• Choose a category
• All
• Classic-Fiction

By Root 321 0

Charlie had no idea what exactly had awakened inside Morgan Stanley, and didn't think too much about it--he and Ben were too busy trying to talk the guy from Wachovia whom Charlie had pounced on in Las Vegas into dealing with Cornwall Capital. "They didn't have one hedge fund client, and they were sort of excited to see us," said Ben. "They were trying to be big-time." Wachovia, amazingly, remained willing to sell cheap insurance on subprime mortgage bonds; the risk its credit officers were unwilling to take was the risk of dealing directly with Cornwall Capital. It took a while, but Charlie arranged for his Uzi-shooting companions from Bear Stearns to sit in the middle between the two parties, for a fee. The details of a $45 million trade more or less agreed upon in February 2007 took several months to hammer out, and the trade didn't go through until early May. "Wachovia was a gift from God," said Ben. "It was like we were in a plane at thirty thousand feet, which had stalled, and Wachovia still had a few parachutes for sale. No one else was still selling parachutes, but no one really wanted to believe they were needed, either.... After that, the market completely shut down."

In a portfolio of less than $30 million, Cornwall Capital now owned $205 million in credit default swaps on subprime mortgage bonds, and were disturbed mainly that they didn't own more. "We were doing everything we possibly could to buy more," said Charlie. "We'd put in our bids at the offering prices. They'd call back and say, 'Oops, you almost got it!' It was very sort of Charlie Brown and Lucy. We'd go up to kick the football and they'd pull it back. We'd raise our bid and the minute we did their offer would jump up."

It made no sense: The subprime CDO market was ticking along as it had before, and yet the big Wall Street firms suddenly had no use for the investors who had been supplying the machine with raw material--the investors who wanted to buy credit default swaps. "Ostensibly other people were going long, but we were not allowed to go short," said Charlie.

He couldn't know for sure what was happening inside the big firms, but he could guess: Some of the traders on the inside had woken up to the impending disaster and were scrambling to get out of the market before it collapsed. "With the Bear guys I had this suspicion that, if there were any credit default swaps on CDOs to buy, they were buying it for themselves," said Charlie. At the end of February a Bear Stearns analyst named Gyan Sinha published a long treatise arguing that the recent declines in subprime mortgage bonds had nothing to do with the quality of the bonds and everything to do with "market sentiment." Charlie read it thinking that the person who wrote it had no idea what was actually happening in the market. According to the Bear Stearns analyst, double-A CDOs were trading at 75 basis points above the risk-free rate--that is, Charlie should have been able to buy credit default swaps for 0.75 percent in premiums a year. The Bear Stearns traders, by contrast, weren't willing to sell them to him for five times that price. "I called the guy up and said, 'What the fuck are you talking about?' He said, "Well, this is where the deals are printing.' I asked him, 'Are desks actually buying and selling at that price?' And he says, 'Gotta go,' and hung up."

Their trade now seemed to them ridiculously obvious--it was as if they had bought cheap fire insurance on a house engulfed in flames. If the subprime mortgage market had the slightest interest in being efficient, it would have shut down right there and then. For more than eighteen months, from mid-2005 until early 2007, there had been this growing disconnect between the price of subprime mortgage bonds and the value of the loans underpinning them. In late January 2007 the bonds--or rather, the ABX index made up of the bonds--began to fall in price. The bonds fell at first steadily but then rapidly--by early June, the index of triple-B-rated subprime bonds was closing in the high 60s--which is to say the bonds had lost more than