This is a follow-up to our last post: The Big Short: Primary Sources (1) – Draw Your Own Conclusions.
Below is a link to an email produced in the FCIC’s (Financial Crisis Inquiry Commission) discovery process; it has been made publicly available by the FCIC. The email is from Gregg Lippmann of Deutsche Bank to numerous hedge funds, explaining the risk in CDOs. The email is dated August 29, 2006.
It’s merely a forward by Deutsche Bank of two articles by Jim Grant, who eloquently touches upon the risks inherent in CDOs and the mortgage market, but as you can see from the email addresses of its recipients, this was a serious email. It was sent to many of the top credit and debt hedge funds.
The size of the list shows the level of conviction Lippmann had behind his thesis regarding the weakness of the mortgage securitization market, both synthetic and cash. Many funds you will recognize as having profited from shorting subprime. The email address of a portfolio manager from Paulson is the first email listed.
We like this email because it echoes one of our main philosophies when looking at business models of companies in which we are looking to invest: If the cash flows of a company are highly dependent on and sensitive to numerous assumptions in a complicated model constructed and only understood by “really smart” people, this level of complexity and mystery is a huge risk itself. We take a step back and pass.
Jim Grant wrote in this article, “Come the next bear market in mortgage debt, many more assumptions will certainly come in for reappraisal. Knowing only this much, the detached and calculating English major might well be able to sweep up astonishing bargains.”
Continuing Ryan Gosling*, excuse me, Gregg Lippmann’s testimony to the FCIC, here is Part 2: FCIC STAFF AUDIOTAPE OF INTERVIEW WITH GREG LIPPMANN, DEUTSCHE BANK (PART 2).