Appendix - Chapter 1
Chapter 1 Appendix
RE: the housing bubble, aka, Bubble 2.0
What’s remarkable about this entire debacle, and there is a plethora of remarkable aspects to it, was that it had happened not that many years before in some of the same countries that were doomed to repeat the tragedy. Let’s use Sweden an example.
This normally staid country was nearly bankrupted by a massive housing boom-cum-bust in the early 1990s. This housing crash was so severe that it caused the Swedish government to nationalize all its banks, at a GDP cost of about 4%. In the process, it guaranteed and protected all deposits in return for complete ownership of its banking system. In a sneak preview of what happened in the U.S. with the Troubled Asset Relief Program (TARP) in 2008, Sweden’s policymakers took equity positions in their banks; eventually, it sold these stakes for an amount that repaid half of its outlays. (During the worst of panic of 2008 and 2009, one of the wildest predictions I made was that the very unpopular TARP would turn out be a windfall for U.S. taxpayers. This view was ultimately vindicated as the treasury eventually sold off the equity it received in banks like Citigroup for tens of billions of profits, back when that seemed like serious money.)
Yet, fewer than twenty years later, Sweden was right back in full-blown bubble mode again, showing that the Swedes are adept at more than just blowing glass. Of course, during the first decade of this century/millennium, it wasn’t only Sweden that had a monstrous mania in housing. Iceland, Ireland, Portugal and Spain were all fully caught up in the hysteria. The subsequent implosion nearly brought down these countries and triggered horrific suffering for their citizens. During the worst of the housing-crash-induced Great Recession, Spain’s unemployment hit 30%--far worse than the 20% rate seen in America during the Depression-wracked 1930s.
RE: my billion-dollar whiff.
It is with great embarrassment that I will now relay a story that has become the stuff of legends in my family. In November of 1995, one of my close friends at the time called me about investing in an internet start-up. Over the years prior to this, I had invested repeatedly side-by-side with this individual, typically on a no-questions-asked basis. We were, at that stage, virtual partners.
Right before Thanksgiving of that year, as I was rushing to get out of town with my young family for a ski trip, he called to tell me of a presentation by a 30-something tech innovator who had blown him away. When I asked what they did, he explained their uncomplicated business plan. Unlike with most tech companies I’d heard about, which were doing things I could only dimly understand, this one was so simple and obvious that I remarked: “But can’t anyone do that?”
After listening to him further, I took my criticism to the next level by invoking Warren Buffett: “Where’s their moat?”. In other words, I couldn’t figure out their competitive advantage. It seemed to me that their much larger and well-established competitors could easily replicate what they were attempting and rapidly drive them out of business. My friend agreed with me but at the end of our conversation, when I said that I would think about the deal on my trip, he ended with this: “I get your points, but the CEO is really, really smart.” He added that he was investing $50,000, a sizable sum back then to put into something as risky as this venture.
Now, my pal had heard a lot of pitches in his career, and he was the furthest thing from a pushover to a dreamer with a sexy story, so his words stuck with me… to this day. But between Thanksgiving and the usual year-end craziness of being a portfolio manager, plus all the upcoming Holiday activities, I forgot about our call for a month or two. In the new year, early 1996, I thought about it periodically and fleetingly, but figured that, given the astronomical odds they faced, they’d be coming back for more money, and probably at a lower offering price (known in the VC game as a “down-round”).
To say that I made a miscalculation is just a bit of an understatement. In May of 1996, my friend called me again asking me if I remembered our chat six months earlier. The sharp pain in my gut told me I knew what was coming—or so I thought. What he was about to tell me rendered my apprehension reaction a shadow of what it should have been…
The tiny company he’d invested in mere months earlier had already attracted a multi-million-dollar “up-round” (i.e., they paid a higher, not lower, price) from one of Silicon Valley’s most prestigious VC firms, Kleiner Perkins. But the worst news, at least for me, was coming: Wall Street was already interested in taking this entity public. Less than a year earlier it had been headquartered in the garage of a 1950s-era house in a Seattle suburb, just a few blocks from where I lived. Now it was poised to realize the oft-dreamed of, and rarely attained, mega-payday (at least for early-stage investors) of an IPO.
As you know from the in-chapter mention, the Seattle-based internet star I’m referring to is the one that, when it comes to its increasingly besieged competitors, plays by jungle rules... as in Amazon jungle rules. Yes, I whiffed on the chance to be a first-round investor in mighty AMZN. It was no big deal; it only cost me about a billion… actually, more like several billions.