Sep 12, 2022 · 54m · capital-allocators
Greg Lippmann – The Big Short and Structured Credit at LibreMax (Capital Allocators, EP.270)
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In Episode 270 of Capital Allocators, host Ted Seides interviews Greg Lippmann, co-founder and CIO of LibreMax Capital, discussing his famous subprime mortgage short, the mechanics of structured credit underwriting, and how his firm capitalizes on illiquid debt market inefficiencies.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 21.1% of the talking time here. How this is scored →
Ted as informed peer 3.5 Guest teaching 4.2 Guest disagreement 1.1 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 26:46 Pushing back on structured credit as a mere trade
Greg firmly objects to Ted's framing of his strategy as a medium-term tactical trade, noting that calling structured products a trade rather than an asset class is a major personal pet peeve.
Hardest push from Ted ▶ 26:40 Challenging the evergreen nature of the strategyTed questions whether starting LibreMax on the back of deeply discounted post-crisis mortgages was merely a medium-term trade rather than an evergreen investment strategy.
Biggest teaching moment ▶ 13:40 Explaining subprime default math in appreciating marketsGreg details how empirical zip code data showed home buyers defaulting even after 50% price appreciation, demonstrating the severe slippage and fundamental fragility of subprime debt.
Ted holds their own ▶ 18:45 Tracing the career arc from Liar's Poker to HollywoodTed synthesizes Greg's journey from reading Michael Lewis as a novice to originating esoteric credit structures and ultimately being portrayed by Ryan Gosling on the silver screen.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Early Career, Wall Street Entry, and Foundations in Credit | 3 | 3 | 1 | 0 | Ted opens by establishing their personal connection from high school and invites Greg to recount his entry into finance. Greg offers a detailed narrative of his early career at Credit Suisse, including his mentor's blunt advice and learning bond structuring languages. | |
| Transitioning to the B-Piece Trading Desk | 3 | 4 | 1 | 0 | Ted prompts Greg on his move to the trading desk. Greg explains the niche world of B-piece trading, contrasting high-volume flow desks to the illiquid, high-margin, art dealer nature of structured products. | |
| Conceptualizing and Constructing the Subprime Short | 4 | 6 | 2 | 0 | Ted asks how Greg conceptualized the famous subprime short. Greg delivers an extensive, highly technical explanation of zip code quartile analysis, default rates in appreciating markets, and the asymmetric math of the CDS trade. | |
| The 2006 Market Disconnect and Pitching to Hedge Funds | 4 | 5 | 2 | 0 | Ted probes the 2006 disconnect between fundamentals and pricing and how hedge funds received the pitch. Greg shares colorful anecdotes of investor reactions ranging from total incomprehension to over-optimizing on the short basket. | |
| Managing Position Pressure, Media Spotlight, and Pivoting to Long | 4 | 4 | 1 | 0 | Ted asks about the psychological toll of maintaining the position before validation and the subsequent pivot to buying beaten-down assets. Greg contrasts holding a proprietary position at an investment bank versus managing hedge fund LP capital. | |
| Institutionalization and Categorization of Structured Credit | 4 | 5 | 1 | 0 | Ted asks about how structured credit institutionalized post-GFC. Greg breaks down the taxonomy of structured credit across sector types, credit ratings, and vintage seasoning differences. | |
| Founding LibreMax and Expanding Asset Classes | 4 | 4 | 2 | 1 | Ted inquires why Greg left Deutsche Bank to start LibreMax and questions whether the original opportunity was tactical rather than an evergreen strategy. Greg corrects the premise, asserting structured credit is a distinct asset class rather than just a trade. | |
| Ridgeline Sponsor Message | 0 | 0 | 0 | 0 | This segment contains a mid-episode sponsor message for Ridgeline alongside the transition back into portfolio management discussion. | |
| Underwriting Framework: Quantitative Sifting and Fundamental Analysis | 4 | 5 | 1 | 0 | Ted asks how LibreMax evaluates complex collateral rapidly when banks call. Greg outlines their two-tiered process using proprietary quant models for fast sifting followed by deep fundamental human review. | |
| Portfolio Construction and Dynamic Capital Allocation | 4 | 5 | 1 | 0 | Ted asks how portfolio construction operates across disparate collateral types. Greg elaborates on marrying offsetting structural risks (like prepayment-sensitive versus interest-only bonds) and managing gross exposures without siloed pod structures. | |
| Operational Infrastructure, Data Barriers, and Competitor Landscape | 4 | 5 | 1 | 0 | Ted asks about operational infrastructure and competitors. Greg details the multimillion-dollar data hurdle creating high barriers to entry, contrasting structured credit with low-barrier equity hedge funds. | |
| Current Market Outlook, Macro Volatility, and Liquidity Provision | 4 | 5 | 1 | 0 | Ted asks about risks and current market conditions. Greg explains why the Fed shift from suppressing volatility to fighting inflation benefits his long structured credit/short corporate credit positioning, while noting the need for callable capital structures. | |
| Living with 'The Big Short' Portrayal and Pop Culture Legacy | 3 | 3 | 1 | 0 | Ted asks about the legacy of being portrayed by Ryan Gosling in The Big Short. Greg shares funny personal stories of public recognition and emails, followed by rapid-fire closing questions. |
Statements from this episode (24)
Lippmann: In 1991 banks manually phoned mortgage servicers to track delinquencies
“And at the time there was no Bloomberg really. Bloomberg was existed, but it was a very, very minor thing. And all the banks had their own internal mortgage backed security departments and whatnot. And so there was a huge demand for people to Call up the mortg…”
Lippmann: Illiquid and Complex Structured Credit Trades Yielded High Margins
“Because the trades were complicated, because they were illiquid, because not that many people did it, our margins were really big.”
