Howie Hubler

Last updated
Howie Hubler
Born
Howard Hubler III

Boonton, New Jersey, U.S.
Alma mater Montclair State College
Occupation(s) Trader, consultant
Known forTrading losses

Howard Hubler III, known as Howie Hubler, is an American former Morgan Stanley bond trader who is best known for his role in the fifth largest trading loss in history. He made a successful short trade in risky subprime mortgages in the U.S., but to fund his trade he sold insurance on AAA-rated mortgage-backed collateralized debt obligations that market analysts considered less risky, but also turned out to be worthless, resulting in a massive net loss on his trades. [1] [2] His actions while handling credit default swaps (CDS) directly resulted in the loss of roughly US$9 billion during the 2007–08 financial crisis—the largest single trading loss in Wall Street history when adjusted for inflation, and the largest at the time. [3] [4] [5] The only bigger single losses in nominal terms came in 2012 with Bruno Iksil (also trading credit default swaps) and in 2021 when Bill Hwang lost around $10 billion on total return swaps.

Contents

Early life and education

Hubler was born and raised in Boonton, New Jersey, the son of a real estate broker. He attended Montclair State College, where he played American football. [2]

Career

Hubler began working in Morgan Stanley's fixed income division as a bond trader sometime in the late 1990s. He had a reputation as a hothead and a bully who responded to critiques with strong anger. In 2003, Morgan Stanley created a proprietary credit default swap for the purpose of shorting bad subprime mortgage bonds. When a group was being formed in 2003 to short subprime mortgages, Hubler was co-opted as the group's manager and placed in charge of the team. After early successes shorting subprime mortgage bonds, as well as selling bonds, he was promoted to run the newly created Global Proprietary Credit Group (GPCG) in 2006. [2]

$9 billion loss

The GPCG had positioned itself within Morgan Stanley as a group that could provide highly profitable deals very quickly. Because of the nature of the credit default swaps, however, the GPCG was required to post premiums to their counter-parties until such a time when the bonds were considered in default. Because the group was paying out a large amount of money to keep the CDS trades in place, their profitability was quite low. [2] To finance their operations, Hubler instructed his traders to sell credit default swaps on $16 billion in AAA-rated collateralized debt obligations (CDOs). Hubler and the GPCG bought $2 billion in credit default swaps on extremely risky mortgages, and sold $16 billion in what they believed were safe CDOs. Because of the opaque nature of the CDOs on which they were selling credit default swaps, Hubler and his group did not realize that the CDOs they were insuring contained subprime mortgages similarly risky to the bonds they were shorting. Because of this, he repeatedly assured his company officers and risk management teams that their position was very secure.

After threatening to quit in a dispute over pay and organizational structure, Hubler was paid $25 million for his performance in 2006 and was expected to make significantly more in 2007 if performance continued as it had. However, once the dispute was resolved, the risk management team asked the GPCG to stress-test their portfolio. At a default rate of 6% (the previous historical high), the portfolio remained solvent. When pushed to a hypothetical default rate of 10%, however, the groups projected profits of $1 billion turned into a projected loss of $2.7 billion. [1] [2] Hubler argued vociferously that such default levels were unlikely and would never happen.

As the housing market began to collapse and defaults on subprime mortgages began to mount, disputes between Hubler's group and their counterparties began to emerge over the value of the bonds and CDOs that had been subject to credit default swaps. When notified by the counterparties that the CDOs' value had dropped to levels warranting a payout, Hubler disagreed, stating that the GPCG's models indicated that the CDOs were worth most of their expected value. Had he conceded the drop in value earlier, the GPCG's losses may have been limited to a relatively small fraction of their overall risk. However, because of his reluctance to follow the procedures outlined in the credit default swaps, GPCG and Morgan Stanley's position worsened over the subsequent months. By the time upper management intervened and removed Hubler, GPCG and Morgan Stanley were liable for nearly 100% of the expected losses. Hubler's group managed to sell $5 billion worth of the CDOs they had before the market collapsed, and realized another $2 billion in revenue from their original credit default swaps, putting the overall losses for his group at $9 billion—the fourth-largest single trading loss in Wall Street history. Morgan Stanley lost $58 billion in the financial crisis overall.

