As for Paolo Pellegrini, he watched the frenzy surrounding Paulson, Goldman, and the controversial Abacus transaction with mounting frustration. Early television reports in the spring of 2010 painted Pellegrini as a whistle-blower who had turned on Paulson and supplied key information to investigators. In truth, Pellegrini did little more than answer questions posed by government officials, telling them that he and Paulson did nothing wrong.
By early 2010, Pellegrini had little to do with Paulson or even the New York financial community. A year earlier, Pellegrini began splitting his time between Bermuda and New York, choosing to try to build his own hedge-fund empire by the calm, blue sea. Pellegrini scored big early trading gains, thanks to a more pessimistic outlook for global economies than his old boss Paulson. But Pellegrini only managed to raise about $50 million from investors for his new firm. And when a bearish wager against the U.S. dollar and Treasury bonds went awry in the summer of 2010 and his fund suffered losses of 11 percent, Pellegrini pulled the plug on his nascent firm and returned all of his clients’ cash.
Building his own hedge-fund empire wouldn’t be possible, Pellegrini concluded, regretfully. Managing his own money while enjoying Bermuda’s low taxes, island setting, and opportunity to socialize with fellow financiers, such as New York City Mayor Michael Bloomberg, would have to suffice.
“Commuting to work with my outboard dinghy across Hamilton Harbor does facilitate a relaxed and productive setting for my Bermuda workdays,” he said in an e-mail.
Andrew Lahde, from time to time, returns from his own island retreat to Los Angeles to meet investors, discuss business opportunities, and attend speeches about drug legalization. During the summer of 2010, he even contemplated starting a bank.
“After all, you can borrow from depositors and the Fed at 0.25 percent, then buy long Treasuries at 3.5 percent, and go to the beach,” Lahde said in an e-mail message. “Of course, that would last only until rates rose and the value of your long bonds fell. But who in a capitalist economy cares about the next quarter if your bonus is tied to this quarter?”
In the end, though, he chose the island life, spending the entire winter by the sea as he dabbled in precious-metal investments and interests, including snorkeling, relaxing by the beach, and ogling women. Lahde even started a photography company “to pursue several of these interests simultaneously,” he said in an e-mail.
“I have no motivation. I like not working. Stress is not fun,” Lahde said, adding that he was trying to nurse himself back to health after “taking a beating” from two years of stress related to his big trade.
By the summer of 2010, Greg Lippmann finally tired of working for Deutsche Bank. After years of bluffing that he would bolt over disappointing bonuses, Lippmann told his bosses he was leaving to launch his own hedge fund. Like Paulson, however, questions surrounded Lippmann. He and Deutsche Bank weren’t accused of any inappropriate actions. But some CDO-related transactions created by others at the bank came under investigation by federal authorities, presenting Lippmann with a potential challenge as he tried to round up clients.
Michael Burry spent months deciding what to do with the rest of his life, but he still had no concrete answer by the middle of 2010. Some of his bitterness had dissipated, thanks to belated public recognition for his early work detecting the financial bubble, recognition related to this book and one by author Michael Lewis. His trade didn’t turn Burry into the next George Soros, but it did make him a wealthy man.
Burry even felt confident enough to publicly tangle with Alan Greenspan.
“As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking,” wrote Michael Burry in an op-ed in the New York Times in April 2010. “The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word.”
But Burry remained gloomy about how his clients had treated him and how little had been learned from the dark period.
“I would say that I’ve lost a lot of faith in the human race, and that has yet to be restored,” he said in an e-mail message. “That’s what really hurts—not so much what was accorded to me, but the tremendous failure of American society. It rips my heart out to think we are veering so far from what made America great. It’s remarkably sad on many levels.”
Jeffrey Greene also decided to turn away from investing. Focusing on politics instead, he launched a quixotic effort to win the Democratic nomination for Senate from his new home in Palm Beach, Florida. Running as a Democrat and saying he was prepared to spend $40 million to win the seat, Greene met more than a few snickers. Some brought up his colorful past, including his friendships with boxer Mike Tyson and Heidi Fleiss, the Hollywood Madam, and Greene’s escapades as an eligible bachelor, to suggest he wasn’t a serious candidate. Fresh pictures of Greene chatting with troubled actress Lindsey Lohan in St. Barts didn’t help his credibility.
But the heavy advertising spending and a serious mien helped convince some voters to ignore Greene’s flashy past.
“Government has a very important purpose, and that’s one of the reasons that I’m a Democrat,” Greene told the Miami Herald editorial board, even though he hadn’t registered as a Democrat until 2008. “To me, it’s not about a safety net. It’s about a trampoline. We need to create a chance for the people at the bottom to bounce back up.”
