"It's not that we're arrogant, or that we've got a lot of hubris," Lou Lucido, a former bond buyer at TCW Group, told the Los Angeles Times in March of 2007. "But we think we've got the position and the talent in place to be able to analyze and manage through this period." At the time, Bloomberg reports today, Lucido was filling up Davis Square III, an investment pool that AIG was bound by contract to insure against failure, with billions of dollars of subprime mortgage bonds that would in short order lose all of their value. Not so talented, it turns out. The news organization rightfully rakes the 61-year-old Lucido and his colleagues Michael Vranos ("a former teen Mr. Connecticut bodybuilder") and TCW bond salesman Jeffrey Gundlach (noted connoisseur of "drugs, porn, and sex toys") over the coals. Their description of Lucido as "a guitar-playing bond buyer ... with a taste for the Rolling Stones" makes it seem as though he was too busy cranking up sweet guitar solo jams to see the coming crash.
Which, let's face it, he probably was.
One of TCW’s March 2007 purchases, consisting of loans originated by Option One Mortgage Corp., then a unit of H&R Block Inc., quit paying by the end of October 2008.
Between April and May 2007, TCW bought another $48 million of securities for Davis Square III, including three bundles of Alt-A mortgages underwritten by New York-based Morgan Stanley. Two of those bonds have stopped paying.
The asset manager also bought a subprime-mortgage-backed bond called HASC 2007-HE2 2A4, underwritten by HSBC. It was rated Aaa by Moody’s, its top ranking. As of the end of January, 67 percent of the borrowers of mortgages backing the bond were at least two months late with payments, according to data compiled by Bloomberg.
“Unfortunately, things deteriorated in an industry way that went beyond even our worst range of forecasts,” said Lucido, who’s on the dean’s executive board at New York University’s Stern School of Business and who performed with other mortgage-securities executives in the Bonded Blues Band in the 1990s.
Emphasis ours because, sigh. If only someone had told AIG what our mother told us: Never trust a guitar player.