYST event is always focused on anticipating and preparing for the future.
THE REITH LECTURES ON “RUNAWAY WORLD”
In 1999, Professor Anthony Giddens, the Director of the London School of Economics, presented a stunning series of lectures about how the forces of globalization were 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 lecture was delivered from a different city across the globe, beginning with Globalisation: London, Risk: Hong Kong; Tradition: Delhi; Family: Washington DC, and ending with Democracy: London. The broadcasts were just the beginning of the international conversation on the interconnected, accelerating forces transforming our cultural environment.
Rather than being a world within our control, it is a runaway world. A world which has produced new kinds of unpredictability, new kinds of risk, new kinds of uncertainty - some of which come from the very sources that were intended to make the world predictable. The very development of knowledge actually makes the future more opaque, not less. - Anthony Giddens
... AND THEIR INFLUENCE
I became interested in the phenomenon of globalization after reading Kenichi Ohmae’s book The Borderless World in a college political science class. Since then, one of my greatest interests has been to understand and anticipate the impact of globalization throughout the housing ecosystem.
By 2000, “globalization” was a pervasive buzzword, yet no one could fully define what it was. Giddens’ approach was differentiated by his definition of it as "a synchronous set of social, cultural, technological, political and economic forces" as opposed to one-dimensional change defined by solely economics or internationalization. In his series, Giddens describes how these synchronized forces change every aspect of our lives from the micro level (our families, ourselves and our identity) to the macro level (multinational corporations, nation-states, and the economy). Given this universal impact, Giddens asserts that globalization has created a world so complex that it is entirely beyond our control and understanding.
MORTGAGES AND MORTGAGE MARKETS SHARE THE SAME MICRO-TO-MACRO-LEVEL IMPACT. Based on my experience in working in eighteen mortgage markets around the world by 2000, I recognized that housing - and the finance of it - shares the same, universal and ubiquitous micro-to-macro-level impact. To illustrate, imagine the importance of mortgages as a pyramid, and start at the bottom: For most people, a mortgage is the largest amount of money they will ever borrow, for the longest period of time. Not only is It the centerpiece of their overall financial portfolio, they will spend the majority of their working lives to pay it off. At the next level, mortgages have long been the anchor product for almost all financial institutions throughout the world. At national economic levels, outstanding mortgage debt typically exceeds 40% of the GDP of every Western country in the world. And at the top, global macroeconomic level, mortgages and real estate were, by 2001, the single largest asset class in global capital markets. From this perspective, you can clearly see that mortgage markets impact every aspect of our lives, whether or not we own a home. They are the epicenter of the global economic faultline.
THE INTERNATIONALIZATION OF MORTGAGE-BACKED SECURITIES. By the latter-'90s, the use of securitization to fund mortgages had become a global (as opposed to a purely U.S.) endeavor. To access global capital markets, countless financial institutions around the world (and especially across Europe) began commodifying their mortgage assets, moving them off of their balance sheets and leveraging those balance sheets via securitization. As each country established new legal structures to accommodate the securitization of mortgage assets, an international market for mortgage-backed securities (MBS) developed.
Greater investor appetite for MBS products led to increasingly complex, risky and obtuse issuance structures across multiple legal jurisdictions. However, while mortgage markets vary in form but not function, the differences between mortgage market products, processes and practices varied greatly from country to country. In other words, there was no harmonization between MBS products.
As the complexity of MBS increased, investors became almost entirely reliant upon rating agencies that were easily coerced into favorable ratings through a practice referred to by investment banks as "ratings arbitrage". (More on this below) In other words, if Moody's wouldn't provide a higher rating, Standard & Poor's would. Or FitchRatings. As disparate MBS proliferated, underlying credit quality decreased and house prices around the world dramatically increased, it seemed to me that mortgage markets were becoming, in essence, the epicenter of the global economic faultline.
THE MAGNIFICATION OF SYSTEMIC RISK. At the same time, by nature globalization accelerated and intensified the linkages and liabilities between financial institutions, and magnified the systemic risk posed by over-leverage in a single asset class (MBS and derivatives thereof) that would inevitably rupture. Were that to happen, I believed that it would be a global phenomenon that would profoundly change the world, and that someone, for God's sake, should get all industry constituents together in one place to take a closer look at how globalization was reshaping the global housing ecosystem. I took my concerns, along with a comprehensive conference and program outline, to the International Monetary Fund, the World Economic Forum, the European Central Bank and the U.S. Federal Reserve, urging them to bring together a conference on - or at the very least attention to these concerns. However, the "party," so to speak, was just getting started. They thought that I was nuts. So in 2002, I did it myself.
EUROCATALYST - THE EVENT
As one of the few "experts" in several areas of the housing finance industry (origination, servicing, funding and technology) as well as my experience in setting up "greenfield" operations, start-ups, building cross-border operations and negotiating joint ventures for American and European financial institutions, I was a frequent speaker and/or keynote at many conferences around the world. Like many of the other speakers at those events, we were disappointed by the lack of meaningful content overall, and most delegates spent this time networking in hallways and not in the actual sessions. Because I had no real experience or "boilerplate" to go by, I wanted to do things quite differently from other conferences. I wanted it to truly be an experiential event. These are some of the hallmarks of the event that continue to this day as AMERICATALYST :
AN EVENT BASED ON ITS PURPOSE - AND NOT ITS PROFIT . Most events are exclusively profit-making endeavors with little to no purpose behind them. The purpose of EUROCATALYST and its successor, AMERICATALYST is to explore, anticipate and prepare for the radical and accelerated changes of the forces of globalization by improving the products, processes and practices of the housing finance industry.
INVITATION-ONLY . The invitation-only aspect of the event is to ensure a well-curated audience comprised of a cross-section of individuals and market players who mattered most. Even event Partners and Sponsors are invitation-only.
NO MEDIA . The lack of media has always led to a much more candid, truthful and meaningful discussion between the audience and stage.
ELECTRONIC INTERACTIVITY . As a very senior-level event, most of our audience was and are as knowledgeable and experienced as the speakers onstage. I wanted to give the audience a voice to actively participate in all of the sessions. Furthermore, the European event encompassed participants who spoke several languages, and the interactivity enabled them to speak or write in their native language, and we would translate onstage.
HOLDING ALL SESSIONS IN ONE ROOM TO ILLUSTRATE THE IMPORTANCE OF THE ECOSYSTEM, AS OPPOSED TO THE PARTS. Most events were (and continue to be) either entirely sector-specific (i.e., origination, or servicing or funding) or if a large-scale event, representatives of different sectors are separated into breakout sessions. I wanted to keep everyone in the same room, and cycle through all sectors so that the left hand, so to speak, knew what the right hand was doing. My purpose was to show housing finance as an ecosystem, and the extent to which each activity was inextricably wed to the other. That way, everyone had something to learn about the other.
THE USE OF MUSIC AND CHOREOGRAPHY . Many of the session titles and descriptions have strong explicit or implicit editorial commentary, and the musical selections that introduce and conclude the sessions do as well. Those who know me well look for and anticipate the underlying message, and you'll often hear immediate or delayed laughter once people "get" the message. The music creates a much more fun atmosphere, creates a true experience for the participants, establishes a particular mood in the sessions and we often choreograph the stage entry of the speakers directly related to the music. This event hallmark has led our alumni to snarkily refer to the event here in the U.S. as, "AMERICATALYST: The musical!"
MOVING THE EVENT TO A DIFFERENT LOCATION IN EUROPE EACH YEAR . I adapted Giddens’ idea to hold his lectures in different cities, and moved the event to a different country each year to show how globalization (and the not-so-invisible hand of Wall Street) was driving accelerated change in all housing markets around the world.
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, 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 IT’S INFLUENCE
While sadly, no one runs around naked and sand-covered at our event, the participatory collaboration of Burning Man lays the foundation for the experiential focus of our event. Our greatest influence from the Burning Man festival is its motto: “Not every experiment works, but we’ll never know if we don’t try.”
As I began putting the event together in 2001, the euro had just been launched as an electronic currency (on January 1, 1999) and the euro banknote was about to be introduced as legal tender (on January 1, 2002). The world stood puzzled at to what would happen as twelve European states ceded their sovereign destiny to a central bank with no political infrastructure to support it.
