The Greatest Trade Ever: The Behind-The-Scenes Story of How John Paulson Defied Wall Street and Made Financial History [Paperback]

This well written book recounts how John Paulson and other like-minded contrarian traders & investors were able to pull off their version of the (in-)famous 'Soros Trade' -- except, instead of breaking the British Pound, Paulson et al. made their bones betting against a crumbling financial system using CDSs (credit default swaps) [basically, a derivative instrument that either allows you to insure against credit risk or make a pure bet against the credit-worthiness of companies, mortgages, cash flows, etc.]. In 2007, Paulson's hedge fund made $15 Billion (John Paulson's take home pay was $4 Billion -- the largest one year payout to an individual in financial history). Paulson made Soros' legendary trade look pedestrian! In fact, as the book recounts, George Soros actually invited John Paulson to give him a tutorial on trading with CDSs!

In years to come, I can safely predict that financial traders wanting to make a big score with a particularly grand bet will refer to it as a Paulson Trade rather than a Soros Trade. What John Paulson and others did was not easy to execute -- although, as the book makes clear, the concept is fairly straightforward (the credit market bubble was being inflated with toxic sludge) -- and I appreciate the fact that the book makes many of the missteps, hurdles, and shady practices of brokers/banks clear.

I'm glad I got this book asap (getting the US version ahead of the UK edition). It was well worth the extra effort. An enjoyable, entertaining, and potentially profitable read. At the very least, the reader can come away with a better understanding of how our easy credit economy fell apart to near depressionary levels.

I finished this book as Robert Rubin was being grilled by a Senate committee about the financial meltdown. It struck me that the book described just the first act in something fundamental which is happening to the West's financial future.
Zuckerman, a Wall Street Journal reporter, describes the decline of the US property market from the point of view of the (few) winners; those who say it coming and figured out how to profit from the looming disaster. The winners it seems were quite few - John Paulson, a formerly obscure hedge fund manager, Jeffery Green a property speculator and Mike Burry, a fund manager based far from the New York financial scene. They all discovered that the newly developed CDS formed a deliciously asymmetric bet on the housing market - i.e. for a regular sequence of insurance -like payments, at cents in the dollar relative to the assets covered(CDOs), they stood to make vast profits if the unthinkable happened i.e. the US property market declined. It did, but when it did the financial destruction was so great that there was always the possibility that they would not get their money as potentially their counterparties would be bankrupted.
That's where the Western tax payers come in, some of the counterparties were banks and as the banks tottered US and other taxpayers stepped in to prevent them failing, i.e. taxpayers money went to pay off the CDO/CDS transactions. I reckon that at least 1billion of John Paulson's funds 12 billion profit came from the German governments rescue of IKB bank (this last is not in the book).

So the fascination is in watching this unfold. The events are so recent that we still have a sense of the breath-taking audacity of those that felt the property market could crash. The banks, the rating agencies, the math-geniuses who calculated risk all felt it couldn't (hence the low rate charged for CDS's). By concentrating on those who bet against the market, Zuckermann under-emphasizes the fact that almost no-one on the planet held their views. Zuckermann's book excels in telling their story - specifically the difficulty in getting investors to stay with the bet - Paulson was willing to loose up to 8% per annum; Burry had to refuse to return money to his investors for up to two years as the bet was in play. It took real courage to wait for the market to turn, even if they were correct, they might run out of money before the bet could pay back - Keynes quote - `the market can stay irrational longer than the investor can stay solvent'. There were also worries about being successful - if the bets came off, the scale of the winnings might be such as to jeopardize actually getting the money.

The behaviour of the bankers is infuriating, in seeking CDS coverage for CDOs (which might just be an extra source of income) bankers could be seen to be betting against products they were selling to their clients. While this may or may not be the case, the fact that there was enough money sloshing around to encourage various investors to create CDOs in the first place, is even more infuriating, as I cannot see
a useful social purpose to it. I can understand the provision of mortgages as a useful social purpose, i can understand insurance,; but to me the speculation that took place here was of no use to society, who ever `won' the bet. And of course the most infuriating of all (which brings me back to Rubin), is that
those that `lost' the bet were not those who took out the CDOs, but rather the taxpayer. Why was this allowed to happen?

