He is the architect of the “The Greatest Trade Ever,” according to The Wall Street Journal.. Just to back up a bit, he wasn't the first. John Paulson made his fortune betting against subprime mortgages at the peak of the 2007 credit bubble. They were very cheap. ZUCKERMAN: Yeah. By way of comparison, George Soros, when he bet against the British pound in the early '90s made a billion dollars just for his firm. If you're a pretty well-paid guy on Wall Street, if you bet with the masses, with the market, and you lose, well, OK, so everybody else has too and you give some good explanation and on to the next gig. One manager, John Paulson, made $3.7 billion last year. Instead of bringing my money back to Bear Stearns, I'm going to start shorting that stock." Some Wall Street people really want to be thought of as intellectuals or deep thinkers, as wise elder statesmen—not just as people who make a lot of money. But he did - and The Greatest Trade Ever is the story of how he realised that the sub-prime housing bubble was going to burst, making $15 Billion for his fund and more than $4 Billion for himself in a single year. https://www.theguardian.com/business/2008/apr/19/subprimecrisis.useconomy SIEGEL: There are some occasions here when you report on, in addition to all the people and the trades involved, some of the ethical misgivings that some people have. You are actually rooting for people to have problems, and he was torn. But when the market crashed, Paulson made billions. People who bought them from him are saying, what's happening? Bear was having problems, and it was trying to make sure these hedge-fund managers would come back into the fold as clients. By the end of the lunch everybody else in the room was like, "Wow, John Paulson actually knows what he's talking about, the Bear Stearns guys don't. You can question why. You could argue that he hasn't achieved that kind of renown as an intellectual, and I'm not sure he's so focused on it. And yet he helps John Paulson make the greatest trade ever. There were a lot of people actually who were skeptical, but couldn't quite figure out a way to bet against housing. In the middle of '06, he started making these trades. Meanwhile, you've been selling people on these securities. Billionaire John Paulson, who netted $20 billion from the 2008 'Big Short' crisis, quits the hedge fund world Halfway through this lunch, when it looked like they were making some good arguments and the hedge-fund guys were coming around, John Paulson stands up and starts objecting to what the Bear Stearns executives are saying. And he's made it into a simple argument: the expanded supply of money and the fiat currency is under pressure, and what's the only thing that holds up when the fiat currency is under pressure? Hedge fund manager John Paulson made a lot of money betting against the U.S. housing market when the bubble formed, and then made a lot more money betting on its recovery after it … He was up 66 percent in February of 2007 and his investors called up thought it was a misprint. To continue reading login or create an account. I appreciate it. [5] Contents. So, they bought a lot of these credit default swaps - CDS contracts as they're called on Wall Street - at dirt-cheap prices when no one else really wanted them. John Paulson, the hedge fund manager who made billions betting on a collapse in US house prices, has suffered heavy losses at Sino-Forest, a Chinese timber company, and people are wondering if … They thought it was 6.6 percent. In a short span of time, John Paulson catapulted to the status of one of the most successful investors in history. John Paulson Probably the most famous of the hedge-fund managers who got it right, Paulson made himself $3.7 billion in 2007, and another $2 billion in 2008… So, if the debt has problems, then this insurance policy rises in price. In his new book, The Greatest Trade Ever, Gregory Zuckerman, a reporter at The Wall Street Journal, examines how the unlikely team of Paulson and assistant Paolo Pellegrini—as well as a few other investors—bucked conventional wisdom and saw through the housing hype. Only on Wall Street can you be worth about $100 million and still be in relative obscurity. SIEGEL: Home run - four grand slams. He moved on to Bear Stearns working in the mergers and acquisitions department, and then to Gruss Partners LP, where he made partner. He made a brilliant bet shorting subprime. John Paulson, a softly spoken hedge-fund manager who still took the bus to work, seemed unlikely to stake his career on one big gamble. And he calls up John Paulson, who he knew vaguely from way back when, and John Paulson's like, "Hey, you can work here as an analyst, but that's about it." He had slowly built up his hedge fund, and by 2005 or so he started getting nervous about this whole housing market and tried to think, maybe I should bet against it. SIEGEL: So, but you're saying that the very banks that had acquired what we came to think of as toxic assets were also selling insurance on those very assets and betting on them again? Unfortunately, the opportunity to create a meaningful documentation of an important time in financial history was lost. Actually, I found it kind of interesting that really only one of my characters in the book had any ethical qualms. SIEGEL: Now, whenever a stock is rising very quickly, there's somebody who is short selling it, who's betting that it'll go down instead of go up. JOHN PAULSON: The Man Who Turned Contrarian Bets Into Billions ... Mr Paulson made tens of billions of dollars for his investors and himself in 2006 and 2007, thanks to it." On the one hand, he was convinced he was going to make a lot of money buying this insurance on risky debt, risky mortgages. The writing style is indicative of a gossip tabloid rather than respected financial journalism. His biggest gains are in '07, which now strikes us as a relatively placid time in the market. Paulson ended up with about $147 million, which sounds like a lot. ZUCKERMAN: That's exactly right. Paulson is reported to have earned a total of £280m after reducing its short position in RBS in January 2009. ZUCKERMAN: Yeah. SIEGEL: So, even if you had no stake in some big mortgage-backed security, you could buy a credit default swap that was insurance against the collapse of that security. In early 2008, and John Paulson is a big name at that point, he got invited by Bear Stearns, along with a number of other hedge funds, to come over for a nice lunch. In 2007 alone he made $15 billion for his firm—by way of comparison, George Soros made a billion dollars betting against the British pound [in 1992]—and in the next, in 2008, he transformed the trade into more of a bet against financial firms and made another $5 billion. When was the eureka moment? What did they do? SIEGEL: Now, there's another ethical dilemma. For himself, he made in 2007 nearly $4 billion and another just two billion or so in 2008. And Paulson made $20 billion over two years. It's not enough just to call the bubble or to have the insight that something's going to fall in the long term—you have to get the timing right in order for it to be profitable. And I understand that he didn't want a book that was colorful and that explored some of the personalities of those who figured out that the housing market was going to collapse. Visit our website terms of use and permissions pages at www.npr.org for further information. ZUCKERMAN: Yeah, I would just respond by saying that John Paulson was generous enough to share over 50 hours of his time with me discussing the trade. So he decides essentially to devote an entire fund to this strategy. We're not talking about individual investors. That we had one trader who was betting against it, well, what are we supposed to do about that? SIEGEL: And let's take the biggest winner in all of this, the hedge fund operator, John Paulson - no relation to the former Treasury secretary, how much did he make? John Paulson is famous for making the greatest trade in Wall Street history … and also one of its worst. (Click here to follow Daniel Gross). In his book, "The Greatest Trade Ever," he writes about the small minority of traders who saw it coming and who bet against the house. So, he did pretty well. ZUCKERMAN: John Paulson made for his firm $15 billion in 2007, another five billion or so in 2008. I think it was Keynes who had the line about "The market can stay irrational longer than you can remain solvent." When did things start to come good? I think he wants it, but he is fascinated by big trades, and his whole life he has been. Some of his investors actually were nervous. SIEGEL: John Paulson, the major subject of this book, has evidently read it now. The Greatest Trade Ever: How John Paulson Bet Against the Markets and Made $20 Billion by Gregory Zuckerman. This is a singles hitter—his whole life is banging out singles, and here he is with this unbelievable grand slam. So, they would argue, well, jeez, we were selling products that people wanted. And, you know, these are big boys, you have to remember as well, who were buying this stuff. In 2007, he made $15 billion in a single year by shorting the housing market. I'm Michele Norris. All rights reserved. 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