Speaker 1: Hello, and welcome to the latest edition of the Odd
Speaker 1: Lots Podcast. I'm Joe Wisenthal, Managing editor at Bloomberg Market.
Speaker 1: My co host Tracy Alloway is away again this week,
Speaker 1: but fortunately she is going to be back next week.
Speaker 1: But since she's out, we're doing another special episode or
Speaker 1: unusual episode. I wanted to talk to one of my
Speaker 1: colleagues here at Bloomberg who wrote a fantastic news story
Speaker 1: that I absolutely love entitled the Big Long making a
Speaker 1: killing in the market everyone left for dead. It's about
Speaker 1: the people who made a fortune by going long risky
Speaker 1: assets down at the worst part during the worst period
Speaker 1: of the financial crisis. So essentially the opposite of the
Speaker 1: big short. So um, without further ado, I want to
Speaker 1: get right into it. I'm here with Alastair Marsh who
Speaker 1: wrote this story. Alistair, thank you very much for joining us.
Speaker 1: Thanks having me on. Let's give the quick round up.
Speaker 1: What's your story about? Who were these investors who were
Speaker 1: bold enough to go along very risky assets right at
Speaker 1: the bottom of January two thousand nine. Who were they
Speaker 1: and what was their bad sure were They were trading
Speaker 1: asset back securities for a UK bank called h Boss
Speaker 1: H BOSS has a very interesting history in the UK.
Speaker 1: In fact that one of the most controversial ones, you
Speaker 1: might say, UM, ultimately collapsed back into the end of
Speaker 1: two thousand and eight. It had a government bail out,
Speaker 1: it had a secret cash infusion from the Central Bank,
Speaker 1: and ultimately was taken over by Lloyd's Bank. So while
Speaker 1: all this UM was happening in the in the background,
Speaker 1: you had these two traders at h BOSS called Melam
Speaker 1: Patel and Richard Paddle, who had spent the last ten
Speaker 1: years or so trading A B S every day. And
Speaker 1: when the crisis hit, A B S the asset back
Speaker 1: security is and these were the securities that were tied
Speaker 1: to mortgages mostly that everybody has come to know and understand.
Speaker 1: We're sort of a key variable in the financial crisis exactly. Yeah,
Speaker 1: these were typically backed by so these were bonds backed
Speaker 1: by mortgages in the UK, typically UM, and they were
Speaker 1: trading these for ten years or so. For most of
Speaker 1: that time, these were considered a relatively vanilla product. Most
Speaker 1: of them were rated triple A, and it all seemed
Speaker 1: like a good and safest houses, so to speak, kind
Speaker 1: of bet. The title of your story is called The
Speaker 1: Big Long obviously a reference to the Big Short, So
Speaker 1: explain what they did in this trade and how it
Speaker 1: was sort of the mirror opposite of the Big Short trade. Sure,
Speaker 1: there as many kind of paradles to the Big Shot. Effectively,
Speaker 1: the Big Short was saying that, um, the housing market
Speaker 1: is going to collapse, and these subprime mortgage bonds are
Speaker 1: priced at crazy levels that don't imply that collapse. Well,
Speaker 1: they had the opposite view that in the UK the
Speaker 1: housing market was not going to collapse, and that the
Speaker 1: mortgage bonds in the UK implied that the mortgage market
Speaker 1: had collapsed or was about too, and they believed it wasn't.
Speaker 1: And they believed that the same kind of massful closures
Speaker 1: that we saw in the US, or the same spike
Speaker 1: in mortgage you is, was it wasn't going to happen
Speaker 1: in the UK. And obviously they they ultimately turned out
Speaker 1: to be correct. So anyone who's seen the movie or
Speaker 1: read the book The Big Short knows that it wasn't
Speaker 1: just enough to have a negative view on housing or
Speaker 1: asset values, but that these trades were not trivial to exercise.
Speaker 1: They were complicated to structure. In the case of the
Speaker 1: story you reported, on, there were difficulties and complications in
Speaker 1: executing the opposite trade. What did they have to do
Speaker 1: to express their view on these assets? Sure? What the
Speaker 1: biggest difference between the two, leaving aside one was short
Speaker 1: and one was long, was that the short bet. These
Speaker 1: were mainly institutional investors, hedge funds and others trying to
Speaker 1: do this, but the big long These guys whilst they
Speaker 1: were traders by profession, they worked for a bank. Actually
Speaker 1: they used there, they put up their own money. This
Speaker 1: was a kind of Ultimately they were retail investors and
Speaker 1: so they had to go They had to first get
Speaker 1: compliance from the bank and they managed to get this.
