WEBVTT - Episode 16: Making Money When Everyone Else is Losing Theirs 0:00:06.040 --> 0:00:09.000 Hello, and welcome to the latest edition of the Odd 0:00:09.039 --> 0:00:14.080 Lots Podcast. I'm Joe Wisenthal, Managing editor at Bloomberg Market. 0:00:14.880 --> 0:00:18.160 My co host Tracy Alloway is away again this week, 0:00:18.200 --> 0:00:21.560 but fortunately she is going to be back next week. 0:00:21.880 --> 0:00:25.439 But since she's out, we're doing another special episode or 0:00:25.520 --> 0:00:28.240 unusual episode. I wanted to talk to one of my 0:00:28.440 --> 0:00:32.880 colleagues here at Bloomberg who wrote a fantastic news story 0:00:32.960 --> 0:00:37.760 that I absolutely love entitled the Big Long making a 0:00:37.880 --> 0:00:41.600 killing in the market everyone left for dead. It's about 0:00:41.720 --> 0:00:45.879 the people who made a fortune by going long risky 0:00:45.960 --> 0:00:50.560 assets down at the worst part during the worst period 0:00:50.560 --> 0:00:53.640 of the financial crisis. So essentially the opposite of the 0:00:53.960 --> 0:00:57.480 big short. So um, without further ado, I want to 0:00:57.480 --> 0:01:00.160 get right into it. I'm here with Alastair Marsh who 0:01:00.240 --> 0:01:03.160 wrote this story. Alistair, thank you very much for joining us. 0:01:03.520 --> 0:01:06.920 Thanks having me on. Let's give the quick round up. 0:01:07.280 --> 0:01:10.520 What's your story about? Who were these investors who were 0:01:10.640 --> 0:01:14.080 bold enough to go along very risky assets right at 0:01:14.080 --> 0:01:17.160 the bottom of January two thousand nine. Who were they 0:01:17.240 --> 0:01:20.720 and what was their bad sure were They were trading 0:01:20.760 --> 0:01:24.080 asset back securities for a UK bank called h Boss 0:01:24.680 --> 0:01:27.920 H BOSS has a very interesting history in the UK. 0:01:28.040 --> 0:01:30.840 In fact that one of the most controversial ones, you 0:01:30.920 --> 0:01:34.840 might say, UM, ultimately collapsed back into the end of 0:01:34.880 --> 0:01:37.600 two thousand and eight. It had a government bail out, 0:01:37.640 --> 0:01:40.240 it had a secret cash infusion from the Central Bank, 0:01:40.720 --> 0:01:43.680 and ultimately was taken over by Lloyd's Bank. So while 0:01:43.720 --> 0:01:46.480 all this UM was happening in the in the background, 0:01:46.560 --> 0:01:49.880 you had these two traders at h BOSS called Melam 0:01:49.920 --> 0:01:52.800 Patel and Richard Paddle, who had spent the last ten 0:01:52.880 --> 0:01:56.080 years or so trading A B S every day. And 0:01:56.480 --> 0:01:59.440 when the crisis hit, A B S the asset back 0:01:59.520 --> 0:02:02.960 security is and these were the securities that were tied 0:02:03.000 --> 0:02:07.600 to mortgages mostly that everybody has come to know and understand. 0:02:07.640 --> 0:02:12.079 We're sort of a key variable in the financial crisis exactly. Yeah, 0:02:12.160 --> 0:02:15.919 these were typically backed by so these were bonds backed 0:02:15.919 --> 0:02:20.280 by mortgages in the UK, typically UM, and they were 0:02:20.320 --> 0:02:23.440 trading these for ten years or so. For most of 0:02:23.440 --> 0:02:26.959 that time, these were considered a relatively vanilla product. Most 0:02:27.000 --> 0:02:30.239 of them were rated triple A, and it all seemed 0:02:30.240 --> 0:02:33.480 like a good and safest houses, so to speak, kind 0:02:33.480 --> 0:02:35.480 of bet. The title of your story is called The 0:02:35.520 --> 0:02:39.520 Big Long obviously a reference to the Big Short, So 0:02:39.680 --> 0:02:42.880 explain what they did in this trade and how it 0:02:43.000 --> 0:02:46.600 was sort of the mirror opposite of the Big Short trade. Sure, 0:02:46.720 --> 0:02:50.079 there as many kind of paradles to the Big Shot. Effectively, 0:02:50.720 --> 0:02:55.160 the Big Short was saying that, um, the housing market 0:02:55.240 --> 0:02:58.160 is going to collapse, and