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Famous Greg Lippmann Deutsche Bank presentation sent to hedge funds arguing for the bet against subprime, mentioned in The Big Short: Inside the Doomsday Machine:
- The flipbook the FCIC interview mentions several times:”FCIC: It strikes me that the title of the flipbook is shorting home equity mezzanine tranches and not shorting subprime mezzanine tranches. Was there a focus on home equity mortgages or what was the reason for that?GL: That’s just a semantical issue. Home equity is a catch-all for subprime and home equity l[ie]ns, you know, which you may be more familiar with, where you have like a home equity line of credit if want to purchase a house, or what have you, that’s not what we, that’s a tiny, tiny market and we didn’t really buy protection on that. Home equity was a term invented by somebody to describe subprime mortgages, like in the early 90s. I have no idea who invented that term that’s just what people called subprime.”
Summary
Investor expresses a bearish view on the subprime US RMBS market (or the US Consumer or US Home Prices) by shorting (or buying protection on) selected Home Equity ABS credits
We believe this product is the most efficient way to express these views; more efficient than shorting stocks of homebuilders, REITs, the S&P 500, etc. We are interested in hearing of other ideas
Since 2003, spreads for Baa3 and Baa2 have compressed. But if anything, risk of a housing bubble / defaults has only increased with the continued proliferation of alternative mortgage products such as IOs, silent seconds, stated-income loans and option ARMs. These products have become quite popular as home price increases until very recently outstripped wage growth. The percentage of subprime mortgages originated that were 10 mortgages grew from virtually zero in 2002 to around 30% in 2005 and 2006.
Full PDF here2007_Subprime_Shorting-Home-Equity-Mezzanine-Tranches (1)
