Seth Goldstein

On June 13, 2006 we hosted our second session of the RootExchange/s speaker series.  Our first speaker was Michael
Goldhaber, the leading philosopher of our emerging Attention Economy.  This second session featured Chairman of Root Markets, Lew Ranieri.  As Vice Chairman of Salomon Brothers in the 80’s, he pioneered the mortgage security market and helped turn it into the trillion dollar market it is today.  Ranieri shared his insights on the housing and mortgage markets, and described how the Internet promises to introduce further efficiencies to benefit consumers, publishers and lenders.

Seth Goldstein: What inspired you to become involved with Root Markets and how does it relate to your perspective on the evolution of the mortgage customer acquisition market?

Lew Ranieri:  About a year ago you started talking to me about your vision “the lead business” … I must admit I’d never heard of it before.  I’ve built a number of banks and some of the largest mortgage companies – I was the founder of what became GMAC Mortgage before there was a mortgage business.  “Lead generation” … what does that mean? When I started to understand it, what became apparent to me was that this is potentially the most powerful origination channel across all the consumer areas. I truly believe that from a trader point of view. I’m a trader. I’ve built businesses and owned companies, but the only thing I’ve ever really loved was trading. The good thing about trading is that you come in in the morning and at the end of the day you know whether you’ve won or lost.  I remember when corporate bond traders were kings of the world.  And then it was junk bond traders.  And then mortgage traders.  I will make a prediction for you: I think that very shortly the new sex symbol for Wall Street will be lead traders;  because I really do believe that as a channel, this is the most powerful technology I’ve ever seen.  It’s in its infancy, it’s ruthlessly inefficient, in many ways it makes very little sense in the way things are being priced, but it has embedded in it the seeds of an extraordinary potential because it’s totally variable cost.  It operates where the consumer has migrated to.  It’s based on the most powerful consumer force, namely the democratization of the access to information.  It’s just extraordinary in its breadth and in what it could become.  So since I have an innate desire to continue to become wealthier, I thought this was a really interesting place to get involved in

SG:  Juxtapose that with your outlook on the mortgage market, both that which is driving online advertising, which is primarily focused on refinance, and what you call the “real housing market.”

LR:  One thing that surprises me about the lead generation business is that when people say mortgages, they mean typically mean refinance (refi).  Normally, when mortgage people are saying mortgages, refi is this other thing that happens periodically when rates are going down because the rest of the time there is no such thing.  The basic process of housing is new construction, resale, home improvement.  Refi for us is a “sometimes” thing.  It’s been a great stretch over the last seven years as rates have come down and everybody’s been refi’d at least one and a half times.

SG: What is your outlook on interest rates?

LR:  My outlook for interest rates should not be surprising to many of you.  I think Bernanke will over-compensate and that interest rates will tighten too much because he believes that to be the safest course.  He feels that it’s easier for them to reverse the course from an over-tightening situation and stimulate the economy than it would be to let interest rates take hold which will take a much longer period of time and be much more painful to stamp out.  So they’re much more prepared to create a recession than they are to allow inflation to take hold.  I think Bernanke, in order establish his bona fides as a certified inflation fighter, will have a double reason to want to overcompensate so I think they will tighten on the front end.  Although the economy, in my opinion, is already starting to slow down.  Energy prices take a long time to work their way through the economy. So, with the tightening that I believe that they will do, we will wind up in a position where we’ll invert the curve more.  We may actually get to one of the more inverted curves with all of those implications, and I can see 18 months from now we might be going the opposite direction with great haste.

SG:  What are the implications for housing?

LR:  But what does that mean for housing?  Well, you’re already starting to see it.  You’re seeing an absolute slowdown on the part of the consumer.  Those of you in the mortgage business know that volumes are off substantially across the board.  That’s likely to continue.  It’s creating some interesting opportunities in refinance because – this is probably the first period since ARMs have been in existence where they’re actually going to roll to the cap at a point when the 30-year rate is lower.  Most adjustable rate loans and a very substantial amount of adjustable rate loans are not rolling to their cap, and note that cap is somewhere between 7 and 7.25 so many consumers are now looking at a 7.25 mortgage rate when the 7-year or 30-year fixed rate is well below that, 6.5 as an example.  So it’s unlikely that a consumer is going to start paying 7.25 or 7.5 when he can just refinance into not another ARM, which used to be we could roll ARMs forever.  Now we’re not in a roll ARMs, we’re actually in the unique position to roll ARMs into fixed rates.