these subprime mortgage bonds are 0:02:58.480 --> 0:03:03.200 priced at crazy levels that don't imply that collapse. Well, 0:03:03.639 --> 0:03:05.760 they had the opposite view that in the UK the 0:03:05.800 --> 0:03:08.680 housing market was not going to collapse, and that the 0:03:08.840 --> 0:03:12.520 mortgage bonds in the UK implied that the mortgage market 0:03:12.760 --> 0:03:15.400 had collapsed or was about too, and they believed it wasn't. 0:03:15.760 --> 0:03:19.280 And they believed that the same kind of massful closures 0:03:19.320 --> 0:03:21.320 that we saw in the US, or the same spike 0:03:21.360 --> 0:03:23.760 in mortgage you is, was it wasn't going to happen 0:03:23.760 --> 0:03:27.000 in the UK. And obviously they they ultimately turned out 0:03:27.040 --> 0:03:30.160 to be correct. So anyone who's seen the movie or 0:03:30.280 --> 0:03:32.760 read the book The Big Short knows that it wasn't 0:03:32.880 --> 0:03:35.560 just enough to have a negative view on housing or 0:03:35.560 --> 0:03:40.440 asset values, but that these trades were not trivial to exercise. 0:03:40.480 --> 0:03:43.880 They were complicated to structure. In the case of the 0:03:43.960 --> 0:03:48.320 story you reported, on, there were difficulties and complications in 0:03:48.440 --> 0:03:51.840 executing the opposite trade. What did they have to do 0:03:52.000 --> 0:03:55.360 to express their view on these assets? Sure? What the 0:03:55.360 --> 0:03:58.520 biggest difference between the two, leaving aside one was short 0:03:58.560 --> 0:04:02.000 and one was long, was that the short bet. These 0:04:02.000 --> 0:04:04.960 were mainly institutional investors, hedge funds and others trying to 0:04:05.000 --> 0:04:08.240 do this, but the big long These guys whilst they 0:04:08.280 --> 0:04:12.440 were traders by profession, they worked for a bank. Actually 0:04:12.480 --> 0:04:15.280 they used there, they put up their own money. This 0:04:15.400 --> 0:04:18.479 was a kind of Ultimately they were retail investors and 0:04:18.520 --> 0:04:20.920 so they had to go They had to first get 0:04:20.960 --> 0:04:24.120 compliance from the bank and they managed to get this. 0:04:24.360 --> 0:04:27.000 It's what's quite interesting and I've I've had feedback from 0:04:27.000 --> 0:04:29.880 a number of people in their ASBAC securities market here 0:04:29.880 --> 0:04:32.760 in the UK who are quite indignant that these guys 0:04:32.760 --> 0:04:35.800 were able to do this because they whilst working at 0:04:35.839 --> 0:04:38.320 various other banks, wish that they had had the opportunity 0:04:38.360 --> 0:04:41.200 they were permitted to do so as well. But anyway, 0:04:41.040 --> 0:04:44.320 they they they had to ask compliance that that they 0:04:44.360 --> 0:04:46.000 managed to get that, and then they had to go 0:04:46.120 --> 0:04:48.760 to the retail broker and say I want to buy 0:04:48.880 --> 0:04:52.240 a BS please, and the retail broke would say, you 0:04:52.320 --> 0:04:56.240 want to buy what typically there are? These are retail 0:04:56.279 --> 0:05:01.120 brokers that are typically used to selling vanilla bond and stocks. Right, 0:05:01.160 --> 0:05:04.080 they're not acid back securities or the sort of more 0:05:04.160 --> 0:05:09.400 complicated stuff that institutional traders trade, right exactly. Yeah, that 0:05:09.440 --> 0:05:11.240 they be the kind of thing like I want to 0:05:11.240 --> 0:05:14.200 buy BP shares or I want to sell bark these 0:05:14.200 --> 0:05:18.719 shares please. So asking for triple B granite bonds, for example, 0:05:18.720 --> 0:05:22.080 which is what their best trade was, was virtually unheard of, 0:05:22.160 --> 0:05:25.560 and they had to explain to these to the basically 0:05:25.720 --> 0:05:29.560 called a call center in Glasgow. For some reason, in 0:05:29.600 --> 0:05:32.080 the UK, most of our call center operators are based 0:05:32.120 --> 0:05:34.200 in Scotland because there's