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Star Wars

Some of us watched the world change in the late 1990s with the emergence of the tech industry. During that time numerous companies came out with valuations that were exceeding many Fortune 50 companies, but still weren’t forecasting any profits. Brokers brought the deals to the banks that underwrote the IPOs, and everyone got rich. AOL bought Time/Warner for $162B, Amazon’s market capitalization went from $800m in 1997 to $23b in 1999 and never made a profit, and countless start-ups ran through billions of dollars just to close down when the bubble burst. Everyone vowed to never invest in technology stocks again.

Fast forward 10 years….housing values sky rocket. It didn’t matter if you could afford a house; it was an investment. Today your house is worth $500,000, but next year it would be worth $750,000. It got to a point where people making less than $15,000/year were given mortgages on homes valued above $500,000. Refinancing your house 2-3 times over the course of a year or two became normal practice. It was easy because no one needed an application to fill out. You didn’t even need to prove your income or employment. These securities were highly rated by the biggest rating agencies in the world. Even if they failed, the largest insurance companies in the world were protecting us. Mortgage brokers were bringing as much in as possible and the underwriters insured everyone. Everyone was getting rich. What could go wrong?

I think you see where I’m going with this. Every 10 years there’s a bubble happening somewhere and we can’t see it. We had our moment of “irrational exuberance” that spanned from 2003 to 2005 and we’ve followed the same path. Can we blame over capacity and lots of capital or is that a red herring? No one is willing to stop spinning the wheel out of fear of the arrow pointing at them. How often does an underwriter accept a policy based on 3 lines of information? How many times does a broker ask for a “refinance”? How often does an underwriter say no?

The last 3 years have started to remove the notion that we are adding value to the transaction. We have become order placers and order takers. Why can’t a computer do that? We once took pride in the ability to analyze risk and establish a potential return on the capital invested. Too often now we simply review what is being offered and accept a line or not. Our bubble will burst, but the outcome for our industry will be transformative. We will see fewer people “building relationships” and more programmers providing higher returns for both brokerages and capital providers. You will go to the AIA bar and find it empty with the attendees drinking lattes and playing foosball, and the keynote speaker will be the latest actor from Star Wars. Hey maybe that’s a good thing! May the force be with you.

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