By the summer of 2010, Greene was closing in on the Democratic front-runner opposing him. Once again, the experts were shocked.
acknowledgments
John Paulson spent more than fifty hours with me, discussing his trade, and for that I am appreciative. Many of the other protagonists in the story were just as generous with their time.
I’d also like to thank Robert Thomson, The Wall Street Journal’s managing editor; Nikhil Deogun, the paper’s deputy managing editor; and Ken Brown, the editor of the paper’s Money and Investing section, who gave their blessings for a leave to complete this book. Roger Scholl, my editor at Random House, and David McCormick, my agent at McCormick & Williams, provided expert insight and valued guidance, not to mention a snazzy title. I’m grateful for the invaluable counsel and critiques of colleagues, former colleagues, friends, and family members including Ezra Zuckerman Sivan, Hal Lux, Karen Richardson, Joanna Slater, Craig Karmin, Serena Ng, Richard Regis, Lynn Davidman, Avigaiyil Goldscheider, and Erin Arvedlund. William Lloyd and Janet Tavakoli made sure I kept mistakes to a minimum. And I’m indebted to Sarah Morgan and Shelly Banjo, two remarkable research assistants.
I couldn’t have completed this project without the patience and support of my wife, Michelle, who somehow convinced me to keep going, as well as the love of Gabriel and Elijah, the best boys any father could ask for. I am eternally grateful for the unwavering encouragement and love of my mother and father. Their confidence in me is the backbone of whatever success I achieve.
When I was young and still impressionable, my father worked with me on my writing. Keep it as tight and simple as possible, he urged. Be creative. My work is an echo of his research and writing, his guidance as close as the keyboard in front of me. The greatest trade ever brought John Paulson billions of dollars. The opportunity to write about it gave me my own fortune—precious extra time with my father, of blessed memory.
notes
Chapter 1
1. Greenwich Associates, “In U.S. Fixed Income, Hedge Funds Are the Biggest Game in Town,” August 30, 2007; Mark Jickling and Alison A. Raab, “Hedge Fund Failures,” Congressional Research Service Report for Congress, December 4, 2006.
2. Dr. David DeBoskey, Charles W. Lamden School of Accountancy, San Diego State University College of Business Administration.
3. Michael J. de la Merced, “Culturally, Hedge Funds Go Public,” New York Times, December 8, 2006.
4. Gregory Zuckerman and Henny Sender, “Exclusive Club: Ex-Trader Creates Hot Hedge Fund, and a Traffic Jam,” The Wall Street Journal, January 12, 2005.
5. Gregory Zuckerman and Cassell Bryan-Low, “With the Market Up, Wall Street High Life Bounces Back, Too—Chartered Jets, a Wedding at Versailles and Fast Cars to Help Forget Bad Times,” The Wall Street Journal, February 4, 2004.
6. Russ Alan Prince, Edward A. Renn, Arthur A. Bavelas, and Mindy F. Rosenthal, Fortune’s Fortress: A Primer on Wealth Preservation for Hedge Fund Professionals, New York: MARHedge, 2007.
7. Gary Weiss, “The Man Who Made Too Much,” Portfolio, February 2009.
Chapter 2
1. Benjamin Franklin, The Way to Wealth, 1758 (originally published as a preface to Poor Richard’s Almanac).
2. Courtney Kane, “MasterCard Hopes to Become the Credit Card of Choice for Ordinary, Middle-class Consumers,” New York Times, October 22, 1997.
3. Gregory Zuckerman, “Debtor Nation: Borrowing Levels Reach a Record, Sparking Debate,” The Wall Street Journal, July 5, 2000.
4. Louise Story, “Home Equity Frenzy Was a Bank Ad Come True,” New York Times, August 14, 2008.
5. Gretchen Morgenson and Geraldine Fabrikant, “Countrywide’s Chief Salesman and Defender,” New York Times, November 11, 2007.
6. Lew Sichelman, “Mozilo: End Downpayment Requirement,” National Mortgage News, February 17, 2003.
7. James R. Hagerty, Ruth Simon, Michael Corkery, and Gregory Zuckerman, “Home Stretch: At a Mortgage Lender, Rapid Rise, Faster Fall,” The Wall Street Journal, March 12, 2007; John Gittelsohn and Mathew Padilla, “How New Century Ran Out of Money,” Orange County Register, April 15, 2007.
8. Mark Zandi, chief economist and cofounder of Moody’s Economy.com.
9. CNBC transcript; Interview: Angelo Mozilo of Countrywide Financial Discusses the Housing Market, CNBC: Kudlow & Cramer, December 23, 2004.
10. Carol Lloyd, “Impossible Loan Turns Dream Home into Nightmare,” San Francisco Chronicle, April 15, 2007.
11. Peter S. Goodman and Gretchen Morgenson, “Saying Yes, WaMu Built Empire on Shaky Loans,” New York Times, December 28, 2008.
