The Greatest Trade Ever by Gregory Zuckerman
The Greatest Trade Ever by Gregory Zuckerman
Paulson doesn't seem as well done as MagnetarCDOs, however the follow-through to buying CDSs on the banks and then going long gold have been well-timed. While Michael Burry was early; both managers paid reputational risk and lost customers pursuing this investment thesis.
Even if he was right, Paulson knew, he could lose his entire investment if he was too early in anticipating the collapse of what he saw as a real estate bubble, or if he didn't implement the trade properly. Any number of legendary investors, from Jesse Livermore in the 1930s to Julian Robertson and George Soros in the 1990s, had failed to successfully navigate financial bubbles, costing them dearly.
Pellegrini and Shu purchased enormous databases tracking the historic performance of more than six million mortgages in various parts of the country, hiring a firm named 1010data to make sense of it all...
even if prices just flatlined, home owners would feel so much financial pressure that it would result in losses of 7 percent of the value of a typical pool of subprime mortgages. And if home prices fell 5 percent, it would lead to losses as high as 17 percent.
Seth Klarman of Baupost Group, bought some CDS insurance contracts on risky mortgages but chose to buy small portions of it and not go overboard...
"Buying so much was a reputational risk," Klarman says, "It wasn't a no-brainer."
He had $50 million in his Merrill account -- a huge sum fo an individual, but tiny compared with the big firms that traded credit default swaps...
More than a dozen Merrill Lynch executives had to sign off, but Greene was thrilled -- he had become the first individual to buy CDS contracts.
"it's not so simple to short mortgages"..."A servicer can just buy mortgages our of a pool, so you guys never will be able to collect."...
It turned out that Bear Stearns owned a "servicing" company called EMC Mortgage Corp...
Pellegrini was already on high alert. For months he had frettede about how the firm's big gains might be stripped by a player in the market, and he wondered whether investment banks might take steps to bolster pools of mortgages.
"I got concerned because I though I would have done it myself if I was in Bear Stearns' shoes."