5 ms·

Trader Made Billions on Subprime

33 points by blackswan 19y ago

byrneseyeview 19y ago
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=hps_us_pageone http://online.wsj.com/article/SB120036270913390155.html?mod=... "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.""
mrtron 19y ago
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 19y ago
  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 19y ago
    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 19y ago
      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 19y ago
        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.
mynameishere 19y ago
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 19y ago
All the hard-earned money people pay on mortgage interest rates ultimately goes to people like him.
- pg 19y ago
  Really? What path does the money take from them to him?
  - cperciva 19y ago
    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 19y ago
      No, shorting mortgage-backed securities doesn't cause losses for mortage lenders. And it was not just banks that were issuing mortgages.
      - cperciva 19y ago
        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).
timr 19y ago
"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 19y ago
  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."
  - mwerty 19y ago
    Rules of thumb can be applied without thinking to control both chance of failure and chance of a crazy success.
    - timr 19y ago
      Yes, but that's the point. These types of risks are always brilliant when you win, and stupid when you lose. Articles like this one teach you little, other than the value of good luck, and great timing. (also, for the record: I agree wholeheartedly with the spirit of his investments; I'm a housing bear too. But I'm also realistic enough to know that he got lucky, using a decidedly risky investment strategy. With hundreds of millions of dollars short in an admittedly irrational market, one bad month of excessively irrational market behavior could have wiped him out.)
  - mynameishere 19y ago
    Cutting a loss is synonymous with "selling low".
tlrobinson 19y ago
"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...
- mwerty 19y ago
  Outlook's drm claims to do this I think. Of course, no software can do it.
- eugenejen 19y ago
  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 19y ago
    Save for the copy and paste hack
    - eru 19y ago
      Luckily for him, not all guys in finance are such uber-hackers.
aswanson 19y ago
He better not believe he can do it again, like this guy did: http://hedgefund.blogspot.com/2006/09/amaranth-and-brian-hunter.html http://hedgefund.blogspot.com/2006/09/amaranth-and-brian-hun...
mvbma 19y ago
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.

33 points by blackswan 19y ago

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=hps_us_pageone http://online.wsj.com/article/SB120036270913390155.html?mod=... "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.""

mrtron 19y ago

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 19y ago
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 19y ago
  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 19y ago
    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 19y ago
      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.

mynameishere 19y ago

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 19y ago

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

pg 19y ago
Really? What path does the money take from them to him?
- cperciva 19y ago
  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 19y ago
    No, shorting mortgage-backed securities doesn't cause losses for mortage lenders. And it was not just banks that were issuing mortgages.
    - cperciva 19y ago
      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).

timr 19y ago

"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 19y ago
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."
- mwerty 19y ago
  Rules of thumb can be applied without thinking to control both chance of failure and chance of a crazy success.
  - timr 19y ago
    Yes, but that's the point. These types of risks are always brilliant when you win, and stupid when you lose. Articles like this one teach you little, other than the value of good luck, and great timing. (also, for the record: I agree wholeheartedly with the spirit of his investments; I'm a housing bear too. But I'm also realistic enough to know that he got lucky, using a decidedly risky investment strategy. With hundreds of millions of dollars short in an admittedly irrational market, one bad month of excessively irrational market behavior could have wiped him out.)
- mynameishere 19y ago
  Cutting a loss is synonymous with "selling low".

tlrobinson 19y ago

"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...

mwerty 19y ago
Outlook's drm claims to do this I think. Of course, no software can do it.
eugenejen 19y ago
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 19y ago
  Save for the copy and paste hack
  - eru 19y ago
    Luckily for him, not all guys in finance are such uber-hackers.

aswanson 19y ago

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

mvbma 19y ago

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.