Thread by @QuisitiveInvest

1/ Brief thread on my experience shorting Lehman Brothers, the Great Financial Crisis, and my opinion on this crisis.

I ended up with the short position on Lehman at Greenlight Capital. Was a couple unique circumstances that...

Folder with sources here:
unhedged.com/exchange/5e6d6…

2/ That gave us some 'edge' on the analysis. First, I had been short AvalonBay, the residential multi-family REIT at the time Lehman Brothers top-ticked their acquisition of ArchstoneSmith. Issues here were already fairly obvious (high exposure to finance sector employees)

3/ By shear coincidence, I had been the investment banking analyst at SalomonSmithBarney (Citigroup) that worked with SunCal, a Southern California real estate developer, that Lehman had just geniusly JV'd with and lent to, to the tune of several billion dollars.

4/ Just a couple years earlier, I had toured all of SunCal's properties... (thats not me in the photo. I was in the backseat of the helicopter)

5/ Aerial shot of one of SunCal's developments in Orange County, CA, basically ground zero of the mortage crisis.

6/ Suffice to say, Lehman's SunCal investment was a disaster. As was their equity hit from ArchstoneSmith acquisition.

7/ Our conviction, though, came from a couple obvious "frauds" and my former boss's ability to read people. We noticed some very strange accounting issues in their 1Q2008 10-Q...

8/ The nice thing about markets in 2008 and prior, not many people read footnotes in financial statements. We were all over it. I had tables comparing every bank's credit books to each other, where they were marking real estate loans, how much CDO, MBS, etc they had relative to..

9/ book value, etc. Anyway, Lehman was marking their books 5-10% higher than others, which equated to a material portion of their equity value.

10/ Then they had this, which was essentially a fraudulent markup of a private equity investment (KSK Energy in India)

https://twitter.com/QuisitiveInvest/status/1239226231259873280?s=20

11/ Anyway, we spoke with Lehman's CFO, and it was obvious they had major problems. The rest of that is history. On to GFC and current situation

12/ The Great Financial Crisis was scary because financial institutions had become over-leveraged into an asset impairment (housing values) that hadn't happened in the past. So all banks were pretty screwed. All of them were under-water by end of 2008.

13/ So that's scary, and markets freaked out. But the consumer held up fairly well, unemployment rose by 5mm jobs, and GDP only fell 1.7% in 2009 vs 2008 (it still grew in 2008)

14/ Recovery process took about 7 years, from an employment perspective (thats how long it took to recover the lost jobs)

15/ This time, the coronavirus pandemic. It's really unprecedented. Western Europe is shut down for alteast a month. United States likely to follow suit. NBA, MLB and NHL suspended. These are things that haven't happened since World War 2.

16/ The consumer is likely to be damaged from this for several years. China seems to have recovered quickly, but look at the data, and they never ended up with a problem in their major urban "nerve centers", Beijing and Shanghai. Data here:
unhedged.com/exchange/5e657…

17/ Given our severely delayed reaction to this issue (note that Lancet Journal published the genetic sequence of COVID-19 in January - unhedged.com/exchange/5e57f…), it seems likely we have a problem in NYC, Seattle, California, possible Boston and Chicago

18/ If we have a hospital problem in our most populated areas, the ripple effects are likely to be measurable for years, not months. This is now feeling inevitable.

https://twitter.com/QuisitiveInvest/status/1239265151758610433?s=20

19/ Some now suggesting that all consumers and businesses should have a 3-6 month stockpile of cash for emergency situations. Okay. The impact to consumer spending, to have consumers have to accrue savings like that, would be meaningful.

20/ Regardless, assume a one month shutdown here. That's 8% of the year. Some of this time is lost forever. Reschedule an event? Well the rest of the year's event calendar is already booked. You can't. The time/opportunity has been destroyed.

21/ The short-term economic impact is obviously extremely severe. But the fall-out is *significantly* more complicated than the Great Financial Crisis.

22/ During the GFC, we had to open the Fed's balance sheet, TARP, Maiden Lane, etc.. But that was like a dozen phone calls. Goldman, Morgan Stanley, JP Morgan, Bank of America, Citigroup, etc. This time around... lets look at the list of issues:

23/
Airlines
Cruises
Travel Agencies
Hotels
Restaurants
Specialty Retail...
go ahead and add energy too now since that domino has fallen.
So now we have a huge swath of discretionary consumer spending measurably impaired.

24/ Think there's not going to be a credit impact from this? The financial institutions are about to have delinquencies and defaults at alarmingly growing levels. So we'll back to having a financial problem too (to say nothing of Fed lowering rates and flattening yield curve)

25/ How many jobs are at risk? That is the most important data point. Employment. Its material. And the difference between this and the GFC is that this is significantly more complicated to coordinate. Who's going to call the corner bodega? The neighborhood italian restaurant?

26/ You're talking north of 2-3 million phone calls now vs the dozen or two in 2008. Its just insanely more complicated. Its still too early to know what will happen and the ultimate impact, but from where I sit, more caution is still warranted.