Speaker 1: It's what's quite interesting and I've I've had feedback from
Speaker 1: a number of people in their ASBAC securities market here
Speaker 1: in the UK who are quite indignant that these guys
Speaker 1: were able to do this because they whilst working at
Speaker 1: various other banks, wish that they had had the opportunity
Speaker 1: they were permitted to do so as well. But anyway,
Speaker 1: they they they had to ask compliance that that they
Speaker 1: managed to get that, and then they had to go
Speaker 1: to the retail broker and say I want to buy
Speaker 1: a BS please, and the retail broke would say, you
Speaker 1: want to buy what typically there are? These are retail
Speaker 1: brokers that are typically used to selling vanilla bond and stocks. Right,
Speaker 1: they're not acid back securities or the sort of more
Speaker 1: complicated stuff that institutional traders trade, right exactly. Yeah, that
Speaker 1: they be the kind of thing like I want to
Speaker 1: buy BP shares or I want to sell bark these
Speaker 1: shares please. So asking for triple B granite bonds, for example,
Speaker 1: which is what their best trade was, was virtually unheard of,
Speaker 1: and they had to explain to these to the basically
Speaker 1: called a call center in Glasgow. For some reason, in
Speaker 1: the UK, most of our call center operators are based
Speaker 1: in Scotland because there's something to do with the Scottish
Speaker 1: accent that's kind of soothing or something like that. Is
Speaker 1: that is that really a thing? That's really a thing
Speaker 1: called most most banks, which boards, etcetera. It's always in
Speaker 1: Scotland anyway. So they call them, they call Glasgow, they're
Speaker 1: they're on the phone for two hours and they have
Speaker 1: to explain not only what they want, um, what it is,
Speaker 1: how it works, but also kind of where they can
Speaker 1: get it and in some cases who to call to
Speaker 1: get it. So for the A B s, they because
Speaker 1: they're sitting at the Bloomberg, they have all context in
Speaker 1: the market. They know that, for example, Morgan Stanley has
Speaker 1: got these bonds, so they know that Credit Swiss has
Speaker 1: got those bonds. So they'd say, cool this guy, Morgan Stanley,
Speaker 1: please and get me these bonds. So basically they are
Speaker 1: doing the job before the retailer. I love this because
Speaker 1: there because their institutional traders, they know everything there is
Speaker 1: to know about what they're trading. But because they, for
Speaker 1: this weird quirk, were forced to go through a retail
Speaker 1: brokerage to make these purchases. They had to sit there
Speaker 1: on the phone and walk the broker through the trade
Speaker 1: exactly so Melan Melan Patel said that he would while
Speaker 1: sitting at his desk, he'd be on hold or be
Speaker 1: listening to the Beethoven Symphony and then in the background
Speaker 1: whilst the cool center person tried to work out what
Speaker 1: it was and how to how to get hold of it.
Speaker 1: But but ultimately these retail brokers were able to do
Speaker 1: the mechanics of buying these assets and getting them into
Speaker 1: their accounts. Ultimately, yes, but it was very painful. That
Speaker 1: was It was it, but it was very painful. Now,
Speaker 1: do the stories of these two traders, Patel and Paddle,
Speaker 1: do they sort of undermine a common argument? I mean,
Speaker 1: the view is, I think in popular culture and probably
Speaker 1: expressed by the books and movies, that the people trading
Speaker 1: these assets had no idea what they were trading. They
Speaker 1: had no idea what was in them. Everyone on Wall
Speaker 1: Street was kind of stupid and there were only a
Speaker 1: few smart people. But does their experience show that actually
Speaker 1: a lot of the traders really did understand them and
Speaker 1: were at least more aware of what was in these
Speaker 1: assets than popular culture is depicted. Well, they certainly knew them,
Speaker 1: and there's no basically they The way they explained it
Speaker 1: is that they were trading for ten years. They knew
Speaker 1: the names of the bonds, that knew how they were structed,
Speaker 1: They knew were to buy them, who to sell them to,
Speaker 1: So they knew the market at the back of their hand.
Speaker 1: And it kind of stands to reason that the same
Speaker 1: thing would be true of other traders and other institutions.
Speaker 1: Now that's not to say that they weren't kind of
Speaker 1: egregious things done in very very various times of various places,
Speaker 1: but it stands to reason that people who trade these
Speaker 1: products every day, and these are not simple products, are
Speaker 1: very complicated. That's why it took them so long to
Speaker 1: get it through the their brokers. Um, you know, they
Speaker 1: should know the risk, they should know what's backing them.
Speaker 1: They should know what the mortgages are like, they should
Speaker 1: know the chances of um you know that the arrears history.
Speaker 1: They but it should know that stuff. But it does
Speaker 1: seem like the way people talk about this period always
Speaker 1: is very black or white. There's a few people that
Speaker 1: were warning and then all of the other people were
Speaker 1: cheap and not, you know, not paying attention to the
Speaker 1: risks at all. And it sounds like it's not quite
Speaker 1: that simple. Yeah, that's true. And actually I think in
Speaker 1: some of the pages of The Big Short, actually it
Speaker 1: implies that some of the guys in the investment banks
Speaker 1: didn't know what they were doing. They were just hoping
Speaker 1: that the a merry go round to go on for
Speaker 1: a little bit longer than it did, so he knew
Speaker 1: what was in there. Of course, one of the things
Speaker 1: that makes The Big Short such a compelling story it
Speaker 1: just the jaw dropping returns that those traders got in
Speaker 1: the amount of money they made talk to me about
Speaker 1: how well these two traders did. Well. They didn't do
Speaker 1: anything um on the scale of the big shot. They
Speaker 1: didn't become billionaires and they didn't become billionaires no, um,
Speaker 1: I think well that they were. They didn't give they
Speaker 1: didn't disclose fully the numbers. We had to do some
Speaker 1: calculations here, but we we estimated that Buttel made about
Speaker 1: one point too million pounds, which is not bad return
Speaker 1: that the best they put he put forward, we reckoned
Speaker 1: about four fifty thou pounds um. Their best return was
Speaker 1: on bonds called Granite. These were sort of controversial and
Speaker 1: central to the whole thing. Tell us about the Granite bonds. Well,
Speaker 1: Grantite we're backed by mortgages from UK Bank called Northern Rock,
Speaker 1: and Northern Rock is probably the closest thing we had
Speaker 1: in the UK to sub prime and the bank basically
Speaker 1: massively over leveraged um Well. It had a huge residential
Speaker 1: mortgage backed securities program and which was called Granite and
Speaker 1: allowed it to fund fifty billion pounds worth of mortgage lending.
Speaker 1: Ultimately it succumbed to the first bank run in the
Speaker 1: UK in a hundred and forty years. So the I
Speaker 1: remember the scenes of watching people queuing outside of Northern
Speaker 1: Rock branches on the high streets of various towns across
Speaker 1: the UK. That that that sort of that is almost
Speaker 1: as iconic as the images of the Lehman Brothers bankers
Speaker 1: leaving the building with the you know, their crates and
Speaker 1: so on and so so. Northern Rock is a very
Speaker 1: kind of controversial and um institution, and it was bailed
Speaker 1: out by the UK government. Um. But granite bonds because
Speaker 1: they were sold, I mean without going to all the
Speaker 1: technicalities of securitization. They were sold by a separate vehicle
Speaker 1: that continue to exist once Northern Rock didn't. In the
Speaker 1: story you quote Paddle is saying, quote there was a
Speaker 1: concern in the market that the UK government would rip
Speaker 1: it up. What did that mean that they would theoretically
Speaker 1: pay nothing in the end? Yeah, well they they bought
Speaker 1: these bonds. So they were initially sold at a hundred
Speaker 1: pence on the pound. They brought them eightpence, So now
Speaker 1: this was discount. Yeah. Um, Now that that was for
Speaker 1: the riskiest bonds, the ones that were first in line
Speaker 1: to take losses. Um. But even so, that's that's kind
Speaker 1: of huge decline and the view was simply that basically
Speaker 1: it was down to political risk that the UK government
Speaker 1: having taken over the institution. I don't think we've had
Speaker 1: a nationalization like that in well in anyone's memory. Um,
Speaker 1: what's going to happen? This is unprecedented. Are they just
Speaker 1: going to say, do you know what, we're not paying
Speaker 1: those bonds back. This bank doesn't have enough money, We're
Speaker 1: not going to pay. Why did they feel confident that
Speaker 1: the government would not rebub those bonds? Well they didn't actually,
Speaker 1: but what there basically their view was that m mathematically
Speaker 1: it worked out that they should get at least get
Speaker 1: their money back. So they bought eight pence on the pound.
Speaker 1: And I think the way they described by the way
Speaker 1: they described it to me was that it would take
Speaker 1: about two years for the granite structure to be unwound,
Speaker 1: as in it's quite a complicated structure and lots of
Speaker 1: mortgages behind it, and soon it would take about two
Speaker 1: years in their calculations to unwind. And in that period
Speaker 1: they should have two years of five coupons, so ten,
Speaker 1: so they should get ten back having put eight in.
