Why Does John Mack Hate The Volcker Rule When MS Prop Was Responsible For The Single Biggest Prop Loss In Wall Street History?

Tyler Durden's picture

A few days ago a smug John Mack, enjoying his premature retirement from Morgan Stanley, was shooting the ...breeze with Charlie Gasparino, in an interview in which he explicitly denounced prop trading as being any concern whatsoever to Wall Street. Gasparino asked: "It is known as the "Volcker Rule" and he claims that proprietary trading was one of the reasons or the major reason for the financial crisis.  I don't believe that is the case.  Do you believe that was the case?" To which Mack responded: "Charlie, I don't believe it and I think you laid it out really clearly in your book."... "so, you obviously don't agree with the Volcker Rule." - "I don't agree." And in continuing the air of camaraderie in which nobody dared to ask anything too damning, Mack proceeded to discuss Charlie's work out routine. All fine and swell... too bad John Mack lied. Enter Howie Hubler, who singlehandedly lost Morgan Stanley $9 billion on a prop trade gone horribly bad, and this was still at a time when $9 billion was a fair amount of money. In fact, according to Michael Lewis, the former Morgan Stanley prop trader lost "more than any single trader has ever lost in the history of Wall Street." Maybe it is time for a repeat appearance of Mr. Mack on Fox Business, this time with some more probing questions by his fans.

Max Abelson discusses the blatant contradiction between Mack's presentation of reality... and facts:

Halfway through this month’s 60 Minutes interview with the
financial journalism deity Michael Lewis, a snapshot of a half-grinning
banker in a pinstriped suit filled the screen. With a thick neck and
soft face, mouth turned tightly upward, the former mortgage bond trader
Howie Hubler smiled out unknowingly at 12 million viewers.

In his nice New Orleans drawl, Mr. Lewis said that this banker lost
Morgan Stanley about $9 billion. “More than any single trader has ever
lost in the history of Wall Street. And no one knows his name.

Yes, prop trading is fine and well, and just waiting for the next massive loss, although not so much at Morgan Stanley, which under Mack's watch was downgraded a third-tier investment bank, after Mack decided to not take any risks ever again... and was summarily booted.

Some more details on Hubler:

By the end of 2004, he was skeptical of the subprime mortgage
business, and craved new ways to bet against it. He found Morgan
Stanley customers willing to sell him credit default swaps on pools of
subprime mortgage loans, which, though there are many poetic ways of
putting this, was like taking out an awesome insurance policy on a
house you’ve built in quicksand.

But the economy’s fall took a while to begin, which was a problem
for Mr. Hubler—who in April 2006 was put in charge of his own Morgan
Stanley hedge fund, called the Global Proprietary Credit Group. To make
up for the millions of dollars that it cost to carry his subprime bets
until the bad times hit, he sold insurance on slightly better
mortgages. He wagered on a disaster he clearly saw coming, and then
against a worse disaster he was blind to—agreeing to insure the house
next door, prettier but in the same sand. And because insuring
something that’s less risky is less lucrative, he had to sell several
times the amount of swaps that he himself had bought

And just in case you thought someone may not make a million dollar bonus after losing his firm's shareholders almost ten billion, you would be dead wrong.

“What happened to Howie Hubler?” Steve Kroft asked this month on 60 Minutes.

“He’s allowed to resign from Morgan Stanley and he takes with him
millions of dollars in back pay,” Mr. Lewis answers. “Tens of millions
of dollars in back pay.”

Not only that, but Hubler is back to his old antics, not so much collecting pennies in front of a rollercoaster this time, as preying on the broke.

Across the Hudson River, in an office suite in Rumson, N.J., Mr. Hubler
has quietly slipped back into the mortgage business. According to
marketing materials, he started a firm with former Morgan Stanley
colleagues to advise mortgage lenders whose borrowers are threatening
to walk away from homes that are worth less than what’s owed on them. They’re called the Loan Value Group. Loan Value Group charges fees to lenders in exchange for organizing a
reward that provides incentive for homeowners not to default. Because
simply leaving can make financial sense, the company says, the solution
is to target a borrower’s pocketbook.

Some other utter failures who works with Hubler are other than NetJets' recent departure Rick Santulli, as well as the former CEO of now bankrupt J.G. Wentworth.

Mr. Hubler would not speak for this article. “He’s pretty much adamant
about not talking about this,” a spokesperson said. Neither would
Richard Santulli, the company’s newly appointed chairman, who was CEO
of the fractional aircraft ownership company NetJets until last August;
nor the board member Michael Goodman, the former CEO of J.G. Wentworth,
the lump-sum payment firm (“we understand it is hard to wait”!) that
filed for bankruptcy last year.

Failed mediocrities of the world unite! Oh yes, and the Volcker Rule is an aberration. God forbid something prevents idiots from blowing up their firms once again in the pursuit of the non-elusive Wall Street bonus, only to ruin their shareholders and have taxpayers bail them out over and over again.


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sweet ebony diamond's picture

conflict of interest?

I buy a shit stock and then sell it to the mutual fund that you invested in (and that I administer and "manage").

small potatoes.

truont's picture

"There is no truth. There is only perception" ~Gustave Flaubert

Fritz's picture

Mack is a turd.

Gasbagarino is a turd.

anony's picture

Why?  Because he's been able to make a fortune on insider trading without getting caught.

That was easy.

ArsoN's picture

I'm afraid I don't quite get how one would separate prop trading from market making.  Market makers (Nasdaq) and specs (NYSE, certainly AMEX) actively take positions for their own accounts anyway.   How do you police that without seriously affecting liquidity?  I don't understand why they can't just bring back Glass-Steagall.  It seems that would be a much cleaner and well proven way of going about it.   

anony's picture

Because..." that would be a much cleaner and well proven way of going about it".   

First rule of Fortune accumulation thru stealing:

In chaos and ignorance (the other guy's) is great profit.

chindit13's picture

I think we know the answer.  Prop desks of TBTF banks cannot actually lose money, though sometimes they have to wait a few weeks for the taxpayer check to clear when struck by temporary and unforeseeable misfortunes (which the general trading world refers to as "losses").

Nice work if you can get it.  And the supreme irony?  From my own experience as a WS trader, I have seen folks who blow up still get a bonus that would be the envy of even upper middle class Americans.  Hubler is not an exception.

Likewise in the HF world.  There are folks who have blown up multiple times, even more than John Merriwether, but can still raise enough new money in new funds so that just the 1-2% management fee helps them keep current on the Greenwich home.  Indeed, when the accumulated losses fall to such a level that bringing the fund back to even---and getting a chance for performance fees again---is a remote or difficult possibility, the "smart" move is to shut down, move across the street, start a new fund, and set the performance meter back to zero.

Of this latter oddity I have far less of a problem than I do with TBTF banks (and HF's disguised as Bank Holding Companies), because the taxpayer is not on the hook for the real HF losses.  If customers are willing to place their funds with a pathological exploder, so be it.  Fools and their money....

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