

Trader Made Billions on Subprime - blackswan
http://online.wsj.com/public/article/SB120036645057290423.html?mod=blog

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byrneseyeview
The article about his estranged friend Jeff Greene (who heard his pitch and
made the same trades on his own) is good for color:

[http://online.wsj.com/article/SB120036270913390155.html?mod=...](http://online.wsj.com/article/SB120036270913390155.html?mod=hps_us_pageone)

"He bought three jets, most recently a Gulfstream. Though he paid just $2
million for an older model, "I certainly could afford" a $50 million one, he
says. He adds, in a telephone interview from his 145-foot yacht: "I tend to be
pretty conservative in the way I spend money.""

------
timr
_"Also key: Mr. Paulson didn't turn bearish too early. Some close students of
the housing market did just that, investing for a downturn years ago -- only
to suffer such painful losses waiting for a collapse that they finally unwound
their bearish bets. Mr. Paulson, whose investment specialty lay elsewhere,
turned his attention to the housing market more recently, and got bearish at
just about the right time."_

Interesting that this article was posted by "blackswan" -- this could be a
case study in _Fooled by Randomness_.

Six months earlier or later, and this guy might well have busted; I don't
think we would be reading about him.

~~~
gruseom
That's a good point. He broke one of the cardinal rules of trading:

 _Housing remained strong, and the fund lost money. A concerned friend called,
asking Mr. Paulson if he was going to cut his losses. No, "I'm adding" to the
bet, he responded..._

By comparison, as Ed Seykota put it in the book Market Wizards, "The elements
of good trading are cutting losses, cutting losses, and cutting losses."

~~~
mynameishere
Cutting a loss is _synonymous_ with "selling low".

~~~
gruseom
I must not have understood you... let me try again. You object to Seykota on
the grounds that cutting a loss entails _taking_ a loss. That's objectionable
because losses are objectionable. Did I get it?

Of course, a big loss is more objectionable than a small one.

~~~
eru
Sure. But you can never know before which way the prices go.

------
tlrobinson
_"He faced skepticism from other big investors. At the same time, fearing
imitators, he used software that blocked fund investors from forwarding his
emails."_

I'm curious as to what software can prevent people from forwarding your
emails...

~~~
eugenejen
It may be a misunderstanding from reporter. But can it be pgp? If he encrypted
his emails and only receiver with the key can decrypt it. It basically prevent
forwarded messages to be read.

~~~
falsestprophet
Save for the copy and paste hack

~~~
eru
Luckily for him, not all guys in finance are such uber-hackers.

------
mrtron
It is easy to look at this guy as the bad guy, but really he just observed
that the housing markets were in a massive bubble and bet against it.

~~~
byrneseyeview
It is quite hard to imagine how he's a 'bad guy'. Housing was _too expensive_.
If you bought a house because of the hype, you _overpaid_. He sold short,
which depressed prices, which means that people who bought after his trade are
better off than if he hadn't made it.

~~~
eru
I agree with the point you are proving. But I do not think your argument valid
- for you could just use your technique to prove the opposite: People who
_sold_ after his trade were worse off.

I think we need a more complex line of reasoning to justify him being the good
guy.

~~~
byrneseyeview
But people who sold after his trades made a stupid decision -- to buy
overpriced mortgages. We'll live in a better world when rational financial
decisions are more rewarding, and that won't happen without making folks like
Paulson pretty rich. The thing is, you could make the case that a mortgage
boom that went on another year would cost the country 1% of GDP in badly-
allocated capital (spent on houses nobody wanted to live in and everyone
bought to flip). From that perspective, he's earning a commission of less than
1%.

~~~
eru
Ok, that sounds like a more convincing argument than the original one.

Speculators are risking their own money re-aligning badly-allocated capital in
the economy and correct prices. If they are right they earn a nice commission.

------
aswanson
He better not believe he can do it again, like this guy did:
[http://hedgefund.blogspot.com/2006/09/amaranth-and-brian-
hun...](http://hedgefund.blogspot.com/2006/09/amaranth-and-brian-hunter.html)

------
mvbma
Did any one notice that he hired Greenspan? The guy who fueled the housing
bubble by lowering interest rates down to 1% the foolishness that made it
possible for Paulson to make his billions.

------
mynameishere
Lots of people short, lots of people long. Nothing special about it. I made a
pile of money on Countrywide a few days ago. Am I a genius?

The only distinction of a fund manager is that they slimed their way into
using other people's money.

------
marketer
All the hard-earned money people pay on mortgage interest rates ultimately
goes to people like him.

~~~
pg
Really? What path does the money take from them to him?

~~~
cperciva
Arguably the bets this guy made resulted in the banks' losses on each of their
sub-prime mortgage loans being greater; ultimately this will raise the cost of
mortgage borrowing as banks price risk higher.

On the other hand, this guy probably helped to make the bubble burst sooner --
and thus before the banks could make even more sub-prime mortgage loans -- and
that would have the effect of reducing the banks' ultimate losses (and
resulting in them applying less of a risk premium to mortgages).

Trying to figure out which of these effects is larger would be pure
speculation.

~~~
nradov
No, shorting mortgage-backed securities doesn't cause losses for mortage
lenders. And it was not just banks that were issuing mortgages.

~~~
cperciva
According to the article,

 _One concern was that even if Mr. Paulson bet right, he would find it hard to
cash out his bets because many were in markets with limited trading. This
hasn't been a problem, however, thanks to the wrong bet of some big banks and
Wall Street firms. To hedge their holdings of mortgage securities, they've
scrambled to buy debt protection, which sometimes means buying what Mr.
Paulson already held._

In other words, Paulson was buying mortgage insurance contracts, driving their
prices up, and now banks are buying those contracts from him (at higher prices
than they would have if he hadn't been involved in the market).

~~~
cstejerean
He didn't drive the prices up (at least not by much). The fact that more and
more people started defaulting on their mortgage drove up the price of
insurance. That's what he was betting on (and he was right). So if he didn't
make the money someone else would have (whoever was holding on to those
insurance contracts).

~~~
cperciva
You can't buy a financial instrument without driving its price up. This
applies even more if you're buying hundreds of millions of dollars worth of a
financial instrument.

~~~
vitaminj
True in general, but when he bought them, they were priced very low. Even
after he bought millions (presumably) of the swaps, other investors thought he
was an idiot and didn't follow suit, so the price of the swaps probably didn't
go up much. It was only after the sub-prime fiasco got into third gear that
other investors began clamouring for the swaps.

By all rights, his initial foray into buying the swaps most likely had minimal
effect on the price. Ultimately he felt they were incorrectly priced by the
market and made a bet on them.