Speaker 1: So that was their very kind of basic bet. Obviously,
Speaker 1: they then had a huge huge price rally, so that
Speaker 1: that's where the huge returns came from. But at that
Speaker 1: point they were just thinking. Yeah. So in you have
Speaker 1: this chart that obviously the list a nurse to the
Speaker 1: podcast can't see, but I'm looking at it right now,
Speaker 1: and it shows that they bought in around eight and
Speaker 1: then they sold around sixty. But actually the bonds continued
Speaker 1: to rally. Uh what well, uh, you know, there's a
Speaker 1: little bit of volatility, but they actually rallied much more
Speaker 1: even after they sold them. Yeah, that's right, um, and
Speaker 1: I did, Austin, why didn't you try to hold on?
Speaker 1: Because actually they were redeemed in January and December so
Speaker 1: that they don't exist anymore and they were paid back
Speaker 1: at pass so at one. That's just let's just pause
Speaker 1: right there. How unbelievable that is that you know that
Speaker 1: we all remember these bonds, these first in line losses
Speaker 1: from two thousand eight and two thousand nine. I don't
Speaker 1: even think that got much attention that in ten they
Speaker 1: had essentially recovered a hundred percent of their value. Not
Speaker 1: that they recovered some, but virtually the entire thing. I
Speaker 1: think that part is almost entirely unknown to people. Yeah,
Speaker 1: it's pretty unbelievable really, Um, but they said or Patel
Speaker 1: specifically said that his start of investing is not to
Speaker 1: try to time the top and not to try to
Speaker 1: hold on for the last or so. But having gone
Speaker 1: from eight to seventy or sixty, he thought, you know what,
Speaker 1: that's a pretty good return. I'll take that. And actually,
Speaker 1: at the time they sold out, which was about eleven,
Speaker 1: it wasn't clear at all that the UK government was
Speaker 1: going to sell them. That's that's why they were deemed
Speaker 1: because the government sold them, but it wasn't clear at
Speaker 1: all that was going to happen at that point. So yeah,
Speaker 1: so no reason to get greedy. Eight to sixty is
Speaker 1: a pretty a pretty nice return, isn't it. Yeah. Um,
Speaker 1: let's let's look big picture for a second. Um. You
Speaker 1: know one thing I want I'm always curious about is
Speaker 1: um the sort of psychology of trading, making a making
Speaker 1: a bed, or making a trade that's the exact opposite
Speaker 1: of how the market sees like, basically, having the guts
Speaker 1: to make a call that's different from what everyone around
Speaker 1: you is um calling for. And it seems to me
Speaker 1: that bears, they're always bears, are always people who think
Speaker 1: the world is coming to an end. There are always
Speaker 1: people who are predicting doom, and that sort of accepted.
Speaker 1: People just accept that there's going to be negative people
Speaker 1: out there. But in a way, optimism in the face
Speaker 1: of panic actually strikes me as much more brave, because
Speaker 1: no one likes to hear someone called a perma ball,
Speaker 1: or people mock the balls. People have an intellectual respect
Speaker 1: for negative people. How does that? What's your view on that?
Speaker 1: Do you think that like that this view that they
Speaker 1: expressed was particularly brave and gutsy given the prevailing negative
Speaker 1: sentiment at the time. I think it was, and especially
Speaker 1: when you think about the very place where they were
Speaker 1: sitting that when they put these trades on, or when
Speaker 1: they first asked permission to do that. That was in
Speaker 1: January two thousand and nine, and it was that month
Speaker 1: that the takeover of h Boss actually happened. So they've
Speaker 1: had in in a few months earlier Lehman had gone down,
Speaker 1: then HBOS itself had had a twenty billion pound bail
Speaker 1: out from the government, it had a Central Bank additional
Speaker 1: top up from the Central Bank, and so with all
Speaker 1: that background for them to be sort of bullish for
Speaker 1: lack of a better way, but it is um. It's
Speaker 1: quite remarkable. But what's also interesting about these guys is
Speaker 1: that that they're not particularly um. They're not how you
Speaker 1: might think or a caricature of a bond trader. They're
Speaker 1: not kind of gregarious types or brash. That they're both
Speaker 1: quite um, quiet and quite thoughtful. And actually Milan in
Speaker 1: particularly very interesting because he's he had he started um
Speaker 1: investing in bank bonds, not a B S, even though
Speaker 1: he traded a B S for living. He first started
Speaker 1: investing in bank bonds and he told me, having not
Speaker 1: known this market that well, he spent his evenings for
Speaker 1: about a month or so reading through bond prospectuses. So
Speaker 1: this is just like Michael burry So was like someone
Speaker 1: who's actually willing to dive into all the paperwork to
Speaker 1: really figure out what's in there and how did you
Speaker 1: find the story. Just as a reporter, it was quite
Speaker 1: fun finding them. Actually, I spent quite a bit of
Speaker 1: time in reporting on the sale of Granite the UK
Speaker 1: government announced it was going to sell. At the time,
Speaker 1: it was thirteen billion pounds and it was the biggest
Speaker 1: ever sale of assets from the UK government. And because
Speaker 1: granted was such a well known um series of bonds.
