Meet Howie Hubler. Born and raised in New Jersey, Hubler is the hottest bond trader at Morgan Stanley from 1994 to 2004.
Hubler's team was actually purchasing credit default swaps on mortgage bonds before Burry, back in 2003. They did this to cover their butts in case bond prices went bad (they own a lot of bonds).
After splintering off to form his own group adjacent to Morgan Stanley, Hubler starts using these credit default swaps in a super shady way, setting up the terms so it only requires a 4% default for the buyer to owe him money.
Unfortunately, the creation of Burry's above-the-board credit default swaps ends this little scam. Boo-hoo.
But here's the problem: Hubler's personal credit default swaps are costing him a lot of money, and his bosses aren't happy. They force him to sell a bunch of them, which negates the financial advantage he had found for himself.
Although Hubler's bosses at Morgan Stanley are aware of this, they are extremely ignorant as to what is actually contained within those bonds.
To make things worse, Hubler begins buying a bunch of CDOs in late 2006-early 2007, assuming them to be of high quality. This only puts him deeper in the hole, without him realizing it.
In April 2007, New Century, "the nation's largest subprime lender," files for bankruptcy (9.19). This leads Morgan Stanley to finally take a closer look at Hubler's deals.
The risk management department is horrified. For his part, Hubler is just confused: he wrongly believes that he's shorting the market.
In July, the chickens come home to roast: Lippmann calls up Morgan Stanley and tells them that they owe him $1.2 billion based on credit default swaps. They pay $600 million to buy time.
In the months that follow, Lippmann offers to sell back the credit default swaps for ever-higher amounts, but Morgan Stanley keeps refusing. In the end, when the bonds bottom out, Morgan Stanley owes Lippmann $3.7 billion.
Hubler is fired after he unloads some worthless CDOs on Swiss and Japanese companies. Still, he's left a $9 billion debt in his wake, too, so don't give him too much credit.
The shekels are hitting the fan, folks. In August, shareholders bring a lawsuit against Bear Stearns for their involvement in the subprime market.
The guys at Cornwall get pretty nervous, as a full-scale collapse could leave them without a way to get their money. Luckily, Ben unloads their credit default swaps while on vacation in England, making over $80 million off a $1 million investment.
Burry starts unloading his own swaps near the end of the month as well, earning roughly $720 million in profit.
Despite this, Burry's investors still don't apologize for the way they acted. This leaves Burry less passionate about finance than he has been in a long time.
Burry also finds himself obsessed with guitars all of the sudden, even though he doesn't even know how to play.
In other words, Burry's obsession with finance is shifting to an obsession with guitars.