Lippmann: B-Piece Structured Credit Trading Resembles Art Dealing
“In some ways what we were doing were more like being art dealers than two-year treasury traders.”
Lippmann: 2000-vintage mortgages in booming regions had 6-7% default rates
“What we saw was that after six years,
The default rate in places in the top quartile where homes were going up 12 to 14% a year, the default rate was still six or seven percent.”
Lippmann: Slow-growth 2000-vintage mortgages had 28% defaults and 50%+ losses
“But if you looked at the bottom quartile for houses, they were going up three to four percent per year, and 28% of the people were defaulting. And we were losing 50, 55 cents on the dollar when they did, because of the similar type of slippage.”
Lippmann: Subprime short took over a year to reprice, moving in February 2007
“February of 2007, the prices started to move, and I began to have a little bit of notoriety for the trade. So I had been involved in the trade for over a year before it worked in any sort of meaningful way.”
Lippmann: Better-perceived subprime tranches had infinite short supply, worse ones had limited supply
“The names that the broader market thought were good, there was an infinite supply of those names. The names of the broader market thought were not so good. There was less of a supply. So the guys that almost got too smart for their own good, they were focused …”
Lippmann told Deutsche Bank to fire him rather than unwind his subprime short
“I had to maintain my position at the bank and not everyone at the bank agreed with it at all times. I ultimately had to, if anything, say, you know, I'm not taking it off. Fire me if you want, but I'm not taking it off.”
Lippmann: Structured credit price moves are more correlated with broader markets today
“And so I think that our market has become more integrated in other markets, and therefore the price moves are somewhat more connected and correlated than they were back then.”
Lippmann: Seasoning makes same-rated structured credit bonds completely different
“So a double B that was issued in 2012 And it's still rated double B for whatever reason. Doesn't look anything like a double B that was issued in 2022. But they're both double Bs.”
Lippmann: Only 3 of 20 most likely LP prospects invested in LibreMax launch
“If you had given me the list of, say, 40 people I called, and you told me, write a list of the 20 most likely and the 20 least likely, I would have got, like, three right. Like, three of the 20 most likely gave me money, and 17 of the 20 least likely gave me m…”
Lippmann: Fund managers cannot easily expand mandates later without style drift penalties
“When you start something, you can dub yourself whatever you want. And either people give you money or they won't. But one thing I've learned in the 12 years, it's very hard to then change. You can claim anything you want to claim. But afterwards, if you try to…”
Lippmann: Structured credit derivatives are a shadow of their pre-crisis size
“The derivative market is a shadow of what it was back then.”
Lippmann: Structured credit remains resistant to quantitative investing
“One thing that is really attractive about the space is the esoteric nature of it. It remains somewhat resistant to sort of the quantification of most of investing. Some of that relates to each deal is different. So it's a little bit harder to do that because w…”
Lippmann: Bank regulations create forced, non-economic debt selling
“There's lots of situations where people are doing things for non-economic reasons. They're saying, hey, if I don't sell this aged inventory, I'm going to get a huge penalty. So it's cheaper for me to sell it cheap today than to get this huge internal penalty, …”
Lippmann: Third-party valuation software errors create alpha in structured credit
“Back when I started, each bank had their own internal software that valued these bonds. Now there are companies that sell those, and the good news about it is that everybody is looking at the same thing, and occasionally our guys are able to identify that ther…”
Lippmann: LibreMax uses AI and quantitative models solely as screening tools
“We're not a quant shop in the sense that we don't take that price, but what we use this for is a sifting mechanism, right? So we'll put 10 bonds through the system, and that system will say, hey, I think you should buy these five, and you should avoid these fi…”
Lippmann: Pairing interest-only CMBS with credit-sensitive bonds creates internal hedges
“One interesting trait to do in commercial mortgages is to buy interest-only securities, where if there's a delay in the refinancing of a property, the value of those soars, because they only get interest, and as soon as the property is refinanced, they're shut…”
Lippmann: Running structured credit properly is impossible under $500M AUM
“We spend millions of dollars a year on data, and on a team to sort of process that data, and then on each of the sector heads where they're reading the documents, and they're parsing the structure and understanding this, so it's really difficult to do what we …”
Lippmann: Only one to two dozen hedge funds do sophisticated structured credit
“There's maybe A dozen, two dozen hedge funds do what we do, and a handful of mutual funds that are very sophisticated in this space.”
Lippmann: Stale credit agency ratings have provided 30 years of profitable trades
“One of the things I've made money on for 30 years is that the rating's Are very, very stale. And sometimes they're stale too good. Sometimes they're stale too bad.”
Liar's Poker inspired Greg Lippmann to join Wall Street despite its warnings
“So the beginning of the book, The Big Short, he said, well, he wrote Liar's Poker as a cautionary tale. He didn't want people to go into Wall Street, is what he thought. And people read that book, including me, and said, this is exactly what I want to do, righ…”
Lippmann is happy with Ryan Gosling playing him in The Big Short
“I certainly don't think I was portrayed as somebody who wasn't smart, and so that, I can't complain, and like I said before, you can't really complain if one of the sexiest men alive plays you in a movie.”
Lippmann: Finance workers must figure out how to add value before expecting training
“This isn't summer camp, like we're paying you, you're not paying us. So like figure out, and that's what I learned from him, figure out how to add value. And then along the way, we'll train you as opposed to it's our job to train you.”