A new film adaptation of F. Scott Fitzgerald’s masterpiece, The Great Gatsby, came to the silver screen on Friday. The film takes bold artistic license, dispensing with period music in favor of modern artists (Jay-Z, Beyoncé, Lana Del Ray, will.i.am, and Gotye, among others) for the soundtrack. So we decided to take our own license and imagine an additional modernized scene narrated by Nick Carraway, Gatsby’s neighbor who incidentally works in fixed income.
I decided to go East and learn the bond business. Everybody I knew was in the bond business, so I supposed it could support one more single man. I bought a dozen volumes on banking and credit and investment securities, and they stood on my shelf in red and gold like new money from the mint, promising to unfold the shining secrets that only Midas and Morgan and Maecenas knew. I moved to West Egg, and my house was at the very tip of the egg, only fifty yards from the Sound. The place on my right was a colossal affair by any standard — it was Gatsby’s mansion.
At nine o’clock, one morning late in July, Gatsby’s gorgeous car lurched up the rocky drive to my door and gave out a burst of melody from its three-noted horn.
“Good morning, old sport. You’re having lunch with me today and I thought we’d ride up together.”
“Look here, old sport,” said Gatsby, leaning toward me, “I’m going to make a big request of you today, so I thought you ought to know something about me. I usually find myself among strangers because I drift here and there to forget the sad thing that happened to me.”
“What sad thing?” I asked after a moment.
Gatsby hesitated. “Years ago – five years in September – I had all my inherited money in mortgage-backed securities. It felt right as rain owning the B-pieces in bond issuances, since the packaging of mortgages meant that I was above the risk of default. But then the great panic came, and I lost it.”
I hadn’t the faintest idea what Gatsby’s request would be, but I was sure it would be something utterly fantastic, and for a moment I was sorry I’d ever set foot upon his overpopulated lawn.
“Listen, old sport, you’re selling bonds, aren’t you? I’d like to recreate my portfolio just like it looked before, now that the market is strong as ever. We are back to the heady days of the middle of the last decade.”
“I wouldn’t ask too much of this market,” I ventured. “You can’t repeat the past.”
“Can’t repeat the past?” he cried incredulously. “Why of course you can!”
He looked around him wildly, as if the past were lurking here in the shadows, just out of reach of his hand.
“I’m going to fix everything just the way it was before,” he said, nodding determinedly. “You’ll see.”
“But just how shall you do that?” I demanded.
“Haven’t you seen that junk bond yields are at the lowest point in history, old sport? The Barclays U.S. Corporate High Yield index stands at 4.96%. 4.96%! That’s what AAA Treasuries were yielding five years ago. The chase for yield is pushing everyone into income-producing but risky bonds – in fact, the first four months of this year have set the record for junk-bond issuance, even higher than ’07.”
I thought back to my books on investment securities, hastily read that spring. “But surely this will mean that the bond investors will demand stricter covenants to protect themselves.”
“Not at all, old sport! We’re on track to see covenant-lite issuances pass $85 billion this year, the highest since ’07. Cov-lite loans remove certain events of default, restrictions on other debts, and sometimes even requirements to deliver annual accounts.”
As Gatsby talked on with ever-increasing animation about bonds, I began to realize that there was something gorgeous about him, some heightened sensitivity to the promises of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away.
“And just look at the housing market, old sport! You know I grew up in the Middle West – San Francisco. Out there tight inventory means that all the homes that hit the market are snapped up in a matter of days. Alameda County and Contra Costa County inventories are down 60% from this time last year. That’s an astonishing drop. And out in Scottsdale, Arizona, where I did my military training, buyers are offering 5% over asking prices the first day. These buying opportunities cannot be missed.”
I began to feel more and more uneasy. “But isn’t the housing market propped up by artificially low interest rates at the moment? Once rates rise, won’t that slow price appreciation, or even sink the value of homes in certain regions?”
But Gatsby had been so full of the idea for so long, dreamed it right through to the end, at an inconceivable pitch of intensity. “No chance, old sport! This January the S&P Case-Shiller index showed the biggest year-over-year gain in home prices since June 2006, back when markets were priced as they should be. You see that everything can be just as it was before.”
At this point, the succulent hash in front of me no longer seemed appetizing at all. But Gatsby went on with an irrepressible earnestness that was almost manic. “And just think about the subprime lending market. We are on pace to see nearly $23 billion in subprime auto loans sold to investors in 2013, almost double what was done just two years ago! I heard a man in Alabama bought his car with a subprime loan, and the down payment was his 12-gauge shotgun. His shotgun, old sport! Can’t repeat the past? Why of course you can!”
I waved away the lemon cakes that were set down in front of me and gulped the highball instead. “But didn’t that decade bring us too-big-to-fail institutions? They smashed up deals and investors and then retreated back into their balance sheets or their vast carelessness, or whatever it was that kept them together, and let the taxpayers clean up the messes they had made.”
Gatsby smiled one of those rare smiles with a quality of eternal reassurance in it, that you may come across four or five times in life. “Certain hedge funds are already lobbying Congress not to liquidate Fannie Mae and Freddie Mac, but instead to restore them as private firms, and preferred shares in Fannie have doubled in price over the last couple of months. These government-sponsored enterprises may not end up being wound down, but rather returned to the private market at a handsome profit for taxpayers.”
I insisted on paying the check and rose to leave, but Gatsby had one more parting word.
“We didn’t even have time to talk about how equity markets are at record heights. Now do you see, old sport? We can repeat the past! I feel as if I were positively floating away on a bubble.”
As I left the cellar, I realized that Gatsby possessed an extraordinary gift for hope, a yield-chasing optimism such as I have never found in any other person and which it is not likely I shall ever find again. For Gatsby still believed in the risk-less positive returns that eluded us then, but that’s no matter – tomorrow we will run faster, stretch out our arms farther … And one fine morning —-
So we beat on, boats against the current, borne back ceaselessly into the past.