something to do with the Scottish 0:05:34.200 --> 0:05:36.240 accent that's kind of soothing or something like that. Is 0:05:36.279 --> 0:05:38.360 that is that really a thing? That's really a thing 0:05:39.120 --> 0:05:42.320 called most most banks, which boards, etcetera. It's always in 0:05:42.360 --> 0:05:46.040 Scotland anyway. So they call them, they call Glasgow, they're 0:05:46.080 --> 0:05:48.040 they're on the phone for two hours and they have 0:05:48.120 --> 0:05:51.160 to explain not only what they want, um, what it is, 0:05:51.240 --> 0:05:53.479 how it works, but also kind of where they can 0:05:53.520 --> 0:05:56.320 get it and in some cases who to call to 0:05:56.360 --> 0:05:58.520 get it. So for the A B s, they because 0:05:58.520 --> 0:06:00.600 they're sitting at the Bloomberg, they have all context in 0:06:00.640 --> 0:06:03.000 the market. They know that, for example, Morgan Stanley has 0:06:03.040 --> 0:06:05.440 got these bonds, so they know that Credit Swiss has 0:06:05.480 --> 0:06:08.440 got those bonds. So they'd say, cool this guy, Morgan Stanley, 0:06:08.440 --> 0:06:10.320 please and get me these bonds. So basically they are 0:06:10.320 --> 0:06:12.920 doing the job before the retailer. I love this because 0:06:13.040 --> 0:06:16.919 there because their institutional traders, they know everything there is 0:06:16.960 --> 0:06:20.760 to know about what they're trading. But because they, for 0:06:20.920 --> 0:06:23.839 this weird quirk, were forced to go through a retail 0:06:24.279 --> 0:06:27.240 brokerage to make these purchases. They had to sit there 0:06:27.279 --> 0:06:30.719 on the phone and walk the broker through the trade 0:06:31.040 --> 0:06:35.080 exactly so Melan Melan Patel said that he would while 0:06:35.120 --> 0:06:37.480 sitting at his desk, he'd be on hold or be 0:06:37.680 --> 0:06:40.320 listening to the Beethoven Symphony and then in the background 0:06:41.120 --> 0:06:44.120 whilst the cool center person tried to work out what 0:06:44.160 --> 0:06:46.120 it was and how to how to get hold of it. 0:06:46.800 --> 0:06:50.920 But but ultimately these retail brokers were able to do 0:06:50.960 --> 0:06:54.680 the mechanics of buying these assets and getting them into 0:06:54.720 --> 0:06:58.640 their accounts. Ultimately, yes, but it was very painful. That 0:06:58.720 --> 0:07:01.680 was It was it, but it was very painful. Now, 0:07:02.000 --> 0:07:06.200 do the stories of these two traders, Patel and Paddle, 0:07:06.680 --> 0:07:11.120 do they sort of undermine a common argument? I mean, 0:07:11.160 --> 0:07:13.920 the view is, I think in popular culture and probably 0:07:13.960 --> 0:07:17.679 expressed by the books and movies, that the people trading 0:07:17.800 --> 0:07:21.080 these assets had no idea what they were trading. They 0:07:21.120 --> 0:07:23.560 had no idea what was in them. Everyone on Wall 0:07:23.600 --> 0:07:25.640 Street was kind of stupid and there were only a 0:07:25.680 --> 0:07:29.640 few smart people. But does their experience show that actually 0:07:29.840 --> 0:07:32.440 a lot of the traders really did understand them and 0:07:32.640 --> 0:07:34.640 were at least more aware of what was in these 0:07:34.640 --> 0:07:40.080 assets than popular culture is depicted. Well, they certainly knew them, 0:07:40.200 --> 0:07:44.560 and there's no basically they The way they explained it 0:07:44.640 --> 0:07:47.960 is that they were trading for ten years. They knew 0:07:48.000 --> 0:07:50.080 the names of the bonds, that knew how they were structed, 0:07:50.360 --> 0:07:52.480 They knew were to buy them, who to sell them to, 0:07:53.040 --> 0:07:54.920 So they knew the market at the back of their hand. 0:07:55.640 --> 0:07:58.440 And it kind of stands to reason that the same 0:07:58.480 --> 0:08:01.600 thing would be true of other traders and other institutions. 