After Morgan Stanley

In October 2007, after Morgan Stanley's management and risk teams realized the extent of the damage, Hubler was given the option of resigning instead of being fired. He was paid $10 million on his departure.

In 2008, Hubler started the Loan Value Group, an organization that works with mortgage lenders dealing with underwater borrowers who are considering a strategic default. [2] [6] He has refused all requests to be interviewed on the topic of his time at Morgan Stanley. [2]

In the 2015 Adam McKay film The Big Short , Hubler's story is presented under the pseudonym of a Morgan Stanley trader named Benny Kleeger.

See also

Related Research Articles

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder.

<span class="mw-page-title-main">Credit default swap</span> Financial swap agreement in case of default

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.

<span class="mw-page-title-main">Goldman Sachs</span> American investment bank

The Goldman Sachs Group, Inc. is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many international financial centers. Goldman Sachs is the second largest investment bank in the world by revenue and is ranked 55th on the Fortune 500 list of the largest United States corporations by total revenue. In Forbes Global 2000 2023, Goldman Sachs ranked 34th. It is considered a systemically important financial institution by the Financial Stability Board.

<span class="mw-page-title-main">Bear Stearns</span> American investment bank

The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 as part of the global financial crisis and recession. After its closure it was subsequently sold to JPMorgan Chase. The company's main business areas before its failure were capital markets, investment banking, wealth management, and global clearing services, and it was heavily involved in the subprime mortgage crisis.

<span class="mw-page-title-main">Structured finance</span> Sector of finance that manages leverage and risk

Structured finance is a sector of finance — specifically financial law — that manages leverage and risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of financial instruments.

A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS). Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. Distinctively, CDO credit risk is typically assessed based on a probability of default (PD) derived from ratings on those bonds or assets.

Fixed-income arbitrage is a group of market-neutral-investment strategies that are designed to take advantage of differences in interest rates between varying fixed-income securities or contracts. Arbitrage in terms of investment strategy, involves buying securities on one market for immediate resale on another market in order to profit from a price discrepancy.

<span class="mw-page-title-main">Subprime mortgage crisis</span> 2007 mortgage crisis in the United States

The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. The crisis led to a severe economic recession, with millions losing their jobs and many businesses going bankrupt. The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA).

<span class="mw-page-title-main">Asset-backed securities index</span>

An asset-backed securities index is a curated list of asset-backed security exposures that is used for performance bench-marking or trading.

The subprime mortgage crisis impact timeline lists dates relevant to the creation of a United States housing bubble and the 2005 housing bubble burst and the subprime mortgage crisis which developed during 2007 and 2008. It includes United States enactment of government laws and regulations, as well as public and private actions which affected the housing industry and related banking and investment activity. It also notes details of important incidents in the United States, such as bankruptcies and takeovers, and information and statistics about relevant trends. For more information on reverberations of this crisis throughout the global financial system see 2007–2008 financial crisis.

A synthetic CDO is a variation of a CDO that generally uses credit default swaps and other derivatives to obtain its investment goals. As such, it is a complex derivative financial security sometimes described as a bet on the performance of other mortgage products, rather than a real mortgage security. The value and payment stream of a synthetic CDO is derived not from cash assets, like mortgages or credit card payments – as in the case of a regular or "cash" CDO—but from premiums paying for credit default swap "insurance" on the possibility of default of some defined set of "reference" securities—based on cash assets. The insurance-buying "counterparties" may own the "reference" securities and be managing the risk of their default, or may be speculators who've calculated that the securities will default.

This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.

Credit rating agencies and the subprime crisis is the impact of credit rating agencies (CRAs) in the American subprime mortgage crisis of 2007–2008 that led to the financial crisis of 2007–2008.

