• Choose a category
• All
• Classic-Fiction

By Root 290 0

and more, said little. There came no apologies, and no gratitude. "Nobody came back and said, 'Yeah, you were right,'" he said. "It was very quiet. It was extremely quiet. The silence infuriated me." He was left with his favored mode of communication, his letter to investors. In early July 2007, as the markets crashed, he posed an excellent question. "One rather surprising aspect of all this," he wrote, "is that there have been relatively few reports of investors actually being hurt by the subprime mortgage market troubles....Why have we not yet heard of this era's Long-Term Capital?"

CHAPTER NINE

A Death of Interest

Howie Hubler had grown up in New Jersey and played football at Montclair State College. Everyone who met him noticed his thick football neck and his great huge head and his overbearing manner, which was interpreted as both admirably direct and a mask. He was loud and headstrong and bullying. "When confronted with some intellectual point about his trades, Howie wouldn't go to an intellectual place," said one of the people charged with supervising Hubler in his early days at Morgan Stanley. "He would go to 'Get the hell out of my face.'" Some people enjoyed Hubler, some people didn't, but, by early 2004, what others thought didn't really matter anymore, because for nearly a decade Howie Hubler had made money trading bonds for Morgan Stanley. He ran Morgan Stanley's asset-backed bond trading, which effectively put him in charge of the firm's bets on subprime mortgages. Right up to the point the subprime mortgage bond market boomed, and changed what it meant to be an asset-backed bond trader, Hubler's career had resembled Greg Lippmann's. Like every other asset-backed bond trader, he'd been playing a low-stakes poker game rigged in his favor, since nothing had ever gone seriously wrong in the market. Prices fell, but they always came back. You could either like asset-backed bonds or you could love asset-backed bonds, but there was no point in hating them, because there was no tool for betting against them.

Inside Morgan Stanley, the subprime mortgage lending boom created a who-put-chocolate-in-my peanut-butter moment. The firm had been a leader in extending into consumer loans the financial technology used to package corporate loans. Morgan Stanley's financial intellectuals--their quants--had been instrumental in teaching the rating agencies, Moody's and S&P, how to evaluate CDOs on pools of asset-backed bonds. It was only natural that someone inside Morgan Stanley should also wonder if he might invent a credit default swap on an asset-backed bond. Howie Hubler's subprime mortgage desk was creating bonds at a new and faster rate. To do so, Hubler's group had to "warehouse" loans, sometimes for months. Between the purchase of the loans and the sale of the bonds made up of those loans, his group was exposed to falling prices. "The whole reason we created the credit default swap was to protect the mortgage desk run by Howie Hubler," said one of its inventors. If Morgan Stanley could find someone to sell it insurance on its loans, Hubler could eliminate the market risk of warehousing home loans.

As originally conceived, in 2003, the subprime mortgage credit default swap was a one-off, nonstandard insurance contract, struck between Morgan Stanley and some other bank or insurance company, outside the gaze of the wider market. No ordinary human being had ever heard of these credit default swaps or, if Morgan Stanley had its way, ever would. By design they were arcane, opaque, illiquid, and thus conveniently difficult for anyone but Morgan Stanley to price. "Bespoke," in market parlance. By late 2004 Hubler had grown cynical about certain subprime mortgage bonds--and wanted to find clever ways to bet against them. The same idea had occurred to Morgan Stanley's intellectuals. In early 2003 one of them had proposed that they cease to be intellectuals and form a little group that he, the intellectual, would manage--a fact that the traders would quickly forget. "One of the quants actually creates all this stuff