0:08:01.640 --> 0:08:03.640 Now that's not to say that they weren't kind of 0:08:04.040 --> 0:08:08.720 egregious things done in very very various times of various places, 0:08:08.760 --> 0:08:12.560 but it stands to reason that people who trade these 0:08:12.560 --> 0:08:14.840 products every day, and these are not simple products, are 0:08:14.920 --> 0:08:16.920 very complicated. That's why it took them so long to 0:08:16.920 --> 0:08:20.000 get it through the their brokers. Um, you know, they 0:08:20.000 --> 0:08:22.200 should know the risk, they should know what's backing them. 0:08:22.200 --> 0:08:24.160 They should know what the mortgages are like, they should 0:08:24.200 --> 0:08:29.120 know the chances of um you know that the arrears history. 0:08:29.160 --> 0:08:30.920 They but it should know that stuff. But it does 0:08:31.000 --> 0:08:34.360 seem like the way people talk about this period always 0:08:34.400 --> 0:08:37.360 is very black or white. There's a few people that 0:08:37.440 --> 0:08:40.320 were warning and then all of the other people were 0:08:40.920 --> 0:08:43.400 cheap and not, you know, not paying attention to the 0:08:43.520 --> 0:08:46.439 risks at all. And it sounds like it's not quite 0:08:46.440 --> 0:08:49.160 that simple. Yeah, that's true. And actually I think in 0:08:49.280 --> 0:08:52.760 some of the pages of The Big Short, actually it 0:08:52.840 --> 0:08:56.000 implies that some of the guys in the investment banks 0:08:56.040 --> 0:08:58.000 didn't know what they were doing. They were just hoping 0:08:58.040 --> 0:09:00.440 that the a merry go round to go on for 0:09:00.480 --> 0:09:02.360 a little bit longer than it did, so he knew 0:09:02.360 --> 0:09:05.319 what was in there. Of course, one of the things 0:09:05.360 --> 0:09:08.319 that makes The Big Short such a compelling story it 0:09:08.480 --> 0:09:12.839 just the jaw dropping returns that those traders got in 0:09:12.880 --> 0:09:16.040 the amount of money they made talk to me about 0:09:16.120 --> 0:09:19.880 how well these two traders did. Well. They didn't do 0:09:19.920 --> 0:09:24.280 anything um on the scale of the big shot. They 0:09:24.280 --> 0:09:28.160 didn't become billionaires and they didn't become billionaires no, um, 0:09:28.440 --> 0:09:31.680 I think well that they were. They didn't give they 0:09:31.720 --> 0:09:34.000 didn't disclose fully the numbers. We had to do some 0:09:34.040 --> 0:09:37.600 calculations here, but we we estimated that Buttel made about 0:09:37.640 --> 0:09:41.120 one point too million pounds, which is not bad return 0:09:41.400 --> 0:09:43.800 that the best they put he put forward, we reckoned 0:09:43.800 --> 0:09:48.040 about four fifty thou pounds um. Their best return was 0:09:49.360 --> 0:09:53.839 on bonds called Granite. These were sort of controversial and 0:09:54.000 --> 0:09:57.080 central to the whole thing. Tell us about the Granite bonds. Well, 0:09:57.280 --> 0:10:01.400 Grantite we're backed by mortgages from UK Bank called Northern Rock, 0:10:01.800 --> 0:10:03.959 and Northern Rock is probably the closest thing we had 0:10:03.960 --> 0:10:08.480 in the UK to sub prime and the bank basically 0:10:08.520 --> 0:10:13.560 massively over leveraged um Well. It had a huge residential 0:10:13.600 --> 0:10:18.520 mortgage backed securities program and which was called Granite and 0:10:18.520 --> 0:10:21.360 allowed it to fund fifty billion pounds worth of mortgage lending. 