Chapter 3
1. Gabriel Sherman, “New Kid in Town,” New York Observer, April 11, 2004.
Chapter 4
1. Mark Pittman, “Subprime Securities Market Began as ‘Group of 5’ Over Chinese,” Bloomberg, December 17, 2007.
Chapter 6
1. Christopher Reed, “The Damn’d South Sea,” Harvard Magazine, May–June 1999.
2. James Grant, Mr. Market Miscalculates: The Bubble Years and Behind, Axios Press, Mount Jackson, Virginia: 2008.
3. “Jesse Livermore Ends Life in Hotel,” New York Times, November 29, 1940.
4. Gregory Zuckerman, “Hedged Out: How the Soros Funds Lost Game of Chicken Against Tech Stocks,” The Wall Street Journal, May 22, 2000.
5. Ezra Zuckerman, “Realists, Constructionists, and Lemmings Oh My! (Part 1),” post on OrgTheory.net blog, October 26, 2008. http://orgtheory.wordpress.com/2008/10/26/realists-constructionists-and-lemmings-oh-my-part-i/.
6. Aaron Lucchetti, “S&P Email: ‘We Should Not Be Rating It,’ ” The Wall Street Journal, August 2, 2008.
7. Gregory Zuckerman, “A Bond Star’s Plays Turn Riskier,” The Wall Street Journal, August 23, 2006.
8. George Soros, Soros on Soros, New York: John Wiley, 1995.
Chapter 8
1. Devan Sipher and Mireya Navarro, “Mei Sze Chan and Jeff Greene,” New York Times, November 4, 2007.
2. Michael Lewis, “The End,” Portfolio Magazine, December 2008.
Chapter 9
1. Serena Ng and Carrick Mollenkamp, “Merrill Takes $8.4 Billion Credit Hit—It Plunged Into CDOs in ’03, Hiring Pioneer of the Debt Securities,” The Wall Street Journal, October 25, 2007.
2. Gary Gorton, “The Subprime Panic,” working paper, Yale School of Management and National Bureau of Economic Research, September 30, 2008.
3. Serena Ng and Carrick Mollenkamp, “Wall Street Wizardry Amplified Credit Crisis,” The Wall Street Journal, December 27, 2007.
Chapter 11
1. Kate Kelly, “Behind a Bear Analyst’s Subprime Call,” The Wall Street Journal, July 11, 2007.
2. Pierre Paulden, “TRADING—Trading on the Edge,” Institutional Investor—Americas, June 13, 2007.
3. Vikas Bajai, “Prospering in an Implosion,” New York Times, April 12, 2007.
4. Kate Kelly, “The Fall of Bear Stearns: Lost Opportunities Haunt Final Days of Bear Stearns—Executives Bickered Over Raising Cash, Cutting Mortgages,” The Wall Street Journal, May 27, 2008.
Chapter 12
1. James R. Hagerty and Ken Gepfert, “Dream Homes Not Always Ideal: Some an Ordeal,” The Wall Street Journal, September 2, 2007.
2. Jonathan Karp, “In Beverly Hills, a Meltdown Mogul Is Living Large,” The Wall Street Journal, January 15, 2008; Devan Sipher and Mireya Navarro, “Mei Sze Chan and Jeff Greene,” New York Times, November 4, 2007.
3. Henny Sender and Monica Langley, “Buyout Mogul: How Blackstone’s Chief Became $7 Billion Man,” The Wall Street Journal, June 13, 2007.
Chapter 14
1. Kate Kelly, “The Fall of Bear Stearns: Lost Opportunities Haunt Final Days of Bear Stearns—Executives Bickered Over Raising Cash, Cutting Mortgages,” The Wall Street Journal, May 27, 2008.
2. Carrick Mollenkamp, Susanne Craig, Jeffrey McCracken, and Jon Hilsenrath, “The Two Faces of Lehman’s Fall—Private Talks of Raising Capital Belied Firm’s Public Optimism,” The Wall Street Journal, October 6, 2008; Lawrence G. McDonald with Patrick Robinson, A Colossal Failure of Common Sense—The Inside Story of the Collapse of Lehman Brothers, New York: Crown Business, 2009.
3. See note 2 above.
4. Kate Kelly, “The Saga of Bear’s Fund Chiefs—In a Jail Cell, One Asks, ‘How Did We End Up in This Spot?,’ ” The Wall Street Journal, June 21, 2008.
Epilogue
1. Cityfile.com, “Security Precautions: John Paulson Beefs Up the Hedges,” http://cityfile.com/dailyfile/4361, February 11, 2009.
about the author
GREGORY ZUCKERMAN is a senior writer at the Wall Street Journal, where he has been a reporter for twelve years.
GregoryZuckerman.com
The Greatest Trade Ever Page 33