Speaker 1: I wanted to investigate and actually managed to break some
Speaker 1: news on who was bidding for them, who wanted to
Speaker 1: buy them. In the end, it was Cerberus who won.
Speaker 1: And but as part of that I kept hearing about
Speaker 1: these mystical traders or the mythical I should say, traders
Speaker 1: who bought granted at the bottom, and I guess there
Speaker 1: had to be someone, right, Yeah, Well, one one whimsical
Speaker 1: hedge fund manager told me that it was Harold Tynesite
Speaker 1: who bought the bonds at the bottom. But I wanted
Speaker 1: to find out who did, particularly when in December the
Speaker 1: first bond started to be redeemed and they were paid
Speaker 1: back at part at one hundred, which to me thought,
Speaker 1: if he bought at the bottom and got a hundred back,
Speaker 1: that's amazing UM. And so I kind of made it
Speaker 1: a bit of a mission to find out who brought them,
Speaker 1: and through asking various contacts in the market, came across
Speaker 1: Richard Paddell and he was kind enough to to speak
Speaker 1: to me in turn with the tale and was fascinating.
Speaker 1: And then Milan also, so yeah, it was a really
Speaker 1: interesting investigative process and looking back at the crisis in
Speaker 1: the will the UK's experience of the crisis really interesting.
Speaker 1: Other other others that you think probably you haven't found, Well,
Speaker 1: there's others I know of, but I haven't necessarily included
Speaker 1: in the piece. Um, there were some others who did
Speaker 1: it with them at h BOSS. I mean, Milan and
Speaker 1: Richard were effectively the brains of the trade, but there
Speaker 1: were other traders that got in on various various purchases
Speaker 1: with them. Um. We also know of a few other
Speaker 1: hedge funds and one particularly large US investment bank UM
Speaker 1: that shall remain unnamed. I guess that that, yeah, that
Speaker 1: also got in on the trade. But they were doing
Speaker 1: it not for them, not for themselves or their own
Speaker 1: personal money, but for for the either the prop desk
Speaker 1: or for the hedge funds. So looking ahead to today,
Speaker 1: are they're always these types of stories in the market,
Speaker 1: people finding assets with extreme dislocations or is this really
Speaker 1: the type of thing that when there's a huge crisis
Speaker 1: or a huge bubble, Yes, you find them, but most
Speaker 1: of the time people can't really be expected to find
Speaker 1: these extraordinary dislocations. I think you could probably argue that
Speaker 1: both ways. Actually, I mean, Richard Paddles said something very
Speaker 1: interesting that he reckons that every ten years this or
Speaker 1: approximately every ten years, there's some big market event that happens,
Speaker 1: whether it be the dot com the do calm bubble bursting,
Speaker 1: whether it be the Asian financial crisis, whether the e
Speaker 1: M debt in Russia for example, And this time around
Speaker 1: he said, well this in so in the two thousand
Speaker 1: two thousand and nine, it was in the A B
Speaker 1: S market, aspect securities market, and since he was trading
Speaker 1: that market, he was in the perfect position to profit
Speaker 1: from it. Now, following his logic, then you know, in
Speaker 1: a few years time, we should see something else, something similar,
Speaker 1: and perhaps some people might say, oh, that's bank bonds,
Speaker 1: or maybe that's high yield, or some people might even
Speaker 1: say that's et F s um. So I'm sure that
Speaker 1: there are going to be more of these type of scenarios.
Speaker 1: I guess you just need to be in the right
Speaker 1: place at the right time. I really know that market well, Alistair,
Speaker 1: thank you very much for joining us. I'm looking forward
Speaker 1: to in a few years you reporting on who made
Speaker 1: the big money in and sixteen. I'm sure you'll find
Speaker 1: them and I really appreciate you coming on the other podcast.
Speaker 1: Thank you very much. Thank you, and thank you very
Speaker 1: much for joining us on the Odd Lodge podcast. I'm
Speaker 1: Joe Wisenthal. You can follow me on Twitter at the
Speaker 1: Stalwart and you should follow Alistair too because he'll be
Speaker 1: turning up the next great uh, the next grade scoop.
Speaker 1: He's on Twitter at at Alistair j Marsh and we'll
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