The Big Short_ Inside the Doomsday Machine - Michael Lewis [45]
Cassano nevertheless agreed to meet with all the big Wall Street firms and discuss the logic of their deals--to investigate how a bunch of shaky loans could be transformed into triple-A-rated bonds. Together with Gene Park and a few others, he set out on a series of meetings with traders at Deutsche Bank, Goldman Sachs, and the rest, all of whom argued how unlikely it was for housing prices to fall all at once. "They all said the same thing," said one of the traders present. "They'd go back to historical real estate prices over sixty years and say they had never fallen nationally, all at once." (Two months after their meeting with Goldman Sachs, one of the AIG FP traders bumped into the Goldman guy who had made this argument and who now said, Between you and me, you're right. These things are going to blow up.) The AIG FP traders present were shocked by how little thought or analysis seemed to underpin the subprime mortgage machine: It was simply a bet that home prices would never fall. Once he understood this, and once he could construe it as his own idea, Joe Cassano changed his mind. By early 2006 he openly agreed with Gene Park: AIG FP shouldn't insure any more of these deals--though they would continue to insure the ones they had already insured.
At the time, this decision didn't really seem like all that big a deal for AIG FP. The division was generating almost $2 billion a year in profits. At the peak, the entire credit default swap business contributed only $180 million of that. Cassano had been upset with Park, and slow to change his mind, it seemed, mainly because Park had dared to contradict him.
The one Wall Street trader who had tried to persuade AIG FP to stop betting on the subprime mortgage bond market witnessed none of these internal politics. Greg Lippmann simply assumed that the force of his argument had won them over--until it didn't. He never understood why AIG FP changed its mind but left itself so exposed. It sold no more credit default swaps to Wall Street but did nothing to offset the 50 billion dollars' worth that it had already sold.
Even that, Lippmann thought, might cause the market to crash. If AIG FP refused to take the long side of the trade, he thought, no one would, and the subprime mortgage market would shut down. But--and here was the start of a great mystery--the market didn't so much as blink. Wall Street firms found new buyers of triple-A-rated subprime CDOs--new places to stuff the riskiest triple-B tranches of subprime mortgage bonds--though who these people were was not entirely clear for some time, even to Greg Lippmann.
The subprime mortgage machine roared on. The loans that were being made to actual human beings only grew crappier, but, bizarrely, the price of insuring them--the price of buying credit default swaps--fell. By April 2006 Lippmann's superiors at Deutsche Bank were asking him to defend his quixotic gamble. They wanted him to make money just by sitting in the middle of this new market, the way Goldman Sachs did, crossing buyers and sellers. They reached an agreement: Lippmann could keep his expensive short position as long as he could prove that, if he had to sell it, there'd be some other investor willing to take it off his hands on short notice. That is, he needed to foster a more active market in credit default swaps; if he wanted to keep his bet he had to find others to join him in it.
By the summer of 2006 Greg Lippmann had a new metaphor in his head: a tug-of-war. The entire subprime mortgage lending machine--including his own employer, Deutsche Bank--pulled on one end of the rope, while he, Greg Lippmann, hauled back on the other. He needed others to join him. They'd all pull together. His teammates would pay him a fee for being on his side, but they'd get rich, too.
Lippmann soon found that the people he most expected to see the ugly truth of the subprime mortgage market--the people who ran funds