He Helped Threaten a Supreme Court Fight Over Bear Stearns. Michael Lewis Said He Was Too Normal for The Big Short
Todd Combs was on a 2007 call with Seth Klarman and 20 others betting against Bear Stearns, and Michael Lewis said Combs would not be in The Big Short.
Joys of Compounding · Todd Combs - Investing, The Last Liberal Art - [Art of Investing, EP.1]Todd Combs had never spoken to Michael Lewis when his assistant said the author was on the line.
Combs, who then ran a small hedge fund called Castle Point, listened as Lewis explained how he had gotten his name. Combs was one of 22 fund managers on a private call in 2007, a group that included Seth Klarman, another hedge fund manager, betting against a collapsing Bear Stearns hedge fund. Lewis said he was writing a book about that trade. They talked for about 45 minutes.
To understand the call, you have to understand the bet. To short something is to bet its price will fall. The Bear Stearns fund owned bundles of home loans that had been packaged into securities, and Combs and the others believed those bundles were failing. When Bear Stearns moved to close its fund, Combs recalled the group believed the plan would, in his word, "screw" them out of their winnings.
That is why they organized a call with the Securities and Exchange Commission, the federal agency that polices markets. Klarman was on the call, though Combs did not know him well at the time. Their message, as Combs recalled it, was blunt. What Bear Stearns was trying to do was absolutely illegal, and Combs recalled telling regulators, "we're going to take it all the way to the Supreme Court if we have to." He called it extremely bad precedent.
Lewis had somehow obtained the list of the 22 participants. Combs told him he did not talk to reporters, that the conversation was off the record, and that he did not want attention. Combs told him, "I do not want to be in this book."
Lewis reassured him. He told Combs not to worry, that he was not going to be in it. The reason, Lewis said, was that Combs seemed too normal, like a really nice guy.
The book became The Big Short, the famous account of the housing collapse. Combs, who called his role "one small little piece" of the backstory to the trades in The Big Short, says Lewis told him he would not be in the book because he seemed too normal.
Questions people ask
What does it mean to short a stock?
To short means to borrow something, sell it, and hope to buy it back later for less. If a $100 stock falls to $10, the short seller keeps much of the difference, but if it rises, losses can keep growing, which is why many investors avoid it.
What was Bear Stearns and what happened to it?
Bear Stearns was a large Wall Street investment bank. In 2007, two of its hedge funds that owned mortgage-related securities collapsed, and the bank itself failed and was sold in early 2008, in one of the opening events of the financial crisis.
Who is Seth Klarman?
Seth Klarman is the Boston-based manager of Baupost Group and author of a cult investing book, Margin of Safety. He is known for cautious, bargain-hunting investing and rarely speaks publicly.