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Greg Lippmann

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2022-09-12
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2022-09-12
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  1. “Actually, have these derivatives. So it was a nascent stage of the derivatives. There weren't that many that were outstanding at the time. And it's all over the counter. So it's possible that somebody had a gigantic short and I knew nothing about it, right? But for every short, there had to be a long. I didn't think that many people were involved, but I certainly can't say that for sure.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Is they're paying somewhere between six and ten to one to bet against them. And I think the chances of it happening or maybe three to one against me. And if you spend your whole life looking for things that are three to one long shots that pay six to one, two out of every three times you walk away empty-handed. But if you look in your pocket, it's really full. And that was what attracted me to it.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “4% per year and 28% of the people were defaulting. And we were losing 50-55 cents on the dollar when they did because of the similar type of slippage. So I saw that and I said, geez, you know, someday home prices are going to go up 3 or 4% a year in California. And apparently when they do, maybe it won't be quite as bad as Ohio or whatever these other states were. It's going to be bad. And these bonds that are backed by them, the triple B, triple B minus tranches, just to oversimplify it, if the losses are 8%, the bonds get 100. And if the losses are 9%, the bonds get zero. And so if you assume a sort of a 50% severity, you're talking about 16% of loans defaulting and the bonds are covered and 18% of loans defaulting and the bonds are zero. And we already know that the bottom quartile of America, like 28% of the people were defaulting. So I looked at this and I thought after I got the shock over, eventually these bonds are going to default. But what I know right now.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Were higher than other parts than, say, the Midwest. So they were 25% of the loan balance, but they were about 62% of the bond balance because the houses are worth more. What we saw was that after six years, the default rate in places in the top quartile where homes were going up 12 to 14% a year, the default rate was still 6 or 7 percent. Now it's kind of amazing that people are defaulting even though their house has gone up by more than 50% in value. That was sort of shocking to me that you have an asset that's way in the money and you still default. What was also interesting was that there was a small loss taken when those people defaulted. So you have an asset where just for simplicity's sake, person buys a house for 100, they borrow 80. The house is worth $140, $150, and we're only getting 70 cents back. The guy borrowed 80. We were getting 70. We're losing 10 cents. So there was a gigantic slippage on this. And that was alarming. But if you looked at the bottom quartile for houses, they were going up three to five.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Like them, or do I love them? But you couldn't really hate them. And then with the emergence of these derivatives in 04 and 05, it became the case that actually you could bet on no. And you never could bet on no before. So that, considering myself an intellectual, I wanted to do the work to find out, well, how much do I like them? And I'd really never thought about it before, to be honest. And so the first thing I did is I work with a colleague and I said, let's break America out into quartiles at a zip code level based on home price appreciation. And let's look and see what the defaults look like. And so we looked at the 2000 vintage, this is back in 2005 and five years was about enough time to really know what would happen in the 2001, 2002 vintages were slightly less seasoned. And certainly the 2003-2004, you couldn't really learn much from them. So what we found was for the 2000 vintage, the top 25% of American home prices generally corresponded to California, Florida, places like that, where the loan balance”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “During the period of time between when I first started and we got to that trade, I became sort of known for doing all of the sort of unusual esoteric trades. So there were, you know, a securitizations really are just backed by cash flows. And you can do securitizations backed on mortgage bonds or credit card loans, boat loans, really anything. And one of the things we had worked on it was after the big tobacco settlement, the tobacco lawyers didn't want to wait for their money for many, many years from the States. So they securitized their future rights to get these payments. So securitization really can do anything. And I was involved in a lot of the more esoteric ones. So I always consider myself like a thinker, an intellectual. And because the B pieces in general and really structure products specifically even the AAAs, each bond is somewhat unique. And even the AAAs where there's maybe a big tranche, maybe it's 100 million. The ability to short something when there's no borrow doesn't really exist. So it was always the case that you just really thought about, well, how much do I like them?”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “So you go from that early 90s doing this work for a long time and then eventually come into this subprime mortgage short, which became, among other things, a marquee for you. I'd love to hear the story of how you got to that trade.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “As many trades as some of the other areas, it was still a pretty profitable. And I always viewed it, as I used to say to people, in some ways what we were doing were more like being art dealers than two-year treasury traders. And that appealed to me, the intellectual aspect of it appealed to me.