0:10:22.000 --> 0:10:24.200 Ultimately it succumbed to the first bank run in the 0:10:24.280 --> 0:10:28.120 UK in a hundred and forty years. So the I 0:10:28.200 --> 0:10:31.480 remember the scenes of watching people queuing outside of Northern 0:10:31.520 --> 0:10:33.920 Rock branches on the high streets of various towns across 0:10:33.920 --> 0:10:37.080 the UK. That that that sort of that is almost 0:10:37.120 --> 0:10:39.920 as iconic as the images of the Lehman Brothers bankers 0:10:40.000 --> 0:10:42.840 leaving the building with the you know, their crates and 0:10:42.840 --> 0:10:45.080 so on and so so. Northern Rock is a very 0:10:45.160 --> 0:10:49.400 kind of controversial and um institution, and it was bailed 0:10:49.400 --> 0:10:53.880 out by the UK government. Um. But granite bonds because 0:10:53.920 --> 0:10:56.000 they were sold, I mean without going to all the 0:10:56.000 --> 0:10:59.480 technicalities of securitization. They were sold by a separate vehicle 0:10:59.559 --> 0:11:04.960 that continue to exist once Northern Rock didn't. In the 0:11:05.080 --> 0:11:08.160 story you quote Paddle is saying, quote there was a 0:11:08.240 --> 0:11:11.280 concern in the market that the UK government would rip 0:11:11.280 --> 0:11:14.000 it up. What did that mean that they would theoretically 0:11:14.040 --> 0:11:18.199 pay nothing in the end? Yeah, well they they bought 0:11:18.240 --> 0:11:21.000 these bonds. So they were initially sold at a hundred 0:11:21.000 --> 0:11:24.760 pence on the pound. They brought them eightpence, So now 0:11:24.800 --> 0:11:29.240 this was discount. Yeah. Um, Now that that was for 0:11:29.280 --> 0:11:31.480 the riskiest bonds, the ones that were first in line 0:11:31.520 --> 0:11:34.720 to take losses. Um. But even so, that's that's kind 0:11:34.720 --> 0:11:40.360 of huge decline and the view was simply that basically 0:11:40.400 --> 0:11:42.840 it was down to political risk that the UK government 0:11:43.080 --> 0:11:46.320 having taken over the institution. I don't think we've had 0:11:46.320 --> 0:11:51.800 a nationalization like that in well in anyone's memory. Um, 0:11:51.920 --> 0:11:54.400 what's going to happen? This is unprecedented. Are they just 0:11:54.440 --> 0:11:56.079 going to say, do you know what, we're not paying 0:11:56.080 --> 0:11:58.319 those bonds back. This bank doesn't have enough money, We're 0:11:58.320 --> 0:12:01.760 not going to pay. Why did they feel confident that 0:12:02.480 --> 0:12:08.439 the government would not rebub those bonds? Well they didn't actually, 0:12:08.440 --> 0:12:14.600 but what there basically their view was that m mathematically 0:12:15.120 --> 0:12:17.839 it worked out that they should get at least get 0:12:17.880 --> 0:12:21.880 their money back. So they bought eight pence on the pound. 0:12:22.720 --> 0:12:24.760 And I think the way they described by the way 0:12:24.800 --> 0:12:27.640 they described it to me was that it would take 0:12:27.720 --> 0:12:31.679 about two years for the granite structure to be unwound, 0:12:32.320 --> 0:12:35.120 as in it's quite a complicated structure and lots of 0:12:35.120 --> 0:12:37.000 mortgages behind it, and soon it would take about two 0:12:37.080 --> 0:12:40.000 years in their calculations to unwind. And in that period 0:12:40.080 --> 0:12:44.360 they should have two years of five coupons, so ten, 0:12:45.200 --> 0:12:47.319 so they should get ten back having put eight in. 0:12:47.440 --> 0:12:51.319 So that was their very kind of basic bet. Obviously, 0:12:51.600 --> 0:12:54.400 they then had a huge huge price rally, so that 0:12:54.400 --> 0:12:56.200 that's where the huge returns came from. But at that 0:12:56.200 --> 0:12:58.080 point they were just thinking. Yeah. So in you have 0:12:58.160 --> 0:13:00.480 this chart that obviously the list a nurse to the 0:13:00.520 --> 0:13:02.839 podcast can't see, but I'm looking at it right now, 0:13:02.840 --> 0:13:05.160 and it shows that they bought in around eight and 0:13:05.200 --> 0:13:10.760 then they sold around sixty. But actually the bonds continued 0:13:10.800 --> 0:13:14.560 to rally. Uh what well, uh, you know, there's a 0:13:14.559 --> 0:13:17.280 little bit of volatility, but they actually rallied much more 0:13:17.400 --> 0:13:21.000 even after they sold them. Yeah, that's right, um, and 0:13:21.040 --> 0:13:23.040 I did, Austin, why didn't you try to hold on? 0:13:23.640 --> 0:13:27.600 Because actually they were redeemed in January and December so 0:13:27.640 --> 0:13:30.160 that they don't exist