(continued)

GOLDSTEIN:   Like David Letterman. I don’t know who’s going to be on the show, but I’m going to turn it on for an hour because I respect the host’s choice of guests.

GOLDHABER:  Exactly.  That’s what happens with Bill Maher or any of those hosts.  That’s still a very common thing that you would trust someone to redirect your attention.  And in effect you’re giving them your attention to begin with so they can redirect it.  And it’s true that you don’t end up with a profound knowledge of the mind of Ed Sullivan, or David Letterman; but this editor at the New York Times, I only know of his mind indirectly by some very subtle things about the kinds of choices made. I have a sense that interesting letters will appear there that will give me a new angle on things.  And that will also reinforce certain prejudices that I have that I want to have reinforced because it makes me feel like I’m significant.

GOLDSTEIN:  So what do you call these people?

GOLDHABER:  I guess you could call them impresarios.

GOLDSTEIN:   In economic terms, what is their role?

GOLDHABER:  Well, if you like broker…

GOLDSTEIN:   Agent, broker, proxy, curator…

GOLDHABER:  Take for example the recent auction of Jackie Onassis materials.   Look at this inkwell that comes from her and suddenly she’s evoked even though nobody knows what her relationship to the inkwell was.  Nobody really knows if she ever used it, but it was found at her house. So, there it is.

GOLDSTEIN:  She paid attention to it, and therefore it has some value above and beyond its functionality. 

GOLDHABER:  Yeah, you imagine her presence somehow.  The functionality is pretty minimal, but somebody might pay $3,000 for it.  Why do they pay so much?  Not because it’s an inkwell, but because it’s Jackie’s inkwell.

GOLDSTEIN:   It’s a container for her attention.

GOLDHABER:  It’s a container for her attention and for our attention to her.  We imagine that she looked at this.  What people say about paying attention is that they were “enthralled.”  Now, enthralled means enslaved and what that connotes is that…

GOLDSTEIN:   Agreed, but you can override people’s attention choices if what you’re doing is so compelling, so attention grabbing, like a terrorist. 

GOLDHABER:  It’s compelling.  Compelling is like compulsion.

GOLDSTEIN:   You can override whatever choices there are.

GOLDHABER:  And people find themselves feeling compelled…

GOLDSTEIN:   It’s a hostile takeover.

GOLDHABER:  Yeah, kind of partially hostile, partially – but it doesn’t feel hostile necessarily.  I mean someone sends an email, and that person’s Ray Ozzie.  Whoever it is, anybody who is in the software world and knows who he is, will open the email.  And it may just say: “I want you to buy this new Microsoft product” in which case you will feel you’ve been had.  Or it may say: “Hey, I have this great idea, let’s talk about it” in which case you would feel that you’re worth a lot of attention.  So in other words, what I’m saying is that you respond on the basis of prior attention that you’ve paid.  I mean you know who Ray Ozzie is.  If you didn’t know who he is, it would not be interesting. 

GOLDSTEIN:   So what technology does– in the case of email, or the case of instant message, or the case of whatever electronic communication, is confront you with choices that force you to rank and rate your attention.

GOLDHABER:  Everybody does that.  For example, Bruce Sterling and his very evocative, entertaining, strange talk showed us a lot of books.  So I thought, well I’m going to read The Laws of Cool for example.  So, one of his functions, which he is constantly doing, is telling you to read somebody else.  He’s redirecting your attention.  He has to have your attention to redirect it. 

GOLDSTEIN:   I mean, last time I sat here you said: read George Lakoff.  So I went to a bookstore, to buy Metaphors We Live By.

GOLDHABER:  Yeah and then there’s Philosophy in the Flesh. 

GOLDSTEIN:   I haven’t picked that one up.

GOLDHABER:  Or even to some extent Women, Fire, and Dangerous Things, an old book by him.  There’s interesting stuff in all that.

GOLDSTEIN:   Who do you read for economics?

GOLDHABER:  I don’t know any economics really.  I sort of make it up as I go along.  I guess that’s a little unfair, I mean, I have a friend who’s an economist. 

GOLDSTEIN:   You don’t teach anymore?

GOLDHABER:  Not right now, I’m not teaching.

