The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
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In 2006, hedge fund manager John Paulson realized something few others suspected--that the housing market and the value of subprime mortgages were grossly inflated and headed for a major fall. Paulson's background was in mergers and acquisitions, however, and he knew little about real estate or how to wager against housing. He had spent a career as an also-ran on Wall Street. But Paulson was convinced this was his chance to make his mark. He just wasn't sure how to do it. Colleagues at investment banks scoffed at him and investors dismissed him. Even pros skeptical about housing shied away from the complicated derivative investments that Paulson was just learning about. But Paulson and a handful of renegade investors such as Jeffrey Greene and Michael Burry began to bet heavily against risky mortgages and precarious financial companies. Timing is everything, though. Initially, Paulson and the others lost tens of millions of dollars as real estate and stocks continued to soar. Rather than back down, however, Paulson redoubled his bets, putting his hedge fund and his reputation on the line.
In the summer of 2007, the markets began to implode, bringing Paulson early profits, but also sparking efforts to rescue real estate and derail him. By year's end, though, John Paulson had pulled off the greatest trade in financial history, earning more than $15 billion for his firm--a figure that dwarfed George Soros's billion-dollar currency trade in 1992. Paulson made billions more in 2008 by transforming his gutsy move. Some of the underdog investors who attempted the daring trade also reaped fortunes. But others who got the timing wrong met devastating failure, discovering that being early and right wasn't nearly enough.
Written by the prizewinning reporter who broke the story in The Wall Street Journal, The Greatest Trade Ever is a superbly written, fast-paced, behind-the-scenes narrative of how a contrarian foresaw an escalating financial crisis--that outwitted Chuck Prince, Stanley O'Neal, Richard Fuld, and Wall Street's titans--to make financial history.
From the Hardcover edition.
investors and banks scrambled to buy their own insurance on toxic mortgages. “Jeffrey, they’re really moving.” It was time to do the buying he planned, Libert decided, sure that big profits awaited. “Okay, get me in at ninety.” “We can’t, we’re way past that.” “What?! You mean we’re at eighty??” “No—it’s seventy.” “What? In one day?!” Libert was in a panic. He was finally prepared to toss his moral qualms into the nearby Atlantic Ocean, but now it was too late. The sharp drop in the index
the most risk of any investor in pursuing the bearish housing wager. He was being paid millions of dollars annually by Deutsche Bank in 2005 when he first had concerns about subprime mortgages. If Lippmann had continued to make investments predicated on housing staying firm, he would have lost money, like others at his bank and on Wall Street. But he likely would have kept his well-paid job. All he had to do was trot out the well-worn excuses of the business. Sorry, boss, but the downturn was a
57th Street to 58th Street, Pellegrini likely would go across town, up the West Side, back to the East Side, and then downtown, to reach 58th Street. The direct route just didn’t seem his style. “Sometimes it’s more fascinating for me to do everything on my own and re-create the wheel,” Pellegrini acknowledges. But an in-depth project was exactly what Paulson now wanted of Pellegrini. Each time he discovered new data, Paulson sent him back for more. Paulson asked probing questions: What happens
could protect it with these mortgage investments. GREENE HAD BEEN BORN in Worcester, Massachusetts, in a blue-collar community that seemed a galaxy removed from jet-set Los Angeles. Greene’s father, Marshall, worked in the textile-machinery business, much like his own father before him, reselling machinery parts. Jeffrey sometimes tagged along as his father visited mills around New England, selling knitting spools, parts, and other machinery. The Greene family owned a three-bedroom,
and his team said the investments Paulson was using were outside his area of expertise and had become too large a part of his firm’s focus. Constantinides tried to explain to Murray that the purchase of the CDS contracts represented little risk for Paulson’s funds. But after several weeks of analysis by Murray and his staff, Murray insisted on moving EIM’s money out of one fund and into Paulson’s merger fund, which held fewer subprime investments. After a barrage of calls from other concerned