anymore and they were paid back 0:13:30.160 --> 0:13:32.839 at pass so at one. That's just let's just pause 0:13:33.000 --> 0:13:35.920 right there. How unbelievable that is that you know that 0:13:36.040 --> 0:13:39.520 we all remember these bonds, these first in line losses 0:13:39.600 --> 0:13:42.320 from two thousand eight and two thousand nine. I don't 0:13:42.360 --> 0:13:45.800 even think that got much attention that in ten they 0:13:45.840 --> 0:13:49.560 had essentially recovered a hundred percent of their value. Not 0:13:49.720 --> 0:13:53.440 that they recovered some, but virtually the entire thing. I 0:13:53.440 --> 0:13:57.800 think that part is almost entirely unknown to people. Yeah, 0:13:57.840 --> 0:14:02.680 it's pretty unbelievable really, Um, but they said or Patel 0:14:02.760 --> 0:14:06.920 specifically said that his start of investing is not to 0:14:06.960 --> 0:14:08.800 try to time the top and not to try to 0:14:08.840 --> 0:14:12.280 hold on for the last or so. But having gone 0:14:12.280 --> 0:14:15.680 from eight to seventy or sixty, he thought, you know what, 0:14:15.760 --> 0:14:18.199 that's a pretty good return. I'll take that. And actually, 0:14:18.559 --> 0:14:22.280 at the time they sold out, which was about eleven, 0:14:23.280 --> 0:14:25.480 it wasn't clear at all that the UK government was 0:14:25.520 --> 0:14:27.440 going to sell them. That's that's why they were deemed 0:14:27.480 --> 0:14:29.320 because the government sold them, but it wasn't clear at 0:14:29.320 --> 0:14:32.280 all that was going to happen at that point. So yeah, 0:14:32.320 --> 0:14:34.960 so no reason to get greedy. Eight to sixty is 0:14:34.960 --> 0:14:38.240 a pretty a pretty nice return, isn't it. Yeah. Um, 0:14:38.320 --> 0:14:40.960 let's let's look big picture for a second. Um. You 0:14:41.000 --> 0:14:43.400 know one thing I want I'm always curious about is 0:14:43.560 --> 0:14:49.160 um the sort of psychology of trading, making a making 0:14:49.160 --> 0:14:52.840 a bed, or making a trade that's the exact opposite 0:14:52.880 --> 0:14:55.720 of how the market sees like, basically, having the guts 0:14:56.080 --> 0:14:58.640 to make a call that's different from what everyone around 0:14:58.680 --> 0:15:02.080 you is um calling for. And it seems to me 0:15:02.240 --> 0:15:06.160 that bears, they're always bears, are always people who think 0:15:06.200 --> 0:15:08.960 the world is coming to an end. There are always 0:15:08.960 --> 0:15:12.320 people who are predicting doom, and that sort of accepted. 0:15:12.600 --> 0:15:15.280 People just accept that there's going to be negative people 0:15:15.280 --> 0:15:19.280 out there. But in a way, optimism in the face 0:15:19.320 --> 0:15:23.440 of panic actually strikes me as much more brave, because 0:15:23.600 --> 0:15:26.160 no one likes to hear someone called a perma ball, 0:15:26.240 --> 0:15:30.840 or people mock the balls. People have an intellectual respect 0:15:30.880 --> 0:15:34.360 for negative people. How does that? What's your view on that? 0:15:34.560 --> 0:15:37.280 Do you think that like that this view that they 0:15:37.320 --> 0:15:42.640 expressed was particularly brave and gutsy given the prevailing negative 0:15:42.680 --> 0:15:45.600 sentiment at the time. I think it was, and especially 0:15:45.600 --> 0:15:47.880 when you think about the very place where they were 0:15:47.880 --> 0:15:51.040 sitting that when they put these trades on, or when 0:15:51.080 --> 0:15:53.080 they first asked permission to do that. That was in 0:15:53.160 --> 0:15:55.680 January two thousand and nine, and it was that month 0:15:55.800 --> 0:15:58.560 that the takeover of h Boss actually happened. So they've 0:15:58.600 --> 0:16:01.840 had in in a few months earlier Lehman had gone down, 0:16:02.320 --> 0:16:06.480 then HBOS itself had had a twenty billion pound bail 0:16:06.560 --> 0:16:10.360 out from the government, it had a Central Bank additional 