least controversial thing to be said about Lippmann was that he was controversial. He wasn't just a good bond trader, he was a great bond trader. He wasn't cruel. He wasn't even rude, at least not intentionally. He simply evoked extreme feelings in others. A trader who worked near him for years referred to him as "the asshole known as Greg Lippmann." When asked why, he said, "He took everything too far."
"I love Greg," said one of his bosses at Deutsche Bank. "I have nothing bad to say about him except that he's a fucking whack job." But when you cleared away the controversy around Lippmann's persona you could see it was rooted in two simple complaints. The first was that he was transparently self-interested and self-promotional. The second was that he was excessively alert to the self-interest and self-promotion of others. He had an almost freakish ability to identify shadowy motives. If you had just donated $20 million to your alma mater, say, and were feeling the glow of selfless devotion to a cause greater than yourself, Lippmann would be the first to ask, "So you gave twenty million because that's the minimum to get your name on a building, right?"
Now this character turns up out of nowhere to sell Steve Eisman on what he claims is his own original brilliant idea for betting against the subprime mortgage bond market. He made his case with a long and involved forty-two-page presentation: Over the past three years housing prices had risen far more rapidly than they had over the previous thirty; housing prices had not yet fallen but they had ceased to rise; even so, the loans against them were now going sour in their first year at amazing rates--up from 1 percent to 4 percent. Who borrowed money to buy a house and defaulted inside of twelve months? He went on for a bit, then showed Eisman this little chart that he'd created, and which he claimed was the reason he had become interested in the trade. It illustrated an astonishing fact: Since 2000, people whose homes had risen in value between 1 and 5 percent were nearly four times more likely to default on their home loans than people whose homes had risen in value more than 10 percent. Millions of Americans had no ability to repay their mortgages unless their houses rose dramatically in value, which enabled them to borrow even more.
That was the pitch in a nutshell: Home prices didn't even need to fall. They merely needed to stop rising at the unprecedented rates they had the previous few years for vast numbers of Americans to default on their home loans.
"Shorting Home Equity Mezzanine Tranches," Lippmann called his presentation. "Shorting Home Equity Mezzanine Tranches" was just a fancy way to describe Mike Burry's idea of betting against U.S. home loans: buying credit default swaps on the crappiest triple-B slices of subprime mortgage bonds. Lippmann himself described it more bluntly to a Deutsche Bank colleague who had seen the presentation and dubbed him "Chicken Little." "Fuck you," Lippmann had said. "I'm short your house."
The beauty of the credit default swap, or CDS, was that it solved the timing problem. Eisman no longer needed to guess exactly when the subprime mortgage market would crash. It also allowed him to make the bet without laying down cash up front, and put him in a position to win many times the sums he could possibly lose. Worst case: Insolvent Americans somehow paid off their subprime mortgage loans, and you were stuck paying an insurance premium of roughly 2 percent a year for as long as six years--the longest expected life span of the putatively thirty-year loans.
The alacrity with which subprime borrowers paid off their loans was yet another strange aspect of this booming market. It had to do with the structure of the loans, which were fixed for two or three years at an artificially low teaser rate before shooting up to the "go-to" floating rate. "They were making loans to lower-income people at a teaser rate when they knew they couldn't
"I love Greg," said one of his bosses at Deutsche Bank. "I have nothing bad to say about him except that he's a fucking whack job." But when you cleared away the controversy around Lippmann's persona you could see it was rooted in two simple complaints. The first was that he was transparently self-interested and self-promotional. The second was that he was excessively alert to the self-interest and self-promotion of others. He had an almost freakish ability to identify shadowy motives. If you had just donated $20 million to your alma mater, say, and were feeling the glow of selfless devotion to a cause greater than yourself, Lippmann would be the first to ask, "So you gave twenty million because that's the minimum to get your name on a building, right?"
Now this character turns up out of nowhere to sell Steve Eisman on what he claims is his own original brilliant idea for betting against the subprime mortgage bond market. He made his case with a long and involved forty-two-page presentation: Over the past three years housing prices had risen far more rapidly than they had over the previous thirty; housing prices had not yet fallen but they had ceased to rise; even so, the loans against them were now going sour in their first year at amazing rates--up from 1 percent to 4 percent. Who borrowed money to buy a house and defaulted inside of twelve months? He went on for a bit, then showed Eisman this little chart that he'd created, and which he claimed was the reason he had become interested in the trade. It illustrated an astonishing fact: Since 2000, people whose homes had risen in value between 1 and 5 percent were nearly four times more likely to default on their home loans than people whose homes had risen in value more than 10 percent. Millions of Americans had no ability to repay their mortgages unless their houses rose dramatically in value, which enabled them to borrow even more.
That was the pitch in a nutshell: Home prices didn't even need to fall. They merely needed to stop rising at the unprecedented rates they had the previous few years for vast numbers of Americans to default on their home loans.
"Shorting Home Equity Mezzanine Tranches," Lippmann called his presentation. "Shorting Home Equity Mezzanine Tranches" was just a fancy way to describe Mike Burry's idea of betting against U.S. home loans: buying credit default swaps on the crappiest triple-B slices of subprime mortgage bonds. Lippmann himself described it more bluntly to a Deutsche Bank colleague who had seen the presentation and dubbed him "Chicken Little." "Fuck you," Lippmann had said. "I'm short your house."
The beauty of the credit default swap, or CDS, was that it solved the timing problem. Eisman no longer needed to guess exactly when the subprime mortgage market would crash. It also allowed him to make the bet without laying down cash up front, and put him in a position to win many times the sums he could possibly lose. Worst case: Insolvent Americans somehow paid off their subprime mortgage loans, and you were stuck paying an insurance premium of roughly 2 percent a year for as long as six years--the longest expected life span of the putatively thirty-year loans.
The alacrity with which subprime borrowers paid off their loans was yet another strange aspect of this booming market. It had to do with the structure of the loans, which were fixed for two or three years at an artificially low teaser rate before shooting up to the "go-to" floating rate. "They were making loans to lower-income people at a teaser rate when they knew they couldn't
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