The Big Short_ Inside the Doomsday Machine - Michael Lewis [66]
They made a hasty list of what they hoped was the worst crap and called up several brokers. It had been hard for them to wriggle free of the brokers who covered rich people and to get into the arms of brokers who covered big, stock market-investing institutions. It was hard all over again to escape the big-time stock market brokers and win acceptance from the people inside the subprime mortgage bond market. "A lot of people when we called them said, 'Hey, why don't you guys buy some stocks!'" said Charlie. Bear Stearns couldn't believe that these young guys with no money wanted to buy not just credit default swaps but a credit default swap so esoteric that no one else had bought it. "I remember laughing at them," said the Bear Stearns credit default swap salesman who took their first inquiry.
At Deutsche Bank they were passed off to a twenty-three-year-old bond salesman who had never had a customer of his own. "The reason I got to know Ben and Charlie," says this young man, "was that no one else at Deutsche Bank would deal with them. They had, like, twenty-five million bucks, which for Deutsche Bank was not really significant. No one wanted to pick up their calls. People were making fun of their name--they'd say, like, 'Oh, it's Cornhole Capital calling again.'" Still, Deutsche Bank proved, once again, the most willing to deal with them. On October 16, 2006, they bought from Greg Lippmann's trading desk $7.5 million in credit default swaps on the double-A tranche of a CDO named, for no apparent reason, Pine Mountain. Four days later, Bear Stearns sold them $50 million more. "They knew Ace somehow," said the Bear Stearns credit default swap salesman. "So we wound up dealing with them."
Charlie and Jamie continued to call everyone they could think of who was even remotely connected to this new market, in hopes of finding someone who could explain what appeared to them to be its sheer madness. A month later they finally found, and hired, their market expert--a fellow named David Burt. It was a measure of how much money people were making in the bond market that the magazine Institutional Investor was about to create a hot list of people who worked in it, called The 20 Rising Stars of Fixed Income. It was a measure of how much money people were making in the subprime mortgage market that David Burt made the list. Burt had worked for the $1 trillion bond fund BlackRock, owned, in part, by Merrill Lynch, evaluating subprime mortgage credit. His job was to identify for BlackRock the bonds that were going to go bad before they went bad. Now he had quit in hopes of raising his own fund to invest in subprime mortgage bonds, and, to make ends meet, he was willing to rent his expertise for $50,000 a month to these oddballs at Cornwall Capital. Burt had the most sensational information, and models to analyze that information--he could tell you, for example, what would happen to mortgage loans, zip code by zip code, in various house price scenarios. He could then take that information and tell you what was likely to happen to specific mortgage bonds. The best way to use this information, he thought, was to buy what appeared to be the sounder mortgage bonds and simultaneously sell the unsound ones.
The insider's artful complexity didn't much interest Cornwall Capital. Spending a lot of time trying to pick the best subprime mortgage bonds was silly, if you suspected that the entire market was about to blow up. They handed Burt the list of CDOs they had bet against and asked him what he thought. "We always looked for someone to explain to us why we didn't know what we were doing," said Jamie. "He couldn't." What Burt could tell them was that they were probably the first people ever to buy a credit default swap on the double-A tranche of a CDO. Not reassuring. They assumed there was a lot about the CDO market they didn't