You’re going to love this joke. Seriously. It’s classic. And it’s all true.
Two gay guys walk into a mortgage broker. The mortgage broker says, “Do you have some undisclosed assets?”…
“That’s what he said!”
Ok, this isn’t quite how the story goes. But it does start with two men, pretending to be gay, walking into mortgage brokers across Western Sydney.
This is the story of a beautiful sting.
Last week, you might have heard a story doing the rounds about a special undercover-exposé conducted by a mildly-famous economist into Western Sydney’s housing market – which caught a special run on 60 Minutes.
In case you missed it, this is the story as we know it:
Economist Jonathon Tepper from Variant Research, together with his employer John Hempton from hedge fund Bronte Capital, pretended to be a gay couple, and went undercover into Western Sydney’s mortgage market. They shadow-shopped a number of mortgage brokers across Western Sydney, and found that mortgage brokers were encouraging them to be creative with their applications, and even lie about their details.
Some, apparently, offered to forge up tax returns on their behalf. They were also encouraged to borrow an ‘excessive’ amount.
Tepper and Hempton then blew the story though a short release to the AFR – the bulk of the report was reserved for Bronte Capital clients. They combined their shadow-shopping results with an overview of market fundamentals. The words “insane”, “crazy”, and “ponzi” were bandied about like nobody’s business, as well as a prediction for a price crash of 50-80%!
(Any of this sound familiar?)
The story went viral – not just here in Australia, but across the world. It had that viral factor. Economists pretending to be gay. An undercover sting. Irresponsible lending practices. A financial system at risk. Some of the biggest banks in the world caught with their pants down…
The story spread like wild-fire.
Markets freaked out. Banks shares were hammered.
That’s what we know.
What we didn’t know was that Bronte Capital and its clients had taken out short positions on the banks ages ago. That is they had bets in place that bank share prices would fall.
They had also gone “long” credit default swaps (CDS), which appreciate in value when investors think that bank repayment risks have increased.
Chris Joye at the AFR reckons Bronte Capital had established short positions around February 9 – over three weeks ago.
Back then, it seemed like a good bet. The property market looked a little shaky after Christmas, and banks were facing funding pressures off-shore.
But then on February 10, CBA released its half-year results, which showed default rates across CBA's home loan, personal loan and credit card portfolios declining from what were already among the lowest levels in the world. It turned out that the plunge in oil prices that had rocked markets had been a blessing for households.
That’s not news a short-seller wants to hear.
It got worse. In the following week NAB, ANZ and Westpac also published trading updates that revealed few impairments and modest default rates.
And despite the wobbles over Christmas, property values increased in January, auction clearance rates steadied, and the “crash” started to look a long way off.
And so despite the worse predictions, the banks looked solid.
Cue PR campaign.
Hempton and Tepper’s released their “research” on Februrary 23, and it quickly went viral.
As a result, bank share prices were hammered. CDS spreads (their cost of capital) jumped 18 to 35 basis points – the biggest single day move since the GFC!
The short-sellers had a field day. Tepper, Hempton and Bronte Capital made a crap can of money.
The sting worked like a charm.
As one trader in Asia said:
“It's pretty obvious this was a well-planned drive-by from the hedgies. They were putting on the short equity and long CDS trades weeks in advance and started taking profits after the media campaign hit home.”
That last point is important. If they genuinely thought a crash was coming, they wouldn’t have cashed out so quickly. They would have waited for things to get worse. If they were expecting a 50% fall in prices, why weren’t they waiting for it?
Because they never really believed it.
Sigh. Just another day in the markets.
It’s tempting to laugh it off. One big hedge fund makes a lot of money at the expense of other hedge funds and the big banks. It’s almost a victimless crime.
Or it would be if it wasn’t for the impact such scare campaigns have on the public – which in turn can shake the value of the houses average Australians own.
But we’ve seen it before, we’ll seen it again.
Banks have left themselves open to attack. By effectively outsourcing a good chunk of their underwriting functions to external mortgage brokers, they encourage doubts as to whether those processes are up to scratch.
Those doubts might be justified.
But at the end of the day, this is just a clever sting to turn a quick buck.
Just goes to show. Believe half of what you see and none of what you hear.
But don’t let me wind up in the talk-is-cheap camp. I’ll put my money where my mouth is.
Let me offer up a little bet to Tepper or Hempton. If any suburb within a 25km radius of the CBD of Sydney or Melbourne sees a fall in median prices of 20% or more in the next 2 years, I’ll pay them $100K.
That’s not even half of what they’re “predicting”.
If not, then I get the money. Heck I’ll even give him 2:1. $200K to him or $100K to me.
Any takers?
Funny? ‘Ha-ha’ funny?
Andrew Penfold says
Sounds like the movie ‘The Big Short’ – except there are no NINJA loans,
no skyrocketing housing default rates & no 50% housing price crash
coming. Just clever hedge fund managers grabbing a quick buck.
