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Howie Hubler

F T L
2 minute read

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.

This 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 in Morgan Stanley.

Part of the functioning of this group became selling CDSs on AAA collateralized debt obligations. Hubler had the traders he managed 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 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, but also taking the bad side of the same bet with others.

In the middle of this secretly growing problem 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% rate of default would crash it. As is probably no surprise, 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. By the time everything was resolved, Morgan Stanley took nearly the largest possible loss due to all the defaulting mortgages. These losses totalled $9 billion for Hubler’s group, and Morgan Stanley lost $58 billion total from the subprime crisis.

As you might expect, 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 the 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 was going to be, and how deep it would go.

Perhaps when the next crisis looms a few less 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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