Sunday, November 21, 2010

'Big Short' Star Talks His Book

Bloomberg News

Lippmann Focuses Hedge Fund Buying on Subprime Debt

Nov. 18 (Bloomberg) -- Greg Lippmann, the former Deutsche Bank AG trader who gained fame for his bets against subprime- mortgage securities, focused his hedge fund’s buying on the debt in its first month.

LibreMax Capital LLC’s fund gained about 1.67 percent in October as it invested 44.4 percent of its portfolio in bonds backed by subprime home loans to borrowers with the worst credit, according to a letter to investors obtained by Bloomberg News. Hedge funds returned 1.5 percent on average last month, Bloomberg data show.

Lippmann, 41, started the New York-based firm with Fred Brettschneider, the former head of global markets in the Americas at Deutsche Bank, after they departed the German lender this year. Lippmann’s team made almost $2 billion for the bank in 2007 wagering against subprime debt through credit-default swaps as homeowner delinquencies soared, according to “The Greatest Trade Ever” (Broadway Books, 2009) by Greg Zuckerman.

“Returns were driven by the rally in the overall mortgage market as well as strong trading gains during the month,” the firm said in the letter.

John Curran, director of marketing at LibreMax, declined to comment. Lippmann is the firm’s chief investment officer.

LibreMax Partners LP bought 82 securities and sold 9 last month, according to the letter. “Our investment team had an active first month,” the firm said.

Foreclosure Issues

The fund found “attractive investment opportunities” in junior-ranked slices of older subprime securitizations, as well as junior pieces of repackaged prime-loan securities and mortgage bonds whose principal will never be repaid, according to the letter.

In addition to subprime debt, the firm also has 13.9 percent of the fund’s portfolio in other home-loan securities that lack government-backed guarantees, according to the letter.

LibreMax is dismissing concern that foreclosure issues, created by loan servicers acknowledging in September that they used false affidavits in court cases, will harm bondholders by increasing how long it takes to liquidate soured debt.

Investors in residential mortgage-backed securities, or RMBS, shouldn’t adjust what they pay, the firm said.

“While the press about foreclosure risks has been prevalent, the RMBS market has largely shrugged off these headlines,” the firm said. “We agree with this sentiment and believe that current prices, broadly speaking, have already factored in the possibility of extended foreclosure timelines.”

Falcone, Paulson

Lippmann was among the Wall Street traders who helped create the standardized default-swap contracts that made it easier for hedge funds including John Paulson’s Paulson & Co., Philip Falcone’s Harbinger Capital Partners and Hayman Advisors LP to bet against housing.

In 2006 and 2007, Lippmann encouraged money managers to make the wagers and handled their trades, according to Zuckerman’s book and Michael Lewis’s “The Big Short” (Norton/Allen Lane), in which he was also featured. Paulson and Hayman, run by Kyle Bass, are among investors who later began buying mortgage bonds at beaten-down prices.

A Markit ABX index of credit-default swaps tied to 20 subprime-loan bonds rated AAA when created in the second half of 2006 has climbed almost 33 percent this year, according to administrator Markit Group Ltd. An increase generally indicates less pessimism about the value of subprime debt.

Index Levels

The index’s levels are typically similar to the prices being paid for the underlying securities in cents on the dollar. The index rose to 56.13 yesterday after falling as low as 28.46 in April 2009. It lost about 1 percent last month after rising to almost 60, the highest since October 2008, during the period.

Prices for the most-senior securities backed by fixed-rate so-called Alt-A mortgages gained 1 cent on the dollar last month to about 79 cents, according to Barclays Capital data. The debt, tied to loans to borrowers who often failed to document their incomes or didn’t plan to live in properties, advanced another cent last week, after ending last year at about 72 cents. Holders also receive interest payments.

Seer Capital Management LP, the hedge fund led by Philip Weingord, is also buying subprime-mortgage securities, Weingord said in a Sept 30 interview. He oversaw Lippmann at Deutsche Bank while the trader made the bets against subprime. Weingord left Deutsche Bank in 2008 and was replaced by Brettschneider.

LibreMax Partners last month also bought “highly seasoned” securities tied to manufactured-housing loans, as the debt category made up 20.7 percent of investments, according to the letter. It also bought bonds backed by private-student loans; subprime credit-card accounts; and high-yield, high-risk corporate loans, known as collateralized loan obligations.

The fund lost money last month on hedges involving high- yield corporate debt, according to the letter.

To contact the reporters on this story: Jody Shenn in New York at Saijel Kishan in New York at

To contact the editors responsible for this story: Alan Goldstein at Christian Baumgaertel at