Big Short Figure Eyes Property Debt But as Something to Buy
Greg Lippmann, a prominent name in Michael Lewis’s ‘The Big Short,’ says there’s a lot of indiscriminate selling.
In the movie ‘The Big Short,’ do you remember the character Jared Vannett played by Ryan Gosling? The one who asked, “Do you smell that? What is that?”
“Opportunity,” an associate of his says.
“No, money.”
The basis of that character was Greg Lippmann, a Deutsche Bank trader, part of the small group who recognized how insanely risky and dangerous the housing market was prior to the massive meltdown that came to be called the Global Financial Crisis.
He eventually went off to start the hedge fund LibreMax Capital in 2010 — currently with $10.2 billion assets under management — with a focus on structured finance, MarketWatch reported. In 2018, during an interview with Bloomberg Television, Lippmann said that he wasn’t looking for the next Big Short as so many others were doing. Instead, he was focused on risk-adjusted returns.
His new interest, as MarketWatch put it, is “beaten-up commercial mortgage bonds.” CMBS, the type of financial instrument that has been receiving a lot of concerned analysis. One reason is that it’s one of the few sources of loan information that is fairly public in nature. It gets the attention in part because it’s available.
“We think that, in a lot of cases, this sector is being sold indiscriminately,” Lippmann said to MarketWatch. “It’s not a short.” Instead, it’s finding specific bonds, not an indiscriminate ingestion of the category, which LibreMax’s analysis determines as less risky while still sitting at bargain prices. Bonds that have been mispriced for some reason because they’re hard to analyze.
“A batch of older investment-grade BBB-rated conduit bonds out for bid in January saw price talk of $42 to $65, according to Empirasign, which tracks trading activity in the secondary market,” MarketWatch noted. “When bonds can avoid losses and fully repay at maturity, they pay the holder their full face value, or $100. LibreMax also sees an edge in riskier securities rated below investment-grade.”
If you buy a bond at $65 and it holds through and ultimately pays the par value, that’s a nearly 54% profit. Of course, if it doesn’t hold through, that could be a 100% loss, so accurate analysis is critically important.
Reportedly, Jeffrey Gundlach’s DoubleLine Capital is also looking at the CMBS market and trying to understand “the intrinsic value of the underlying assets,” said portfolio manager Morris Chen.