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Lippmann Reduces Subprime Wagers While Seeing Housing Recovering

Greg Lippmann, the former Deutsche Bank AG trader who gained fame by betting against subprime-mortgage bonds before housing collapsed, reduced his more recent bullish wagers even as he sees a durable real-estate recovery.

Lippmann’s $2.3 billion hedge fund, New York-based LibreMax Capital LLC, shifted more toward commercial-mortgage bonds, collateralized loan obligations and consumer-tied securities last quarter, he wrote in a Nov. 19 letter to investors. Still, subprime notes represented 35 percent of its “long” positions as of Sept. 30, down from 40 percent on March 31, and other residential debt accounted for 16 percent.

Lippmann’s shift comes after some U.S. home-loan securities gained as much 60 percent this year, according to Barclays Plc, and as he sees risks to markets and property-price indexes falling 1 percent through April. After that, home values will be pushed higher by the limited supply of real estate for sale and rising demand from new households and investors, he wrote.

“The outperformance of housing, compared to other economic data in 2012, heralds the beginning of a multi-year relative trend regardless of the strength of the U.S. economy,” Lippmann said in the third-quarter investor letter, which was obtained by Bloomberg News. He declined to comment on its contents.

Home prices in 20 large metropolitan areas gained 8.8 percent from February through August amid rising demand from property investors and record-low loan rates, after a 35 percent drop from a 2006 peak, according to an S&P/Case-Shiller index.

April ‘Nadir’

After such indexes reach a “nadir” in April, they’ll gain 3.8 percent in the next 12 months, 4.7 percent in the subsequent year and 4.6 percent in the following period, Lippmann said. The typically higher share of sales tied to foreclosures during the fall and winter tends to depress aggregate prices, according to analysts at firms including Barclays and JPMorgan Chase & Co.

A gain of 8.2 percent at Lippmann’s fund last quarter was driven mainly by subprime debt and brought returns to 16 percent in the first nine months of 2012, according to the letter.

He wrote that he was positioning “more conservatively” because of concerns related to the U.S. presidential election, the so-called fiscal cliff, Europe’s debt crisis and Hurricane Sandy. Lippmann remains bullish on the “relative prospects” of securitized debt in general and still sees “tremendous value” in residential mortgage securities, he said.

Lippmann was featured in books on the financial crisis that began with soaring subprime defaults in 2007 including Michael Lewis’s “The Big Short” and Greg Zuckerman’s “The Greatest Trade Ever.” He left Deutsche Bank in 2010 to start LibreMax with Fred Brettschneider, the German bank’s former head of global markets in the Americas.

Singer, Bass

Other investors that switched to buying home-loan securities after selling subprime bonds before their collapse include Elliott Management Corp., the $21 billion New York-based hedge fund founded by billionaire Paul Singer, and Kyle Bass of Dallas-based Hayman Capital Management LP.

Elliott said in an Oct. 26 letter to investors that it sold the securities last quarter even as it expects a “continuation of good news in housing” because their yields had fallen too much. Bass is staking half his firm’s money on subprime because the debt’s prices are still low enough to make the bonds “bullet-proof” against principal losses if housing reverses, he said in an Nov. 16 interview with Bloomberg Television.

The share of commercial-mortgage securities among bullish bets at LibreMax rose to 15 percent on Sept. 30, from 9 percent at the end of the first quarter, the period in which it started trading those bonds, according to the letter.

The notes are being made more valuable by the Federal Reserve’s purchases of government-backed home-loan securities, Lippmann wrote. That so-called quantitative easing is driving investors to “seek yield,” which both bolsters demand and creates easier lending that helps borrowers refinance maturing debt, he said.

At the same time, “while loose underwriting could help the performance of existing securitizations, it will also add a degree of risk to the new issue market,” he said.

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