
Shorting Home Equity Mezzanine Tranches (2007) [pdf] - rococode
http://static1.squarespace.com/static/56e34fd9e707eb512223f372/56e89b00fd211959539d959d/56e89b02fd211959539d9669/1458084610683/2007_Subprime_Shorting-Home-Equity-Mezzanine-Tranches.pdf?format=original
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mifeng
I was involved with similar trades at JPMorgan and Citi. Investment bankers
gave these presentations to hedge funds to convince them to short the housing
market. Then, they created a CDO, called the hedge fund the "manager" and
tried to dump the bonds on Asian and Middle Eastern investors.

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bottle2
> tried to dump the bonds

How did that go?

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icelancer
Pretty good, in actuality. Europe got it way worse than the United States.

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simonebrunozzi
More details about this, if you can?

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patrickk
Ctrl+F "Dusseldorf"

[http://www.peterfrase.com/2011/08/the-big-short-germany-
and-...](http://www.peterfrase.com/2011/08/the-big-short-germany-and-toxic-
financial-products/)

~~~
simonebrunozzi
Thanks!

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fancyfredbot
Would this have convinced you to short home equity mezzanine tranches in 2007?
I'd like to think I'd have had the foresight to see what was coming if someone
was pitching it to me like this. If I'm being honest however I'm not sure how
convinced I'd have been by these slides.

~~~
nakedshorts
> I'd like to think I'd have had the foresight to see what was coming if
> someone was pitching it to me like this.

Well, you can test yourself, short ideas are abound in these uncertain market
conditions. It's surprisingly hard to have clarity while things are happening,
even if they are obvious in hindsight. For example, do you believe you should

1\. Short restaurant equipment suppliers because up to 15% of restaurants
could go out of business? [https://www.presciencepoint.com/research/research-
archives/m...](https://www.presciencepoint.com/research/research-
archives/middleby/)

2\. Short Chinese tech companies claiming to have exponential growth numbers
in the wake of "The China Hustle" and Luckin Coffee?
[https://citronresearch.com/wp-content/uploads/2020/04/GSX-
Te...](https://citronresearch.com/wp-content/uploads/2020/04/GSX-Techedu-The-
Most-Blatant-Chinese-Stock-Fraud-Since-2011.pdf)

3\. Short tangentially related healthcare companies trying to cash in on COVID
test kits? [https://hindenburgresearch.com/scworx-evidence-points-to-
its...](https://hindenburgresearch.com/scworx-evidence-points-to-its-massive-
covid-19-test-deal-being-completely-bogus-price-target-back-to-2-25-or-lower/)

I believe at least one of these things will appear extremely obvious in
hindsight ("duh, restaurants going out of business was a no-brainer").

~~~
ethbro
I feel like one of the biggest opportunities in the 2007/8 housing market
short was the speed at which it developed.

More specifically: glacially.

Up until the credit markets froze up, all the information was available, with
time to digest and for anyone to act on it.

That's the most interesting thing about this presentation. I'm assuming this
or similar was the one dramatized in _The Big Short_?

It's simply saying that something doesn't add up. Then laying out its case for
the numbers that were added.

At a macro level, there isn't much complexity:

(1) Home price appreciation is strongly inversely correlated with default
rate.

(2) CDO are created with sharp risk cliffs related to systemic default rate.

(3) Current home price appreciation + observed default rate + CDO pricing does
not add up. Ergo, one of those things must be wrong.

~~~
cinquemb
Yeah, I think people knew it would eventually play out because of the marco,
but for traders its important to figure out how to get the cheapest exposure
to the short until it happens.

Even in the big short, they show the routes different traders took to get
short exposure and all took various amounts of heat until it payed off.

Same is true now wrt to corporate bonds (or I should say was true, way more
expensive now to short than it was say during the entire time of 2019), one
know's they will go tits up, but getting the cheapest exposure will enable to
either build the position with minimal/fixed draw down or sweat every bps move
against you.

~~~
icelancer
The Big Short covers it fairly well, but doesn't give Burry enough credit /
blame. His crowning achievement wasn't in deducing the bonds were
overvalued/fraudulent, it was in finding suckers to take the other side of the
bet. This is alluded to in the casino with the Cornwall Capital guys, but was
a real thing. Plenty of people wanted to make the moves they did, but had
trouble finding outs.

~~~
JackFr
I worked as a software developer for a subprime prop trading desk at a big
bank from 2006 to 2009. Our two main RMBS traders were short from about 2005.
They would get beat up every week in capital committee meetings, and were told
“what is wrong with you guys, the guys on the dealer side are crushing it with
this stuff”.

Finally in 2008, these guys booked like $100 million in profits. But it didn’t
matter at all cause the dealer side lost $50 billion.

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radkapital
Can you share the original source / how you found the document? Thanks!

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rococode
I've actually reposted this a couple times since I thought it was interesting
and it never gained traction, so at this point I don't remember for sure how I
originally came across it. A quick search shows this page has the same link
and some more info: [http://www.scmessinacapital.com/blog/2015/04/where-can-i-
see...](http://www.scmessinacapital.com/blog/2015/04/where-can-i-see-a-copy-
of-greg-lippmanns-famous-2006-short-subprime-presentation-sent-from-deutsche-
bank-to-hedge-funds)

So I suppose the context was probably that I had just watched The Big Short
and was reading up on the topic some more haha.

~~~
emmelaich
It looks like an addendum to (or part of) "Wall Street & the Financial Crisis-
Anatomy of a Financial Collapse"

[https://www.hsgac.senate.gov/imo/media/doc/PSI%20REPORT%20-%...](https://www.hsgac.senate.gov/imo/media/doc/PSI%20REPORT%20-%20Wall%20Street%20&%20the%20Financial%20Crisis-
Anatomy%20of%20a%20Financial%20Collapse%20\(FINAL%205-10-11\).pdf)

Yep, there's a reference on page 289.

1119 2/2007 “Shorting Home Equity Mezzanine Tranches,” Deutsche Bank
Securities Inc.,

and there was an earlier version, from 2005.

1314 See, e.g., 2/2007 presentation, “Shorting Home Equity Mezzanine
Tranches,” prepared by Mr. Lippmann, DBSI_PSI_EMAIL01988773-845

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SanchoPanda
On your site you have the brk reports back to 1965, but I think all are
availalbe from public sources.

Here is 57 though 2012. If I'm mistaken and this looks like its from one of
the books let me know and I'll take it down.

[https://send.firefox.com/download/9a64844c1321c00c/#aKJwkyJh...](https://send.firefox.com/download/9a64844c1321c00c/#aKJwkyJh6X6IUmva-
PzxdQ)

Thanks for the share that is the subject of the post.

Edit for clarity: Early ones are Buffett Partnership, NOT brk.

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thorwasdfasdf
From what I gather, they're basically saying that the 10 year old housing boom
is at an end now.

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johnvanommen
If you want to see some crazy financials, you should go and look at the oil
and energy sector right now.

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adreamingsoul
why is that?

