The Big Short_ Inside the Doomsday Machine - Michael Lewis [41]
To sell investors on the idea of betting against subprime mortgage bonds--on buying his pile of credit default swaps--Greg Lippmann needed a new and improved argument. Enter the Great Chinese Quant. Lippmann asked Eugene Xu to study the effect of home price appreciation on subprime mortgage loans. Eugene Xu went off and did whatever the second smartest man in China does, and at length returned with a chart illustrating default rates in various home price scenarios: home prices up, home prices flat, home prices down. Lippmann looked at it...and looked again. The numbers shocked even him. They didn't need to collapse; they merely needed to stop rising so fast. House prices were still rising, and yet default rates were approaching 4 percent; if they rose to just 7 percent, the lowest investment-grade bonds, rated triple-B-minus, went to zero. If they rose to 8 percent, the next lowest-rated bonds, rated triple-B, went to zero.
At that moment--in November 2005--Greg Lippmann realized that he didn't mind owning a pile of credit default swaps on subprime mortgage bonds. They weren't insurance; they were a gamble; and he liked the odds. He wanted to be short.
This was new. Greg Lippmann had traded bonds backed by various consumer loans--auto loans, credit card loans, home equity loans--since 1991, when he had graduated from the University of Pennsylvania and taken a job at Credit Suisse. He'd never before been able to sell them short, because they were impossible to borrow. The only choice he and every other asset-backed bond trader ever had to make was whether to like them or to love them. There was never any point in hating them. Now he could, and did. But hating them set him apart from the crowd--and that represented, for Greg Lippmann, a new career risk. As he put it to others, "If you're in a business where you can do only one thing and it doesn't work out, it's hard for your bosses to be mad at you." It was now possible to do more than one thing, but if he bet against subprime mortgage bonds and was proven wrong, his bosses would find it easy to be mad at him.
In the righteous spirit of a man bearing an inconvenient truth, Greg Lippmann, a copy of "Shorting Subprime Mezzanine Tranches" tucked under his arm, launched himself at the institutional investing public. He may have begun his investigation of the subprime mortgage market in the spirit of a Wall Street salesman, searching less for the truth than for a persuasive-sounding pitch. Now, shockingly, he thought he had an ingenious plan to make customers rich. He'd charge them fat fees to get in and out of their credit default swaps, of course, but these would prove trivial compared to the fortunes they stood to make. He was no longer selling; he was dispensing favors. Behold. A gift from me to you.
Institutional investors didn't know what to make of him, at least not at first. "I think he has some kind of narcissistic personality disorder," said one money manager who heard Lippmann's pitch but did not do his trade. "He scared the shit out of us," said another. "He comes in and describes this brilliant trade. It makes total sense. To us the risk was, we do it, it works, then what? How do we get out? He controls the market; he may be the only one we can sell to. And he says, 'You have no way out of this swimming pool but through me, and when you ask for the towel I'm going to rip your eyeballs out.' He actually said that, that he was going to rip our eyeballs out. The guy was totally transparent."
They loved it, in a way, but decided they didn't want to experience the thrill of eyeball removal. "What worked against Greg," this fund manager said, "was that he was too candid."
Lippmann faced the usual objections any Wall Street bond customer voiced to