0:16:10.360 --> 0:16:13.040 top up from the Central Bank, and so with all 0:16:13.080 --> 0:16:16.160 that background for them to be sort of bullish for 0:16:16.240 --> 0:16:18.520 lack of a better way, but it is um. It's 0:16:18.600 --> 0:16:21.600 quite remarkable. But what's also interesting about these guys is 0:16:21.600 --> 0:16:27.280 that that they're not particularly um. They're not how you 0:16:27.360 --> 0:16:30.600 might think or a caricature of a bond trader. They're 0:16:30.640 --> 0:16:35.400 not kind of gregarious types or brash. That they're both 0:16:35.480 --> 0:16:40.080 quite um, quiet and quite thoughtful. And actually Milan in 0:16:40.120 --> 0:16:44.080 particularly very interesting because he's he had he started um 0:16:44.160 --> 0:16:46.640 investing in bank bonds, not a B S, even though 0:16:46.640 --> 0:16:48.600 he traded a B S for living. He first started 0:16:48.600 --> 0:16:51.160 investing in bank bonds and he told me, having not 0:16:51.280 --> 0:16:54.640 known this market that well, he spent his evenings for 0:16:54.720 --> 0:16:58.040 about a month or so reading through bond prospectuses. So 0:16:58.080 --> 0:17:00.480 this is just like Michael burry So was like someone 0:17:00.520 --> 0:17:03.480 who's actually willing to dive into all the paperwork to 0:17:03.520 --> 0:17:05.800 really figure out what's in there and how did you 0:17:05.840 --> 0:17:08.920 find the story. Just as a reporter, it was quite 0:17:08.960 --> 0:17:11.960 fun finding them. Actually, I spent quite a bit of 0:17:12.000 --> 0:17:15.800 time in reporting on the sale of Granite the UK 0:17:15.800 --> 0:17:18.080 government announced it was going to sell. At the time, 0:17:18.119 --> 0:17:20.040 it was thirteen billion pounds and it was the biggest 0:17:20.080 --> 0:17:24.080 ever sale of assets from the UK government. And because 0:17:24.200 --> 0:17:29.280 granted was such a well known um series of bonds. 0:17:30.560 --> 0:17:33.000 I wanted to investigate and actually managed to break some 0:17:33.040 --> 0:17:35.960 news on who was bidding for them, who wanted to 0:17:36.000 --> 0:17:38.440 buy them. In the end, it was Cerberus who won. 0:17:39.119 --> 0:17:41.960 And but as part of that I kept hearing about 0:17:41.960 --> 0:17:44.960 these mystical traders or the mythical I should say, traders 0:17:44.960 --> 0:17:49.120 who bought granted at the bottom, and I guess there 0:17:49.119 --> 0:17:54.160 had to be someone, right, Yeah, Well, one one whimsical 0:17:54.200 --> 0:17:57.080 hedge fund manager told me that it was Harold Tynesite 0:17:57.119 --> 0:18:01.359 who bought the bonds at the bottom. But I wanted 0:18:01.400 --> 0:18:04.359 to find out who did, particularly when in December the 0:18:04.359 --> 0:18:06.320 first bond started to be redeemed and they were paid 0:18:06.320 --> 0:18:09.560 back at part at one hundred, which to me thought, 0:18:09.560 --> 0:18:11.760 if he bought at the bottom and got a hundred back, 0:18:11.800 --> 0:18:13.960 that's amazing UM. And so I kind of made it 0:18:13.960 --> 0:18:16.920 a bit of a mission to find out who brought them, 0:18:17.000 --> 0:18:20.119 and through asking various contacts in the market, came across 0:18:20.240 --> 0:18:24.640 Richard Paddell and he was kind enough to to speak 0:18:24.720 --> 0:18:26.480 to me in turn with the tale and was fascinating. 0:18:26.520 --> 0:18:30.840 And then Milan also, so yeah, it was a really 0:18:30.880 --> 0:18:35.240 interesting investigative process and looking back at the crisis in 0:18:35.320 --> 0:18:38.080 the will the UK's experience of the crisis really interesting. 