Study Guide

The Big Short: Inside the Doomsday Machine Chapter 9

By Michael Lewis

Chapter 9

A Death of Interest

  • 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.