Howie Hubler was a bond trader at Morgan Stanley during the subprime bubble. He was working for them since the late 1990s. Eventually, Howie moved into credit default swaps (CDSs) in 2003 and then on to run their Global Proprietary Credit Group in 2006.
The Global Proprietary Credit Group would offer credit default swaps, but this also meant offering premiums until any bonds were in default. This and the costs of keeping the trades in place made this a low-profit Group within Morgan Stanley.
Part of the functioning of this group became selling CDSs on AAA collateralized debt obligations. Howie Hubler had the traders he managed to sell $16 billion worth of them while at the same time buying $2 billion in risky mortgage CDSs.
The problem with this plan is that the AAA Collateralized Debt Obligations (CDOs) that the Group was relying on actually contained riskier mortgages than they had realized. This created a situation where the Group was wisely shorting the subprime mortgage and taking the bad side of the same bet with others.
In the middle of this secretly growing problem, Howie Hubler was arguing with the company management about his pay. He wanted to ensure that the bonus of $25 million he got for 2006 would be larger in 2007.
Immediately following this, a risk analysis was performed on the portfolio of the Global Proprietary Credit Group. They found that the portfolio would be fine at the historical high of 6% defaults but that a 10% default rate would crash it. As is probably no surprise, Howie Hubler argued with this assessment.
Not only did he argue with the internal review, but he even argued with the other side of the CDO trades. This cost Morgan Stanley much more. The disputes caused them to stay in these awful trades longer. Morgan Stanley took nearly the largest possible loss by the end of everything due to all the mortgage defaults. These losses totaled $9 billion for Howie Hubler’s group, and Morgan Stanley lost $58 billion total from the subprime crisis.
As you might expect, Howie Hubler lost his job over this. What you might not expect is that he also left with $10 million in back pay.
It’s a shame in the end. The idea to invest in risky mortgages was a very sound plan that made people such as Michael Burry a lot of money. However, funding it with money from the AAA mortgage CDOs was a huge mistake. It shows the prevalent tone of the time. The market could not perceive how bad the problem would be and how deep it would go.
Perhaps when the next crisis looms, a few fewer people will make such a mistake. Everyone knows not to be a person building a house on sand. This story points out that it’s also not wise to be that person’s neighbor.
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