Wantmore, Tweakmore, Totalscum, and the Tragedy of Boneheadia
A Parody about the Great Recession.
A Parody Describing the Contributions of Wantmore, Tweakmore, Totalscum, Countwrong, and Oblivious to the Tragic "Great Recession" in Boneheadia and the Thoughts of Some People Relating to This Disaster.
In the country of Boneheadia there was a man, Wantmore, who earned his income as a home mortgage loan originator. Wantmore operated conservatively. All his home loans bore interest rates of 6 percent or less, and he demanded of all borrowers large down payments, documented proof of adequate income, and an immaculate credit-using history. Wantmore sold all his loans to life insurance companies that, before closing purchases, checked loan quality with rigor—then held all loans to maturity.
As Wantmore prospered, he eventually attracted the attention of Tweakmore, a very bold and ingenious investment banker. There was no other investment banker quite like Tweakmore, even in the United States.
Tweakmore had become the richest person in Boneheadia, driven by an insight that had come to him when, as a college student, he had visited a collection of hotels that contained gambling casinos located in a desert.
As Tweakmore saw immense amounts of cash pouring into cashiers' cages surrounded by endless sand, in business operations that did not tie up any capital in inventories, receivables, or manufacturing equipment, he realized immediately that he was looking at the best business model in the world, provided one could also eliminate commitment of any capital or expense to hotel rooms, restaurants, or facilities providing parking or entertainment.
Tweakmore also saw exactly how he could create for himself an operation that possessed all the characteristics of his ideal business. All he had to do was add to investment banking a lot of activities that were the functional equivalent of casino gambling, with the bank having the traditional "house advantage." Such casino-type activities, masked by respectable-sounding labels, Tweakmore foresaw, could easily grow to dwarf all the action in ordinary casinos.
Determined to create and own his ideal business as fast as possible, Tweakmore quit college and entered investment banking. Within 12 years, Tweakmore was the most important investment banker in Boneheadia. Tweakmore rose so rapidly because he was very successful in convincing regulators and legislators to enlarge what was permissible.
Indeed, by the time Tweakmore called on Wantmore, any investment bank in Boneheadia could invent and trade in any bets it wished, provided they were called "derivatives," designed to make counterparties feel better about total financial risks in their lives, outcomes that automatically happened. Moreover, an investment bank faced no limit on the amount of financial leverage it employed in trading or investing in derivatives or anything else. Also, Tweakmore had obtained permission to use "Mark-To-Model" accounting that enabled each bank to report in its derivative book whatever profit it desired to report. As a result, almost every investment bank claimed ever-growing profits and had ownership of assets totaling at least 30 times an ever-swelling reported net worth. And despite a vast expansion of transaction-clearance risk, no big mess had so far occurred.
Tweakmore was pleased, but not satisfied, by what he had accomplished. And he now planned to revolutionize Boneheadia's home-mortgage loan business in a manner that would make Tweakmore a national hero.
In his first proposal to Wantmore, Tweakmore held much of his ingenuity in reserve. All he proposed was that Wantmore hereafter sell all his home loans to Tweakmore at a higher price than life insurers would pay. Tweakmore said that he planned to put all loans into trusts with no other assets. Each trust would be divided into five "tranches" with different priorities in use of loan payments. Four tranches would use their shares of loan payments to pay off complex new fixed-interest-bearing, freely tradable debt instruments, called CDOs. The fifth tranche got a tiny residue in case all home loan payments were received as due. The CDOs would be sold by Tweakmore, using a highly paid sales force, to anyone who could be induced to buy, even highly leveraged speculators and small Scandinavian cities near the Arctic.
To Wantmore, Tweakmore's proposal at first appeared unfeasible. The planned operation seemed to resemble the operation of a meat vendor who routinely bought 1,000 pounds of chuck roast, sliced it up, and then sold 950 pounds as filet mignon and the balance as dog food.
But Wantmore's doubts melted away when Tweakmore revealed how much he would pay. Under the offered terms, Wantmore would double his income, something Tweakmore could easily afford because his own income was going to be three times that of Wantmore. After Wantmore accepted Tweakmore's proposal, everything worked out exactly as Tweakmore had planned, because buyers of CDOs in aggregate paid much more than the life insurers had formerly paid.
Even so, Wantmore, as he became familiar with Tweakmore's prosperity, was soon dissatisfied with a merely doubled income. With Wantmore restive, Tweakmore now displayed the full range of his ingenuity.
What Tweakmore next proposed was that Wantmore add to his product line a new class of "Subprime, pay-what-you-wish" home-mortgage loans. All loans would bear interest at 7½ percent or more, and borrowers would not be allowed to state anything except that they wanted the money. There would be no down payments and no credit checks or the like. Also, each loan would be very user-friendly in its first three years, during which the borrower could make only tiny payments with all unpaid interest being added to principal. After three years, very onerous loan service was required, designed to pay off the greatly swollen principal, plus all interest, over the next five years.
Charles Munger is vice chairman of Berkshire Hathaway.
Illustration by Alex Eben Meyer.