A Look At The Lawsuit Against Michael Lewis, In Which We Find That Brad Pitt Has Bought The Movie Right To "The Big Short"
Earlier today, some hilarious news hit the tape after it was made public that disgraced CDO trader Wing Chau has decided to go nuclear and sue Michael Lewis and Steve Eisman due to their all too honest representation of the Harding Advisory asset manager, in Lewis' book "The Big Short" (not spared from the lawsuit was even book publisher W.W. Norton). "Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book. The book "depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of 'Wall Street bond trading desks' above those of his investors." It appears that Chau missed at least one additional defendant: Jody Shenn of Bloomberg, who in 2010 wrote a scathing article titled "How Wing Chau Helped Neo Default in Merrill CDOs Under SEC View" which provided just as damning and just as accurate a portrait of the (allegedly) pathologically greedy manager who presided at the "center of an epidemic of conflicts of interest." And while we present the key highlights from Shenn's piece which is a must read for anyone interested in what will surely be a recurring drama in the coming months (the Michael Lewis op-ed repartees will be worth the price of admission alone), what appears to have forced Chau to take this career ending step (sorry Wing, no more AUM for you) is that he is about to hit the silver screen. In the full lawsuit we read that "Brad Pitt's production company, Plan B Entertainment Inc., has bought the movie rights and is working with Paramount Pictures Corporation to produce [The Big Short] film." Well isn't that special...
Here are some of the choicest quotes by Jody Shenn from his May 2010 article:
In early 2007, with subprime-mortgage defaults soaring, Wing F. Chau teamed with Merrill Lynch & Co. to create a $300 million pool of assets that shared a name with the main character in The Matrix movies who discovers reality isn’t what it seems.
Neo CDO Ltd. was a complex construction. More than 40 percent of its holdings were slices of collateralized debt obligations sold by Merrill, according to Moody’s Investors Service and Bloomberg data. Many of those were CDOs made up of other CDOs backed by bonds linked to home loans. About one-sixth of Neo was invested in junk-rated debt.
Eight months after the deal closed, Neo defaulted, wiping out most of its investors. It was one of seven transactions that Chau, 43, hatched with Merrill and Citigroup Inc. in 2007 as banks raced to offload mortgage assets, helping to make his firm, Harding Advisory LLC, the biggest manager of CDOs tied to risky mortgages and related derivatives issued that year.
Managers such as Chau were at the center of a financial machine that pumped out more than $200 billion of mortgage- linked CDOs in the months before the subprime crisis spread. They picked the securities that went into CDOs and held themselves out as independent agents. Now potential conflicts of interest and questions about what banks disclosed have drawn regulators’ attention.
Interactions across the industry among bankers, asset managers, ratings firms and lawyers contributed to what Lang Gibson, head of CDO research at Merrill until early 2008, called a “Ponzi scheme” of CDOs buying other CDOs.
“It was the most incestuous market around,” Gibson said.
Chau said that more than 80 firms, including BlackRock Inc., TCW Group Inc. and Fidelity Investments, managed CDOs created in 2007 and that “the number and the prominence of the firms participating in the CDO industry” shows there wasn’t a consensus that the housing market was in trouble.
Chau, who told colleagues that he grew up in Rhode Island where his family owned a restaurant, started his career as a junior analyst at Prudential Securities and then at Salomon Brothers, where he wrote reports on the bonds spawned during a boom in subprime lending in the 1990s. He also has a master’s degree in finance from Babson College in Wellesley, Massachusetts.
He joined New York Life Insurance Co. as a portfolio manager in 1999 overseeing asset-backed securities and commercial mortgage bonds, and helped create the company’s first CDO filled with asset-backed debt, according to CDO prospectuses. He later worked as a securities trader at French bank Societe Generale and Tokyo-based Nomura Holdings Inc.
In 2004, Chau moved to New York-based Maxim Group, where he started a CDO unit. While there, he helped create four CDOs underwritten by Merrill, including the $485 million Lexington Capital Funding Ltd. in October 2005, his first tied to low- rated securities.
Chau stood to make money for awhile even if the CDOs he managed didn’t return principal to investors. His fees ranged from at least 0.09 percentage point of assets a year for CDOs filled with high-rated bonds to at least 0.17 percentage point for those with lower-rated debt, according to prospectuses
At a dinner at a securitization conference in Las Vegas in January 2007, the same month the Neo marketing document was dated, Chau met with Steven Eisman, who ran a hedge fund at Frontpoint Partners LLC that was betting against subprime loans.
Chau thanked Eisman, saying he would have less to buy if people weren’t shorting the market, according to two people familiar with the conversation. The comment, a reference to Harding’s investment in derivatives as well as bonds, helped convince Eisman that the companies taking on subprime risk were relying on conflicted CDO managers serving mainly as fronts for banks, the people said.
The bottom line.
About $6 billion of Harding’s CDOs have been liquidated, cutting off
management fees, according to RBS data. An additional $7.4 billion also
have experienced events of default, ending Harding’s fees in certain
deals. Harding was managing $4.1 billion of assets as of April 15,
according to the firm’s SEC registration.
And on to important things: such as the release date of the Brad Pitt production of "The Big Short"...
Full filing against Michael Lewis: