Monday, December 7, 2009

Economy’s Loss Was One Man’s Gain

Book review (“The Greatest Trade Ever”) in the New York Times by Devin Leanard:

THERE has been no shortage of books about Wall Street leaders who made billions of dollars disappear in the financial crisis. But as the Wall Street Journal reporter Gregory Zuckerman writes in “The Greatest Trade Ever,” (Broadway Books, 295 pages) the financial crisis was a goldmine for a small group of investors. One of them, John Paulson, founder of Paulson & Company, a New York hedge fund, made $15 billion in 2007 by shorting the housing bubble.

How did he do it? His fund purchased insurance contracts — called credit default swaps — on securitized mortgage debt at the peak of the real estate boom. Their value soared when the subprime crisis arrived. Mr. Paulson personally took home $4 billion of his fund’s take.

Mr. Zuckerman argues that Mr. Paulson’s lucrative bets — it wasn’t a single trade — put him in the pantheon of legendary investors like Warren E. Buffett, George Soros and Bernard Baruch. “They also made him one of the richest people in the world, wealthier than Steven Spielberg, Mark Zuckerberg and David Rockefeller Sr.,” he writes.

Mr. Zuckerman is a first-rate reporter who is also able to explain the complexities of real estate finance in layman’s terms. At times, “The Greatest Trade Ever” (the subtitle is “The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History”) reads like a thriller.

But as you might have already discerned from the overly exuberant title, his book lacks perspective. Mr. Zuckerman depicts Mr. Paulson as a hero for seeing though “the hubris and failure of Wall Street and the financial sector.”

Mr. Paulson did indeed see through Wall Street hubris. But if you read this book closely, you realize he’s no hero.

The author clearly considers Mr. Paulson morally superior to the leaders of investment banks like Bear Stearns and Lehman Brothers and subprime mortgage lenders like Countrywide Financial and New Century, all of whom are vilified.

But is he really? It’s true that the bearish Mr. Paulson enriched his investors while his bullish counterparts helped bring about a global economic crisis that impoverished countless people. But he wouldn’t have made his billions if those players had acted more prudently.

According to Mr. Zuckerman, Mr. Paulson persuaded Goldman Sachs and Deutsche Bank to put together securitized collateralized debt obligations (known as C.D.O.’s), which were filled with nasty mortgages that he could then short.

Of course, nobody told the suckers — er, investors — who bought those C.D.O.’s that they were designed to help a man who wanted the most toxic mortgages imaginable so he could profit when they went sour. But Mr. Zuckerman doesn’t make much of this scandal — and it is a scandal — perhaps because he doesn’t want to taint his supposedly heroic central character.

This isn’t the only instance in which Mr. Zuckerman bends over backward to present Mr. Paulson in a favorable light. He goes to great lengths to depict him as a self-effacing regular guy who takes the bus and dresses unfashionably. In short, the author would like us to think that this hedge fund manager is very un-Wall Street.

Perhaps. But Mr. Zuckerman also explains that Mr. Paulson, who grew up in Queens, marched off to Wall Street for the same reason everybody else does: to make piles of money.

We learn in “The Greatest Trade Ever” that, in his 30s, Mr. Paulson had a loft in SoHo where he mingled with models, celebrities and other bankers. After turning 40, Mr. Zuckerman writes, Mr. Paulson married his attractive assistant. They settled down to raise their daughters in a $15 million, six-story mansion, complete with indoor pool, on the Upper East Side.

The former sybarite then became something of a prig, by Mr. Zuckerman’s account, scolding his friends for using foul language and his employees for eating pizza, which he considered unhealthy. That may not be typical Wall Street behavior. The rest of it sounds familiar, though.

Luckily for Mr. Zuckerman — and his readers — Mr. Paulson is not the only character in the book. There is also Paolo Pelligrini, a 50-year-old Italian analyst who is living in a one-bedroom rental in Westchester after washing out at the investment bank Lazard Frères and breaking up with his second wife, a wealthy New York socialite.

Mr. Paulson, an old Wall Street acquaintance, throws him a lifeline in the form of a job offer. Mr. Pelligrini reciprocates by throwing himself into his work and helps his boss create his winning strategy.

There is Mr. Paulson’s friend, Jeffery Green, a Los Angeles real estate investor who pals around with Mike Tyson and Paris Hilton. He falls out with Mr. Paulson after learning of his friend’s investment strategy and making his own bets again the boom.

Jeffery Libert, another old acquaintance, also decides to buy credit default swaps. But he is racked with guilt, Mr. Zuckerman writes, when he finds himself wishing for homeowners to default so he can make money. It’s a rare moment of introspection in “The Greatest Trade Ever.” For the most part, the people in Mr. Zuckerman’s book couldn’t be happier when the housing market collapses.

At the end of the book, Mr. Paulson has more money than he will ever be able to spend. He gives $15 million to the Center for Responsible Lending, a nonprofit that helps families facing foreclosure. That’s not much for a guy who made $4 billion in a single year.

Mr. Buffett and Mr. Soros have been more generous with their earnings. If Mr. Paulson wants to be remembered as a hero, he might want to do more for the people who are on the wrong side of his trades.

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