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Sleepier backwater part of the business. It wasn't really flow trading. There weren't a lot of trades. We sometimes didn't even do one trade in a day. But it was more about really understanding the risks inherent in these structures and the leverage in them. And it was not portfolio management. We would buy things not really knowing who we would sell them to or when we would sell them to, as opposed to somebody who's trading in more of a flow product. And I sort of thought of us as like the track team in that the agency mortgages were sort of the football team and they were doing tons of trades and everybody wanted to be around and the salespeople were the cheerleaders, if you will, and they all wanted to be around the agency pass through traders. Those guys were doing huge trades and whatnot. And the AAA mortgaged the non-government guaranteed mortgage. They were maybe the baseball team. They were also doing these big trades and everybody wanted to talk to them. And we were kind of these guys in the corner doing these very small trades. But because the trades were complicated, because they were illiquid, because not that many people did it, our margins were really big. And so even though we weren't doing”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “So I found that the trading people seem to have a more interesting job and maybe they made more money than some of the other people and they weren't working the crazy long hours like I was as an analyst. So what I decided to do is every day I worked on the 18th floor and the trading floor was on the third floor. So I would go downstairs and if anybody was traveling for work or out sick or on vacation, I would just sit in their desk and I would do my job and I wouldn't say anything to anyone, but I would just sit there and do my job. And so one people would see me. Two, I would hear them talking and pick up something. And just I thought I would be this way top of mind if they ever thought something. So when the BP's trader at the time needed a second person, I was sort of the logical person to do it. One, I was known for being really good at my job and I looked up in the database and I had structured more of these deals than all the other four people put together. And two, I was always around. So I was invited to join the BP's desk, which was this.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “And so there was a huge demand For people to call up the mortgage servicers. And find out how many loans were delinquent and just really rudimentary type of stuff. And so I started.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “I started November 4th. And at the time, there was Bloomberg, really, Bloomberg existed, but was a very, very minor thing, and all the banks had their own internal mortgage-backed security departments and whatnot.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “After. So it was a different time. Just trying to find a job, living at home after college, trying to find a job and taking any sort of interview I got. And, you know, some of it is luck. And then eventually I was hired a middle office type job, a creditor.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Yankee and Goldman Sachs seated out of college. I'm like, yeah, well, you graduated before the 87 crash, and I graduated.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “So it's kind of ironic or funny story, I guess, which is that my family was in the real estate business, small time real estate business. I assumed I would go into the real estate business. And I graduated college in 91, which was one of the times that was hard to get a job. So two things happened. One, I was hard to get a job. And two, I read the book Liar's Broker by Michael Lewis. And I said, wow, this sounds amazing. And I had never heard of really Wall Street Korea. I just didn't come from a background that was talked about or I knew anyone who did that or anything. So I read the book and I thought this is interesting. And while still sort of trying to get jobs in real estate, I tried to get a job on Wall Street as well. And although I was Magna Cum Loud, I graduated unemployed because 91 was a bad year. I remember going to interviews and people saying, wait, you're Magnus Loud Economics and you're unemployed. Like I had a two and a half GPA and I majored in biology and I got a job in M&A.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “People are who they are, and you can work harder to be a better person or be happier or calmer or whatever it may be, but we are the person that we were sort of made to be. And I haven't changed that much. So it's sort of interesting that you have some knowledge or memory. We went to a small high school, so we certainly knew each other. And to this day, I remember the names of your brother and your sister. So yeah, we know each other.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “Sure. Well, I don't know how far we want to go back. Ted and I went to high school together. And people are the same. My parents were cleaning out my bedroom when I was about 25, and they gave me some papers and included in that was my second grade report card. And I was just then at the same time getting my review from my employer at the time, Credit Suisse Boston. And you put my 25-year-old employment review next to my second grade report card and the strengths and the weaknesses are the exact same.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “My guest on today's show is Greg Lippmann, co founder and chief investment officer of Libramax, an $8 billion asset management firm specializing in structured products. Greg co-founded LibraMax in 2010 after a long tenure at Deutsche Bank focused on the space. He was one of the originators and the literal epicenter of the subprime mortgage short position during the financial crisis. Michael Lewis featured Greg in The Big Short and Ryan Gosling played him in the movie based on the book. Our conversation covers Greg's background, story of the subprime short, structured product market, and launching LibraMax. We discuss his investment strategy, research process, portfolio construction, trading, competitive landscape, and market outlook. We close with Greg's experience being portrayed by a Hollywood star on the big screen.”

    2022-09-12 · Capital Allocators · Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270) · IDENTIFIED FROM THE TRANSCRIPT · source