Book Review: The Greatest Trade Ever

In the recent financial crisis and meltdown, one person stands out for making a fortune from the collapse of housing prices, subprime mortgages, and related derivatives. In 2007 Paulson & Co made $15 billion, of which John Paulson got $4 billion; the figures for 2008 were $5 billion, and $2 billion. In The Greatest Trade Ever (Random House, 2009) Gregory Zuckerman, a Wall Street Journal senior reporter, tells how Paulson did it. His new book is detailed, engrossing, and reads like a suspense novel.

Capitalizing on the bubble was not easy. There was stress, uncertainty, and problems for Paulson at every step of the way. While he already was a reasonably successful hedge fund operator, he was not one of the flashy, name brand players. Raising the money to short subprime was very difficult at first. There was the “negative carry” of paying the premiums on the credit default swaps on subprime pools and collateralized debt obligations. Mortgage values were slow to decline despite the evident problems in housing prices. These values were kept up by banks eager for the income stream from the related derivatives.

As Paulson raised money to fund his short selling, he feared others would catch on to the logic and potential profits, bringing in big money competition. Fortunately, few caught on until the very end. Paulson was able to buy the de facto insurance for very low prices. This meant he could make a big-time bet for a limited amount of money and have a low-risk, high-profit investment. 

Paulson’s operation is a dramatic story of how constantly probing research can pay off, a good lesson for NYSSA members. And lest NYSSA members think that we are now in a non-bubble world with no more big short-selling opportunities, the book ends by pointing out that low- to zero-interest rates could now be creating the next bubbles.

–William A. Hayes