The Big Short_ Inside the Doomsday Machine - Michael Lewis [99]
Morgan Stanley management, for its part, always feared that Hubler and his small team of traders might quit and create their own hedge fund. To keep them, they offered Hubler a special deal: his own proprietary trading group, with its own grandiose name: GPCG, or the Global Proprietary Credit Group. In his new arrangement, Hubler would keep for himself some of the profits this group generated. "The idea," says a member of the group, "was for us to go from making one billion dollars a year to two billion dollars a year, right away." The idea, also, was for Hubler and his small group of traders to keep for themselves a big chunk of the profits this group generated. As soon as feasible, Morgan Stanley promised, Hubler would be allowed to spin it off into a separate money management business, of which he'd own 50 percent. Among other things, this business would manage subprime-backed CDOs. They would compete, for instance, with Wing Chau's Harding Advisory.
The putative best and brightest on Morgan Stanley's bond trading floor lobbied to join him. "It was supposed to be the elite of the elite," said one of the traders. "Howie took all the smartest people with him." The chosen few moved to a separate floor in Morgan Stanley's midtown Manhattan office, eight floors above their old trading desks. There they erected new walls around themselves, to create at least the illusion that Morgan Stanley had no conflict of interest. The traders back down on the second floor would buy and sell from customers and not pass any information about their dealings to Hubler and his group on the tenth floor. Tony Tufariello, the head of Morgan Stanley's global bond trading and thus in theory Howie Hubler's boss, was so conflicted that he built himself an office inside Howie's group, and bounced back and forth between the second floor and the tenth.* Howie Hubler didn't want only people. He wanted, badly, to take with him his group's trading positions. Their details were complicated enough that one of Morgan Stanley's own subprime mortgage bond traders said, "I don't think any of the people above Howie fully understood the trade he had on." But their gist was simple: Hubler and his group had made a massive bet that subprime loans would go bad. The crown jewel of their elaborate trading positions was still the $2 billion in bespoke credit default swaps Hubler felt certain would one day very soon yield $2 billion in pure profits. The pools of mortgage loans were just about to experience their first losses, and the moment they did, Hubler would be paid in full.
There was, however, a niggling problem: The running premiums on these insurance contracts ate into the short-term returns of Howie's group. "The group was supposed to make two billion dollars a year," said one member. "And we had this credit default swap position that was costing us two hundred million dollars." To offset the running cost, Hubler decided to sell some credit default swaps on triple-A-rated subprime CDOs, and take in some premiums of his own.* The problem was that the premiums on the supposedly far less risky triple-A-rated CDOs were only one-tenth of the premiums on the triple-Bs, and so to take in the same amount of money as he was paying out, he'd need to sell credit default swaps in roughly ten times the amount he already owned. He and his traders did this quickly, and apparently without a great deal of discussion, in half a dozen or so massive trades, with Goldman Sachs and Deutsche Bank and a few others.
By the end of January 2007, when the entire subprime mortgage bond industry headed to Las Vegas to celebrate itself, Howie Hubler had sold credit default swaps on roughly 16 billion dollars' worth of triple-A tranches of CDOs. Never had there been such a clear expression of the delusion of the elite Wall Street bond trader and, by extension, the entire subprime