GOLDSTEIN:   Did you teach at Berkeley?

GOLDHABER:  I used to teach physics at Berkeley, but the academic world is set up by what you have your PhD in, and it’s very hard to teach something you don’t have your PhD in.  I haven’t wanted to teach physics, so I haven’t…

GOLDSTEIN:   There’s no graduate seminar on the physics of attention?  What about the biology of physics?

GOLDHABER:  Well, I don’t know that I’m interested in the biophysics.  It’d probably be very boring. 

GOLDSTEIN:   Mirror neurons.  What would that be considered?

GOLDHABER:  Yeah, that would be neuroscience.  I’m interested in them only in their broader applications.  I mean, to me they’re so interesting because all of a sudden biologists have to admit the relationship that exists between people.  That we’re not sort of, whatever the term is, monads.

GOLDSTEIN:   That’s profound; that there are physiological networks that aren’t physically apparent.

GOLDHABER:  Right.  The fact that we’re all part of a social system and we’re not just computers having data fed in…

GOLDSTEIN:   Data?

GOLDHABER:  Yeah, data is important.  We’re very interactive, very, very interconnected. 

GOLDSTEIN:   So, it’s not accidental.  It’s not anonymous.  It’s actually permanent.  I learned from you that people continue to receive
attention even if they are no longer alive.  People
don’t naturally think that way.  They think attention is about who I am paying attention to now.  As opposed to the
fact that I’m always paying attention on different levels to
different people and accross different eras, and that all of these people accrue attention even
if they’re gone.  That is the spime that Bruce Sterling was talking about.  I guess that the social interactions we have leave residues that we take with us, even when the other person is gone.

(thread 11, the end of a conversation in oakland between seth goldstein and michael
goldhaber after oreilly’s march 06 attention economy conference)

GOLDHABER:  If you’re watching television you can flip the channels, but that isn’t something that someone’s doing to you.  Before Tivo, when there was a program on at 9:00 at night, everybody had to watch it.  Huge numbers of people  structured their time that way.  That doesn’t quite happen now.  I think in some ways we’re freer, but at the same time there are different constraints.

GOLDSTEIN:   Can you talk about delegation of attention choices? If it’s the case that we’re confronted with more choices and there are more bids on our attention, can you separate the agency from the principal?  This is what an assistant does.  An assistant filters requests on your time and allows you to focus.  You establish your priorities: "here’s what I want to be interrupted for, here’s what I don’t" and you delegate the authority of brokering attention requests.  Ideally, this creates a sense of calm, since you remove yourself from the constant stimulation of unanticipated requests on your attention.  Does this create a new kind of wealth, for those people who can afford to delegate?

GOLDHABER:  We all trust certain editors, for example, in the newspaper or on television.  But that’s something the Internet does not yet do, or perhaps right now doesn’t do very well where you’re left with this constant set of infinite responses to some statement.  And all these people come in with their    comments that you don’t really want to read.  That’s a good example of something that’s unfiltered.  I love to read the letters to the New York Times.  I’m sure I wouldn’t like to read every letter that was sent.  So there is that editing role.  It is very important… 

GOLDSTEIN:   But what about in an economic context: what is the role of the filter, the role of the agent?  What’s the right model for compensation?

GOLDHABER:  Well, in effect, the editor becomes a star of their own sort in a way.

GOLDSTEIN:   But in economic terms, is it a broker?

GOLDHABER:  I don’t know if I can make this distinction.  In some way it’s a director.  But in a way, I don’t know the name of the editor of the Times page, but I know that they do a pretty good job of choosing the letters that are interesting.  In a way, that person is the master of ceremonies of the page as much as Ed Sullivan or someone like that.

GOLDSTEIN:   What was his economic status?

GOLDHABER:  Well, because he was the star, he was known for his nondescript personality, his total blah-ness.  But he was also the person who, at least apparently, chose the acts. 

GOLDSTEIN:   He curated.  He filtered.  He promoted.

GOLDHABER:  Right.  And so even though we didn’t necessarily think that much of him as a person, although everybody could imitate him at a certain point and…

GOLDSTEIN:   We trusted him with our attention because we felt he would use it wisely. 

GOLDHABER:  That’s right. 

(thread 10 of conversation with between seth goldstein and michael
goldhaber after oreilly’s attention economy conference, in march of
2006 in oakland)