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By Root 382 0

Hubler took with him the comforting sense that he was not the biggest fool at the table. He might have let go of the balloon rope too late to save Morgan Stanley, but, as he fell to earth, he could look up at the balloon drifting higher in the sky and see Wall Street bodies still dangling from it. In early July, just days before Greg Lippmann had called him to ask for $1.2 billion, Hubler had found a pair of buyers for his triple-A-rated CDOs. The first was the Mizuho Financial Group, a trading arm of Japan's second biggest bank. As a people, the Japanese had been bewildered by these new American financial creations, and steered clear of them. Mizuho Financial Group, for some reason that would remain known only to itself, set itself up as a clever trader of U.S. subprime bonds, and took $1 billion in subprime-backed CDOs off Morgan Stanley's hands.

The other, bigger, buyer was UBS--which took $2 billion in Howie Hubler's triple-A CDOs, along with a couple of hundred million dollars' worth of his short position in triple-B-rated bonds. That is, in July, moments before the market crashed, UBS looked at Howie Hubler's trade and said, "We want some of that, too." Thus Howie Hubler's personal purchase of $16 billion in triple-A-rated CDOs dwindled to something like $13 billion. A few months later, seeking to explain to its shareholders the $37.4 billion it had lost in the U.S. subprime markets, UBS would publish a semi-frank report, in which it revealed that a small group of U.S. bond traders employed by UBS had lobbied hard right up until the end for the bank to buy even more of other Wall Street firms' subprime mortgage bonds. "If people had known about the trade, it would have been open revolt," said one UBS bond trader close to the action. "It was a very controversial trade in UBS. It was kept very, very secret. There were a lot of people, had they known the trade was happening, would have screamed eight ways from Sunday. We took the correlation trade off Howie's hands when everyone knew the correlation was one." (Which is to say, 100 percent.) He further explained that the traders at UBS who executed the trade were motivated mainly by their own models--which, at the moment of the trade, suggested they had turned a profit of $30 million.

On December 19, 2007, Morgan Stanley held a call for investors. The company wanted to explain how a trading loss of $9.2 billion--give or take a few billion--had more than overwhelmed the profits generated by its fifty thousand or so employees. "The results we announced today are embarrassing for me; for our firm," began John Mack. "This was a result of an error in judgment incurred on one desk in our Fixed Income area, and also a failure to manage that risk appropriately.... Virtually all write downs this quarter were the result of trading about [sic] a single desk on our mortgage business." The CEO explained that Morgan Stanley had certain "hedges" against its subprime mortgage risk and that "the hedges didn't perform adequately in extraordinary market condition of late October and November." But market conditions in October and November were not extraordinary; in October and November, for the first time, the market began accurately to price subprime mortgage risk. What was extraordinary is what had happened leading up to October and November.

After saying he wanted "to be absolutely clear [that] as head of this firm, I take responsibility for performance," Mack took questions from the bank analysts of other Wall Street firms. It took this group a while to get to the source of embarrassment, but eventually they did. Four analysts elected not to probe Mack too closely about what was almost certainly the single greatest proprietary trading loss in Wall Street history, and then William Tanona, from Goldman Sachs, spoke:

TANONA: A question on the risk again, [which] I know everybody has been dancing around.... Help us understand how this could happen that you could take this large of a loss. I mean, I would imagine that you guys have position limits and risk limits as such. I just--it