The book itself leaves out mention of the counterparties - what possessed those who generated and purchased CDO's? There is an interesting description of a confrontation between Paulson and Stanley O'Neal (ex CEO of Merrill Lynch) which exposes O'Neal as not being aware of the existential risk his own bank was holding as CDOs. But otherwise the book has little to say about the guy's who lost. It is both deferential and stylistically quite flat in describing the winners. Somehow Paulson is seen as a bit of a loser in the hedge fund community prior to his big bet , despite a lifestyle most would see as opulent.
Through Zuckerman Paulson is allowed to make self-justifying statements about how he never misrepresented what he was doing; statements which might be pre-emptive in light of the SEC investigations of Goldman Sachs (though in fairness Paulson has not been indicted). Michal Lewis' book `the big Short' does not interview Paulson at all.

So overall, a fascinating partial account of the latest trauma of Capitalism. The book could do with being more critical, more analytic., less deferential. From a full reading of the text, I'm not sure that the irony in the title was intentional A more comprehensive account would need to cover the irrational `group-think' among bankers, rating agencies and regulators. Nonetheless well worth a read. Also, for about fifty pages I think I understood what a synthetic CDO was.

It is all about credit default swaps

It is difficult to make financial coups exciting particularly when you know the outcome. There has been an industry in recent years highlighting business and how to make money.

No one had heard of John Paulson and the book does not show one photograph of him so we still don't know him by sight.

I am always interested in how people make money particularly if it is an unusual way. What could be more unusual than betting against the general trend at the time that the housing market would get better and better and by making such a bet make billions of dollars.

It is beyond the comprehension of mere mortals that such a system exists let alone that someone would think it was a good idea.

This is the story of such a person

The recession started because the smart financial brains had come up with a whole new slew of products that they claimed to understand that that in the end they did not understand and sold them off as triple A rated investments.

It is really emperor's new clothes everyone wanted to believe it was true so anyone who tried to blow the whistle was poo poohed as being wrong. John Paulson was such a person.

To fox both the wary and the unwary the first thing you do is create a whole new vocabulary to describe things

Calling it a second mortgage that like hocking your house but call it equity access and it sound more innocent.
They created structures that allowed them to take piles of risky mortgages and created shiny AAA rated investments. They had created gold from dross. They securitized all these mortgages and no one knew what they were.

The story is about Paulson and he was a lack lustre performer but he had a mission. He encouraged his employees to eat healthy and he said if I can stay alive longer I can compound my wealth longer . "" He was joking and yet he wasn't"

When Paulson realised what was happening he went in search of an insurance product that would pay out if the market crashed. This was very unpopular as traders like to bet that the prices will go up not down. It was regarded as unpatriotic to bet against the economy doing well.

These financial instruments had fooled everyone that everything was OK.

When he did this he was pilloried as people told him that there were a lot of smart people on the boards of these companies and that they would have smelt a rat if there were one. The impressive thing about Paulson was that he stuck at it against so much contrary advice.

It would have been easy to have caved in and gone with the herd.

Once the sub prime mortgages started to fail he was making hand over fist. He made 1.25 billion in a single morning 250 million more that George Soros made betting against the pound sterling.

Even when things started to go wrong AIG said they could not see us losing $1 on any of these transactions.

Money drove John Paulson but he wished to be recognised as one of the investment wizards an objective that long eluded him over the years as he toiled in obscurity in 2007 George Soros rang him. Paulson had made 12 billion at that point, He gave Soros a tutorial .

The facts are well set out the difficulty it to make the characters live off the page as they are essentially very ordinary dull people. Nothing much to distinguish them

Not a thrill a minute but a worthy effort and an important story to tell and for people to read who are interested in how money works.