What this country needs is a new national holiday.
We have a holiday to honor the founding fathers, with their stoic dedication to republican virtue. We honor a leader who showed moral strength under the extreme stress of the Civil War. We honor a visionary who had a dream of a better America.
But for the speculators, the gamblers, the go-for-broke players who bet the mortgage money on the 100-1 long shot? Nothing.
I have a nominee: David Crockett, born on Aug. 17, 1786. I can't think of a better hero for our times -- when real-estate speculation has become required backyard chatter, when Wall Street can't wait to throw money at lenders of any stripe, and when the derivatives market is so busy creating new products to control risk that it can't be bothered to figure out the risk in the paper products it has already invented.
Why Crockett? If you know of Crockett at all, you likely know him as a coonskin-hatted man of the backwoods, and as a hero at the battle of the Alamo in Texas, where he died fighting against hopeless odds. But Davy Crockett was much, much more.
A Fast Learner
Crockett was born into hardscrabble poverty on the North Carolina or Virginia frontier (there was dispute about which colony, and later state, actually had the better claim to the territory). But Crockett quickly learned two important lessons: First, there was a lot more money to be made in buying and selling land than in farming it; and second, to make money speculating, it sure helped to be politically connected to the powers that ruled the banks, the statehouses and the nation's capital.
Crockett, from all accounts including his own, was a gifted stump speaker with the ability to convince his rural neighbors that he was one of them and that his opponent was a tool of the rich and powerful. He promised that he'd work to make sure his constituents got the riches they were due if they sent him to Washington. The evidence argues that Crockett was sincere. When elected to Congress, he did work for a land bill that would have given many of his poorest constituents ownership of the land they had settled as squatters.
But Crockett had also seen how the connected were able to buy land cheaply on credit, then quickly flip their purchases for a profit. He had done that himself on a smaller scale by selling his farm, as his father had done, to move west to cheaper land. He finally wound up in Tennessee.
There Crockett had either the misfortune or the bad judgment to go up against the Democratic machine that General and later President Andrew Jackson had built on the Tennessee frontier. Facing the tough tactics of Jackson's political chief, James Polk, Crockett was first maneuvered onto the sidelines in Congress and then defeated in a bid for re-election.
With Tennessee firmly in the hands of his political opponents, Crockett did what so many Americans of his time did when they needed to revive their fortunes: He lit out for the frontier. He went to Texas, where he hoped to become a land agent and either work for a speculator or become one himself. He called Texas "the garden spot of the world," where anyone could make a fortune, where so much land was available at a small price. In fact, it was Crockett's hope to revive his political career in Texas -- the first step toward making money in real estate -- that led him to join the Texas volunteer forces and that eventually put him at the Alamo.
An Icon for Our Times
Why Crockett now? Crockett's career combined politics and real-estate speculation, showed that no risk was too big, emphasized flipping assets and left the grinding hard work of building real wealth to others. He is exactly the icon for our times.
Today, despite all the worry about a "housing bubble" (or housing "froth," in Alan Greenspan's words), there are few signs that the housing market is cooling down. In June, existing-home sales set a new record. The median price of an existing home rose at its fastest annual pace in almost 25 years, 14.7%. That was just short of the 15.1% year-to-year pace set in April.
If you're looking for signs that the market may be set to slow soon, you can take comfort in the growing affordability gap. The average initial mortgage payment for homebuyers climbed to $2,338 in the first quarter, up from $2,060 in the fourth quarter of 2004, according to Bear Stearns. With prices still climbing, this growing initial payment means that fewer buyers can afford the monthly mortgage charges that increasingly expensive homes require. According to the Federal Deposit Insurance Corp., home price appreciation climbed faster than income in 38 of 50 states in the year that ended in March.
Of course, a true Davy Crockett wouldn't be discouraged by numbers like that. As long as homebuyers believe the market will let them flip a house for a higher price in a year or two, higher mortgage payments and higher prices aren't much of a deterrent.
The Next Frontier
Wall Street, in true Crockett fashion, has already lit out for a new frontier. The hot new thing isn't residential mortgages but securities backed by bundles of commercial mortgages. Last year, real estate owners borrowed $94 billion through commercial mortgage-backed securities, a new annual record. In this year's first half, borrowing through commercial mortgage-backed securities came to $72 billion, so we're well on the way to breaking last year's record with a vengeance. And of course, as long as there's plenty of money begging to be borrowed, commercial real estate prices will keep rising, justifying ever bigger loans, which, in turn, lead to ever higher prices.
The market for commercial mortgage-backed securities, however, is violating one of the rules of speculation that Crockett clearly understood. If you're going to take a bigger risk, such as the possibility that joining the Texas volunteers will lead to participation in a shooting war, you should get a bigger reward, such as, in Crockett's case, the potential for dibs on a big hunk of Texas.
The commercial mortgage-backed securities market is headed in exactly the opposite direction. In the last three years, yields have dropped as risk climbed. Three years ago, a single-A-rated commercial mortgage-backed security yielded 5.88%. Today, the yield is 5.23%. The premium to Treasury bonds has dropped to just 1 percentage point from 1.35 percentage points.
Wall Street behaves like this because it knows that it's a lot smarter than a barely literate backwoods Indian-fighter from the 19th century. Guys and gals with impressive training from universities that Crockett could never have dreamed of attending have created massive markets in derivative securities. Those, theoretically, spread out and neutralize risk.
They're called derivatives because these synthetic securities are derived from paper such as bonds and mortgages by packing and bundling little bits of this and little bits of that. They've become a huge market because they promise to let financial giants seek profits wherever they may be, without regard to a situation's underlying risk. The risk, you see, has been lessened, controlled and maybe even eliminated by the correct mix of derivatives.
At least that's what the theory says. A recent report from the Counterparty Risk Management Group II, a self-selected group of financial veterans that has periodically taken a look at the risks in the derivative market, makes me wonder, though. According to the report, one bank,
J.P. Morgan Chase
, had total derivative exposure of $41 trillion. (No, that's not a misprint. I do mean trillion with a T.) When all the risks were balanced in this portfolio according to the theories and rules for calculating risk employed on Wall Street, J.P. Morgan Chase's most recent financial statements list total exposure as a mere $60 billion.
You've got to wonder, of course, if all these instruments will act the way that the bankers expect.
As Crockett learned, not everything works out as planned. Instead of living to a ripe and wealthy old age as a Texas land baron, Crockett wound up surrounded by the Mexican army. It was just a bit peeved at plans to make a big profit from land that was still, in their minds, part of Mexico.
As I wage my campaign for a Davy Crockett national holiday to celebrate and honor the long American history of speculation, I have just one thing to say to the current generation of speculators: Remember the Alamo!