<span class="mw-page-title-main">Causes of the Great Recession</span>

Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and the following recession include lax lending standards contributing to the real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

<span class="mw-page-title-main">2007–2008 financial crisis</span> Worldwide economic crisis

The 2007–2008 financial crisis, or the global financial crisis (GFC), was the most severe worldwide economic crisis since the Great Depression. Predatory lending in the form of subprime mortgages targeting low-income homebuyers, excessive risk-taking by global financial institutions, a continuous buildup of toxic assets within banks, and the bursting of the United States housing bubble culminated in a "perfect storm", which led to the Great Recession.

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse is a report on the financial crisis of 2007–2008 issued on April 13, 2011 by the United States Senate Permanent Subcommittee on Investigations. The 639-page report was issued under the chairmanship of Senators Carl Levin and Tom Coburn, and is colloquially known as the Levin-Coburn Report. After conducting "over 150 interviews and depositions, consulting with dozens of government, academic, and private sector experts" found that "the crisis was not a natural disaster, but the result of high risk, complex financial products, undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street." In an interview, Senator Levin noted that "The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest." By the end of their two-year investigation, the staff amassed 56 million pages of memos, documents, prospectuses and e-mails. The report, which contains 2,800 footnotes and references thousands of internal documents focused on four major areas of concern regarding the failure of the financial system: high risk mortgage lending, failure of regulators to stop such practices, inflated credit ratings, and abuses of the system by investment banks. The Report also issued several recommendations for future action regarding each of these categories.

<i>The Big Short</i> (film) 2015 American biographical drama film directed by Adam McKay

The Big Short is a 2015 American biographical crime comedy-drama film directed and co-written by Adam McKay. Co-written by Charles Randolph, it is based on the 2010 book The Big Short: Inside the Doomsday Machine by Michael Lewis showing how the 2007–2008 financial crisis was triggered by the United States housing bubble. The film stars Christian Bale, Steve Carell, Ryan Gosling, and Brad Pitt, with John Magaro, Finn Wittrock, Hamish Linklater, Rafe Spall, Jeremy Strong, and Marisa Tomei in supporting roles.

<i>The Greatest Trade Ever</i>

The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History is a debut non-fiction book by American journalist Gregory Zuckerman. The book was released on November 3, 2009, by Crown Business. The book investigates the reasons and consequences of the subprime mortgage crisis and the role that hedge fund manager John Paulson played in those events.

<span class="mw-page-title-main">Goldman Sachs controversies</span>

Goldman Sachs, an investment bank, has been the subject of controversies. The company has been criticized for lack of ethical standards, working with dictatorial regimes, close relationships with the U.S. federal government via a "revolving door" of former employees, and driving up prices of commodities through futures speculation. It has also been criticized by its employees for 100-hour work weeks, high levels of employee dissatisfaction among first-year analysts, abusive treatment by superiors, a lack of mental health resources, and extremely high levels of stress in the workplace leading to physical discomfort.

References

  1. 1 2 Hagan, Joe (2008-04-27). "Only the Men Survive – The Crash of Zoe Cruz". New York . New York Media. Archived from the original on 2015-04-06. Retrieved 2015-10-18.
  2. 1 2 3 4 5 6 7 Abelson, Max (2010-03-24). "Howie Hubler of New Jersey: The Return of a Subprime Villain". The New York Observer . Archived from the original on 2015-01-03. Retrieved 2015-10-18.
  3. ↑ Springer, Kate (2012-05-11). "Top 10 Biggest Trading Losses in History". Time . Time Inc. Archived from the original on 2015-02-14. Retrieved 2015-10-18.
  4. ↑ Luccchetti, Aaron; Timiraos, Nick (2010-09-13). "After $9 Billion Loss, Trader Revives Career". Wall Street Journal . News Corporation. Archived from the original on 2015-01-14. Retrieved 2015-10-18.
  5. ↑ "Masters of Fraud Series: Howard Hubler | Financial Careers". financialcareeroptions.com. Archived from the original on 2017-11-17.
  6. ↑ Blackden, Richard (2010-09-13). "Trader blamed for Morgan Stanley's $9bn loss back in business". The Daily Telegraph . Archived from the original on 2015-02-28. Retrieved 2015-10-18.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.