The Senate Committee assigned to report on the causes of the financial crisis used then-trader Greg Lippmann’s emails in their 650-page report as an example of the view within Deutsche Bank that the subprime market was collapsing.
The report was released today. Click here to download it.
The committee is trying to establish that banks knew the market was souring as early as 2005, yet inflated the bubble anyway. Senator Levin, who led the committee, believes that banks knew what was going on, and misled clients so they they could ultimately reap the profits (which they did).
Here are the examples the report uses from Lippmann’s emails to show that bankers knowingly shorted the market while hawking the products to any dim-wits who would buy them. From the emails, a pattern emerges.
First he found “crap” that “blows”:
- “This bond blows” (regarding a subprime RMBS security issued by Long Beach) – 2/24/2006
- “Yikes didn’t see that. Half of these are crap and rest are ok… Crap-heat pchlt sail tmts.” (The acronyms refer to “Home Equity Asset Trust” “People’s Choice Home Loan Securities Trust,” “Structured Asset Investment Loan,” and “Terwin Mortgage Trust.”) – 4/5/2006
- “This is a good pool for you because it has a fair number of weak names but not so many that investors should balk (I wouldn’t add more of these) and also has only a few names that are very good.” (Advising Derek Kaufman at JPMorgan) – 6/23/2006
- “You can certainly build a portfolio by picking only bad names and you have largely done that as Rascahl is considered bad as is Fremont (bsabs fr, fhlt, jpmac fre, sabr fr, nheli fm deals) ace, arsi and lbmlt.” (The acronyms refer to the names of lenders. Lippmann called “ACE,” “bad” even though it was a Deutsche Bank-created asset.) – 8/4/2006
- “I was going to reject this [long purchase of a synthetic CDO] because it seems to be a pig CDO position dump 60^ but then I noticed winchester [DB affiliated hedge fund] is the portfolio selector….. any idea???” (Email to Michael Lamont and Richard D’Albert, DB’s CDO Co-head and Global head of securitized products) – 8/4/2006
- “u have picked some crap right away so u have it figured out.” (To Mark Lee at Contrarian Capital) – 12/4/2006
Then he shorted it, or “covered the short” by “duping” “CDO fools” and told clients to do the same:
- “That said I can probably short this name to some CDO fool.” (To Bradley Wickens at Spinnaker Capital) – 8/30/2006
- “This kind of stuff rarely trades in the synthetic market and will be tough for us to cover ie short to a CDO fool. that said if u gave us an order at 260 we would take it and try to dupe someone.” (To Bradley Wickens at Spinnaker Capital) – 9/1/2006
And there’s more.
- At times during 2006 and 2007, he referred to CDO underwriting by investment banks as the workings of a “CDO machine” or “ponzi scheme.”
- “I don’t care what some trained seal bull market research person says this stuff has a real chance of massively blowing up.”
Eventually, the committee’s report says, Deutsche Bank built a $5 billion short against the subprime market (Lippmann says he had to fight to get them to do it). A trader who worked for Deutsche Bank even wrote a song about it. It’s called “CDO Oh Baby,” and it’s set to the Vanilla Ice song.
Lippmanns defence for “duping” and writing the above is this: He was “grasping at things” to prove he was right in his short position.
Because his trade was so successful, Lippmann doesn’t work at Deutsche Bank anymore. He left to start a hedge fund, Libre Max, which launched in the fall.