Studying successful entrepreneurs is great; I am looking forward to reading Brad Stone’s new book, Amazon Unbound: Jeff Bezos and the Invention of a Global Empire. But studying unsuccessful ones can be more enlightening. As Charlie Munger says, “All I want to know is where I’m going to die so I’ll never go there.” The trouble is that there are few books written about unsuccessful entrepreneurs. The next best thing is a parliamentary hearing. This week, Lex Greensill, founder of Greensill Capital, appeared in front of the UK House of Commons Treasury Committee to help lawmakers understand what went wrong.
The Chair of the Committee cited the piece Steve Clapham and I wrote back in July last year warning of problems at Greensill. Lex Greensill didn’t confirm if he’d read it but replied that he didn’t become concerned about the position of his business until December. His view is that the failure of his firm rests with the insurance company that denied him cover. He even used the opportunity to give the Committee a recommendation: “…one of the real lessons from the failure of my firm… is that a heavy reliance on trade credit insurance is dangerous. I urge you and the Committee to consider the manner in which that is regulated, because it is fundamentally counter cyclical in its behaviour.”
No surprise that he would deflect. The firm failed because it was riddled with conflicts of interest, carried heavy customer concentrations and grew too fast. The problem with unsuccessful entrepreneurs is that they may be less than honest.
The Federal Reserve Bank of New York on Wednesday released its quarterly report on household debt and credit for the final three months of 2020, with its strategists and statisticians deciding to dig deeper into mortgage originations, the types of homebuyers during the Covid-19 pandemic and to what extent Americans are taking out cash against their home equity. While much of what they found confirms many of the narratives about the housing market, it’s the sheer magnitude of the move that’s breathtaking and puts into context where the economy stands almost one year after the coronavirus crisis began in the U.S.
At the highest level, mortgage originations reached almost $1.2 trillion in the final three months of 2020, the highest quarterly volume in the history of the New York Fed’s data, which begins in 2000. Americans refinanced more mortgage debt last year than any time since 2003, while mortgages taken out to purchase a home surged to the highest since 2006. First-time buyers took on more debt than at any time in history, while mortgages for repeat buyers and those looking for a second home or an investment property reached the highest in more than a decade.
Meanwhile, home prices soared across the U.S., with the S&P CoreLogic Case-Shiller index jumping 9.5% in November, the most since 2014 (December’s figures will be released next week). This surge led to “a notable increase in cashout refinance volumes, which spiked in the fourth quarter of 2020 and show no sign of abating,” the New York Fed researchers said in a blog post. Collectively, homeowners withdrew $182 billion in home equity in 2020, or an average of about $27,000 for each household. Even those who chose not to take out extra cash saved an average of $200 a month on their mortgage payments.