What's up guys and welcome back to wall street millennial on this channel, we've seen some major trading disasters. We covered the archagos disaster while was happening which ended up costing 10 billion dollars in losses that incident single-handedly wiped out billions of dollars from the risk management systems of multiple prime brokers, in addition to a total loss for billionaire investor bill huang, and then there was Long-Term capital management, whose overly leveraged and optimistic investment strategy caused the destruction of the world's most admired hedge fund. At the time today, we're going to talk about the single biggest loss in creating a single trade. This loss occurred in 2008 and was triggered by the real estate market disaster.

The losses were incurred by the investment bank morgan stanley, but caused by a trade put on by a single trader. By the time the smoke had cleared, the firm had lost 9 billion when adjusted for inflation. That's a bigger loss in archaicos in this video we'll go over what the trade was, what happened to the trader after the incident and how morgan stanley dealt with the loss? Howie huber was a trader at morgan stanley, starting in the 1990s. He worked as a trader in the company's fixed income division.

Although fixed income is traditionally associated with bonds, it also incorporates a wide range of other financial instruments. Any financial security or contract that pays a fixed amount at predefined time intervals can be considered fixed income. Another significant type of fixed income. Besides, bonds is mortgage-backed securities mortgage-backed securities are a type of structured product whose value comes from mortgages that banks issue to home buyers in reality, they're, basically the same as bonds.

Both are loans that are paid back with interest, the only difference being that mortgages are loans for the purchase of real estate. Another difference is that the mortgages are typically in the hundreds of thousands of dollars, much bigger than a single bond to make mortgages into tradable securities. Banks such as morgan, stanley, split them into mortgage-backed securities in the most basic form. Mortgage-Backed securities simply split up the rights to mortgage payments into smaller chunks, which can then be sold and traded.

Leading up to the 2008 financial crisis. Mortgage-Backed securities were a source of seemingly infinite profits for investment bankers. The economy was booming, fueling demand for real estate. It seemed like mortgage-backed securities were a sure-fire way to get a good return on investment and default risk was low.

Also with mortgage-backed securities. Partial stakes in large numbers of different mortgages could be packaged together into a single security or portfolio diversifying away much of the default risk for an investor. This allowed investment makers to sell mortgage-backed securities where the underlying loans had less than perfect credit, but everyone seemed to want to buy them and the investment banks, selling them were making a killing. In the early 2000s howie hubler was a trader at morgan, stanley trading.

These mortgage-backed securities, he and his team of several other traders were making hundreds of millions of dollars of profits for morgan stanley and were themselves making tens of millions of dollars in total compensation leading up to 2008 hubler made more than 20 million dollars a year for His work at morgan stanley because of his skills and performance trading, mortgage-backed securities and other fixed income. He was considered one of the best traders within the company and probably in the entire industry. Contrary to what some may think in the financial industry, many people leading up to 2008 saw and recognized the warning signs that the real estate market was about to collapse under its own weight. Howie hubler and its trading group were among them.

They could tell that mortgage-backed securities, which they are trading had gotten a little too exuberant. They thought default. Risk was being underappreciated, especially with the lower end ones, to prepare for the increase of defaults. They bought credit default swaps on the riskier mortgage-backed securities.

Eventually, they owned. Two billion dollars worth of these credit default swaps, which basically paid out if the underlying loans defaulted. With this position, hubler positioned himself to profit when the inevitable wave of defaults was finally realized. This was a forsightful trade that should have netted him billions in profits.

However, enough market participants at that point were worried about default risk that those credit default swaps were expensive. Hubler, wasn't the only one predicting a crash in order to fund the purchase of these credit default swaps, hubler decided to sell credit default swaps on the significantly less risky loans with aaa ratings. The idea behind the trade was that being long and short, the same type of security credit default swaps. He was only taking a position on loan defaults by being long, the swaps on high risk debt and short the swaps on low risk debt.

He was positioned to profit if the lower end debt defaulted in exchange for being on the hook. If higher risk debt defaulted, the only problem was that selling insurance on high rated debt didn't provide much in the way of proceeds. The market already thought that these loans were low risk, so hubert needs to sell credit default swaps on a massive 16 billion dollars worth of them in order to receive the proceeds to buy credit default swaps on just two billion dollars worth of the risky loans. But the loans for which he sold the swaps were seen as extremely low risk, so hubler considered those proceeds like free money.

Unfortunately, for hubler, the credit crunch which he had predicted was much more extreme than anyone had anticipated. Not only did all of his high risk swaps pay out making him about 2 billion dollars of profit, but 93 of the low risk ones also defaulted. He was short, a much greater nominal amount of swaps on the high risk loans about 16 billion dollars worth so that position lost nearly everything. Luckily, at some point, hubler's higher ups realized the disaster that was happening and were able to close some of the swaps before incurring the full losses.

Still, they took 11 billion of losses on the aaa loan swaps that they had shorted all told after accounting. For the two billion dollars that they made from the subprime mortgage swaps, the trade lost nine billion dollars. Now that marks the biggest loss in a single trade in wall street history throughout the rest of the 2008 financial crisis, morgan stanley lost about 60 billion dollars. Total much of these losses were due to the widespread defaults on mortgages and other kinds of loans.

These losses almost took down the entire company after the trading disaster, hubler wasn't fired, but he was asked to resign from morgan stanley upon his departure from the firm he was given a 10 million bonus. Perhaps it was a reward for his good work, while at the company after leaving morgan stanley, hubler found a way to continue making money in the financing industry, he started a small business called loan value group. The company engaged in helping mortgage lenders keep borrowers from abandoning their homes when they were worth less than their mortgage around that time. Something like a quarter of all u.s households were underwater on their homes.

That means that the value of their homes following the 2008 crash was less than the amount that they had remaining on their loan to pay back whenever a homeowner finds themselves in this situation, it can make financial sense to default on the loan and allow the bank To foreclose the house, they lose the house, but they also lose the mortgage debt, which is bigger than the house after 2008. Some people started doing this hubler's company helped mortgage lenders prevent this from happening by offering homeowners a cash incentive to keep making their mortgage payments. Sometimes they would offer as much as twenty thousand dollars as upfront cash in order to get people to agree to keep paying the mortgage. In return, the mortgage lenders paid hubler's company an initial fee upfront for each mortgage that they originate, so that hubler would do this.

If the mortgage became underwater ironically hubler's former employer, morgan stanley used the strategy of walking away from underwater mortgages on a billion dollar scale. In 2007, they bought five office buildings in san francisco as an investment at the height of the real estate boom. After the bubble burst, those offices were only worth about half of the amount they bought them for. Morgan stanley was financially able to continue paying the mortgages on those offices, but they decided to default.

Instead, hubler may have used his experience at morgan stanley as inspiration for his business by offering homeowners an upfront payment. He hopes to entice them with a short-sighted payout in order to keep paying an underwater mortgage. His company grew quickly in the early days, but soon fizzled out after the mortgage crisis passed these days. Their company website is no longer maintained and is riddled with formatting errors.

Unfortunately, for hubler, he'll probably never be known for the company that i started, but instead for the 9 billion dollars that he lost for morgan stanley, alright guys that wraps it up for this video. If you like, this content, make sure to hit that like button and subscribe for future videos also leave a comment saying what you think about hubler's investment strategy in the meantime. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.