The formation of the European Union and its single currency struck me as the greatest (and bold) social experiment of our lifetime, but one undertaken with backwards procedures. In launching the euro, it seemed as though its architects were building the roof first, with the foundation to be built later. To me, the lack of calculation showed the extent to which the formation of the EuroZone was the "petrie dish" for globalization. In this case, EU leaders put the roof before the foundation due to the urgency of economic integration among smaller countries in order to compete in a globalized world, and that urgency prevailed over design.
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. "Burning Down the House" is from the Talking Heads' 1984 concert film, Stop Making Sense. (Hey, if the shoe fits) And, after all, our event is one that features “talking heads”! At this point, I hope 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.
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 cutting-edge ideas in the technology industry. Esther was, in fact, the primary catalyst for bringing Silicon Valley together, and continues to be the catalyst for gatherings in any sector in which she is involved.
As a friend and mentor, when I couldn't convince others to do produce the event, Esther urged me to do it myself. She was our keynote speaker at EUROCATALYST 2002 in Madrid. Today, Esther is a leading angel investor focused on healthcare, genetics and 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 designed by Danny Hillis as an icon for public discourse. In 2003, they established a series of Seminars About Long-term Thinking with a narrative of long-term perspectives, 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.
When I was a child, people used to talk about what would happen by the year 02000...Now, no one mentions a date at all. I think it is time for us to start a long-term project that gets people thinking past the mental barrier of an ever-shortening future.
- Daniel Hillis
... AND IT’S INFLUENCE
I'm very proud to be Member 724 of the Long Now Foundation, and was introduced to it by Esther Dyson in 2007. Long Now's premise, activities and ideas have been instrumental in changing the way that I view the housing industry as an ecosystem and its overall viability and sustainability. For an industry that extends credit thirty years into the future, it is shocking that we have 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 has many goals, the primary intention of the Idea Lab is to establish long-term thinking focused on the viability, sustainability and balance in the housing ecosystem.
In his 2001 Nobel prizewinning work on asymmetry of information, economist Joseph Stiglitz (and his colleagues Akerlof and Spence) focused on 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).
In a late-2005 IFR ASIA article about covered bonds and investor reporting standards, I was quoted: "One would hope that issuers voluntarily enter the 21st century and meet the investor reporting standards required by a global marketplace. In lieu of volunteers, regulators and rating agencies should gauge standards to the highest common denominators and not stoop to the lowest no matter how much whining goes on".
As mentioned earlier in this primer, 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 Fitch Ratings) 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 continued to "ride 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 increasingly risky mortgage products and related mortgage-backed securities around the world. Ultimately, investor pursuit of higher yields trumped the lack of underlying information and transparency. In the events of 2007, Stiglitz’s theory was illustrated in the global mortgage market.
The concept of “reflexivity” in social science was developed by the philosopher Karl Popper, illustrated in the work of Anthony Giddens, and applied to economic theory by George Soros. Reflexivity is a very dense topic, and difficult for me, at least, to summarize in this editorial. But I'll try: it is a way of understanding causes and effects in which the relationship between two agents 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. In other words, perhaps neither what appears to be a cause or what appears to be an effect can really be understood under the microscope of a critical mind.
Let's 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 preceded "the crisis", and predicted it.
ENDNOTE: A SERENDIPITOUS OCCURRENCE
On April 30, 2008, my EUROCATALYST business partner (and event producer), Shirley Jackson, and I had just wrapped up our last European event, EUROPESERVICING 2008, in London. At that time, the collapse of housing markets was just beginning in the U.S. although 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 almost 14 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 never spoke himself. As for Stiglitz, my annual (and I admit, 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 preventing the outcome.
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 as a practitioner or this event itself, they most often assume that I am nothing more than “a conference producer” and know little to nothing about the topics or content.
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 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, eh? 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 ascended 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?” Eh, not really. And then...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 (he is an avowed tennis nut) but was turned away at the reception desk when the local pro discovered that “Toni” 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 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.