Stuart says
What made this situation worse was that 60 Minutes were reporting those “predictions” (50% drop in values) as virtual fact, or because an American “expert” predicted it (and gee, we’ve never had that happen before), it is a foregone conclusion that it will happen; just a matter of time. And they were also basing this ‘fact’ around a couple of investors who ploughed big money into Moranbah (a little mining town which had one employer – a mining company which had then shut up shop and the investors did their dough). According to 60 Mins, this situation was apparently, and I quote, “the canary in the coal mine of Australian real estate prices”. Really? I think it says more about the mining industry than real estate prices …
Carl says
True, but what does it say about 60 Mins sorting the fact from the fiction. Obviously more uninformed media hype
Jon Giaan says
Exactly. I feel for that woman, but 10 properties in one town, thats dependent on one industry? I think most people would see the risk with that. but the idea that she somehow represents the risk-attitudes of the entire country is a joke.
Jenny Kennedy says
From what I’ve seen in the media, anyone would be stupid to believe anything that comes from Hedge funds!
ron says
dear king jon,
i think that maybe our ‘western civilization’ has lost the plot somewhere. the whole stanza of profiteering at another’s expense is bad enough. to scoff at this type of nonsense as though it was a ‘bad’ thing, but in reality not so bad because it was also a nonsense, about sums up our values. regarding donald trump ..the donald…his name might not be appropriate to the comment today. do you know of his family tie ups? are you aware of his real purpose in america? please forgive me if i can tell you that this presidential campaign is a nonsense to trump. ..his mission is far more serious. i cannot tell you much..except that it would be way way over the heads of most australians. your story today and the comments i have just read justifies my statement..and then there is the catholic question…haven’t this mob just about had their time here. ..i would like to see their religion disbanded and all of their wealth distributed to all of the unfortunates who have to had suffer this abomination on earth. they have systematically worked their way into a fortress of duplicity and greed. and the pope? his 7 month pregnant ‘secretary’ was murdered by the freemasons in summary fashion. secretary alias mistress.
in retaliation for something that the pope said about the donald..a bit heavy..but thats politics pope style. back near home the freo footy team look good for the flag this year……i am still waiting though lol
Tom says
G’day Ron,
You teaser, you!!!
“…I cannot tell you much…” If you have substantiated FACTS, as opposed to imaginative speculation, give us your sources.
This evidently bitter and biased gutter press type of innuendo does nobody any good and does not promote intelligent discussion. Follow Jon’s lead and acknowledge that speculation is speculation and that reported facts can be sourced at stated places.
Please be fair dinkum.
ron says
dear tom..i will say thank you for your comment..i can agree it may sound a bit funny. ok i refer you to ‘whatdoesitmean.com?’..have a good read for a few hours..it may inverse your belief system somewhat…it did mine. the reason i say not too much because in this world it is downright dangerous to be too dogmatic about anything. and i hope it is not ‘gutter press’..just facts about the real world as not explained to us by the pop press. i do appreciate jon’s comments and stories. he, at least, is a realist and is becoming very learned. its just that i doubt some things we hear and read. and i don’t like p.m.s or state premiers who mouth off…puppets they are. a few didn’t read their lines and they were sent packing by the press. cheers, ron
sanjay says
Good work Jon,
This guys needed to be exposed if you are okay would like to share this article on social media
Jon Giaan says
go for it.
Jack says
Jon,
Based on current fundamentals I’d agree with your position HOWEVER…IF???…. there is a second leg to the GFC later this year you may have egg on your face and $200k lighter in the pocket for what potential benefit to you? Talking up prices/confidence?
For all our sakes I hope it doesn’t happen, but it is certainly possible? if not probable?
Cheers
Jack
Simon says
What I like about this article, is that it exposes the games of those who really trade in markets, the non gamblers, like ‘don’t ask any q that you don’t already know the answer to’,
One for FB, where’s that little F to click on…
Paul says
OK just looking at my little pond Brisbane. Some 21,000 unites will hit the market this year, the bulk of them pre sold to Asian investors, developers often need 50% pre sold to get finance. A lot of these investors are now not able to settle, & are just stating keep my 10 / 20 grand deposit & pulling out. I’m of the opinion next year this time will be tough, & that will start a chain reaction. Construction is what is keeping the economy afloat, most of the ex miners have gone back to construction. What happens next year when unites are not selling, Builder & developers are not going to risk more of their money. One thing 60 min is right about most Australians are hoked to the eye ball & living above their means. So higher unemployment, lets throw a few interest rises in. As they can not stay at historic lows for ever.
Common knowledge the government is in the red, so there wont be Kevin Rud, to come to the rescue & throw 500 Billion in to keep every one in work, sorry we have already sold the farm.
Feel free to explain to me different, as I hate to be a pessimist.
As Wesley Snipes once said “Always bet on black.”
I think tough times ahead people
Ben says
Wow this guy is betting there is a 1 in 3 chance that a suburb in Sydney or Melbourne is going to fall in value by 20% or more in the next two years. This is a guy who is upbeat about realestate no wonder people are worried!!!