The Big Short_ Inside the Doomsday Machine - Michael Lewis [103]
At any rate, from Deutsche Bank's point of view, the collateral wasn't that big a deal. "When Greg made that call," said a senior Deutsche Bank executive, "it was like last on the list of the things we needed to do to keep our business running. Morgan Stanley had seventy billion dollars in capital. We knew the money was there." There was even some argument inside Deutsche Bank as to whether Lippmann's price was accurate. "It was such a big number," said a person involved in these discussions, "that a lot of people said it couldn't possibly be right. Morgan Stanley couldn't possibly owe us one point two billion dollars."
They did, however. It was the beginning of a slide that would end just a few months later, in a conference call between Morgan Stanley's CEO and Wall Street's analysts. The defaults mounted, the bonds universally crashed, and the CDOs composed of the bonds followed. Several times on the way down, Deutsche Bank offered Morgan Stanley the chance to exit its trade. The first time Greg Lippmann called him, Howie Hubler might have exited his $4 billion trade with Deutsche Bank at a loss of $1.2 billion; the next time Lippmann called, the price of getting out had risen to $1.5 billion. Each time, Howie Hubler, or one of his traders, argued about the price, and declined to exit. "We fought with those cocksuckers all the way down," says one Deutsche Bank trader. And, all the way down, the debt collectors at Deutsche Bank sensed the bond traders at Morgan Stanley misunderstood their own trade. They weren't lying; they genuinely failed to understand the nature of the subprime CDO. The correlation among triple-B-rated subprime bonds was not 30 percent; it was 100 percent. When one collapsed, they all collapsed, because they were all driven by the same broader economic forces. In the end, it made little sense for a CDO to fall from 100 to 95 to 77 to 70 and down to 7. The subprime bonds beneath them were either all bad or all good. The CDOs were worth either zero or 100.
At a price of 7, Greg Lippmann allowed Morgan Stanley to exit a trade it had entered into at roughly 100 cents on the dollar. On the first $4 billion of Howie Hubler's $16 billion folly, the loss came to roughly $3.7 billion. By then Lippmann was no longer speaking to Howie Hubler, because Howie Hubler was no longer employed at Morgan Stanley. "Howie was on this vacation thing for a few weeks," says one member of his group, "and then he never came back." He'd been allowed to resign in October 2007, with many millions of dollars the firm had promised him at the end of 2006, to prevent him from quitting. The total losses he left behind him were reported to the Morgan Stanley board as a bit more than $9 billion: the single largest trading loss in the history of Wall Street. Other firms would lose more, much more; but those losses were typically associated with the generation of subprime mortgage loans. Citigroup and Merrill Lynch and others sat on huge piles of the things when the market crashed, but these were the by-product of their CDO machines. They owned subprime mortgage-backed CDOs less for their own sake than for the fees that their deals would generate once they had sold them. Howie Hubler's loss was the result of a simple bet. Hubler and his traders thought they were smart guys put on earth to exploit the market's stupid inefficiencies. Instead, they simply contributed more inefficiency.
Retiring to New Jersey, with an unlisted number, Howie