0:18:38.280 --> 0:18:42.240 Other other others that you think probably you haven't found, Well, 0:18:42.280 --> 0:18:45.040 there's others I know of, but I haven't necessarily included 0:18:45.040 --> 0:18:48.080 in the piece. Um, there were some others who did 0:18:48.080 --> 0:18:51.040 it with them at h BOSS. I mean, Milan and 0:18:51.160 --> 0:18:53.760 Richard were effectively the brains of the trade, but there 0:18:53.760 --> 0:18:58.000 were other traders that got in on various various purchases 0:18:58.080 --> 0:19:02.040 with them. Um. We also know of a few other 0:19:02.160 --> 0:19:07.200 hedge funds and one particularly large US investment bank UM 0:19:07.520 --> 0:19:11.040 that shall remain unnamed. I guess that that, yeah, that 0:19:11.160 --> 0:19:13.320 also got in on the trade. But they were doing 0:19:13.359 --> 0:19:15.120 it not for them, not for themselves or their own 0:19:15.119 --> 0:19:17.760 personal money, but for for the either the prop desk 0:19:17.880 --> 0:19:20.320 or for the hedge funds. So looking ahead to today, 0:19:20.640 --> 0:19:24.040 are they're always these types of stories in the market, 0:19:24.200 --> 0:19:29.840 people finding assets with extreme dislocations or is this really 0:19:29.880 --> 0:19:33.240 the type of thing that when there's a huge crisis 0:19:33.440 --> 0:19:36.480 or a huge bubble, Yes, you find them, but most 0:19:36.520 --> 0:19:40.679 of the time people can't really be expected to find 0:19:40.760 --> 0:19:45.879 these extraordinary dislocations. I think you could probably argue that 0:19:45.960 --> 0:19:49.720 both ways. Actually, I mean, Richard Paddles said something very 0:19:49.760 --> 0:19:54.639 interesting that he reckons that every ten years this or 0:19:54.920 --> 0:19:58.399 approximately every ten years, there's some big market event that happens, 0:19:58.400 --> 0:20:01.600 whether it be the dot com the do calm bubble bursting, 0:20:01.760 --> 0:20:04.359 whether it be the Asian financial crisis, whether the e 0:20:04.520 --> 0:20:08.399 M debt in Russia for example, And this time around 0:20:08.440 --> 0:20:10.639 he said, well this in so in the two thousand 0:20:10.800 --> 0:20:12.680 two thousand and nine, it was in the A B 0:20:12.840 --> 0:20:15.240 S market, aspect securities market, and since he was trading 0:20:15.280 --> 0:20:19.359 that market, he was in the perfect position to profit 0:20:19.400 --> 0:20:24.480 from it. Now, following his logic, then you know, in 0:20:24.480 --> 0:20:27.160 a few years time, we should see something else, something similar, 0:20:27.359 --> 0:20:29.760 and perhaps some people might say, oh, that's bank bonds, 0:20:30.080 --> 0:20:33.320 or maybe that's high yield, or some people might even 0:20:33.359 --> 0:20:37.000 say that's et F s um. So I'm sure that 0:20:37.080 --> 0:20:40.280 there are going to be more of these type of scenarios. 0:20:40.280 --> 0:20:41.720 I guess you just need to be in the right 0:20:41.720 --> 0:20:45.919 place at the right time. I really know that market well, Alistair, 0:20:46.000 --> 0:20:49.320 thank you very much for joining us. I'm looking forward 0:20:49.320 --> 0:20:52.640 to in a few years you reporting on who made 0:20:52.680 --> 0:20:57.320 the big money in and sixteen. I'm sure you'll find 0:20:57.320 --> 0:21:00.640 them and I really appreciate you coming on the other podcast. 0:21:01.080 --> 0:21:03.600 Thank you very much. Thank you, and thank you very 0:21:03.720 --> 0:21:06.400 much for joining us on the Odd Lodge podcast. I'm 0:21:06.480 --> 0:21:09.000 Joe Wisenthal. You can follow me on Twitter at the 0:21:09.000 --> 0:21:12.199 Stalwart and you should follow Alistair too because he'll be 0:21:12.240 --> 0:21:15.199 turning up the next great uh, the next grade scoop. 0:21:15.520 --> 0:21:19.440 He's on Twitter at at Alistair j Marsh and we'll 0:21:19.440 --> 0:21:29.840 be back here next week. We at Bloomberg are proud 0:21:29.840 --> 0:21:32.640 of our new and growing slate of original content podcasts. 0:21:33.359 --> 0:21:36.199 They include Benchmark, a jargon free dive into the stories 0:21:36.200 --> 0:21:39.280 that drive the global economy. It's hosted by Tory Stillwell, 0:21:39.520 --> 0:21:43.640 Ako and Dan Moss. 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