Clay Sparkman
I just recently finished reading The Greatest Trade Ever, the 2009 book by Wall Street Journal reporter Gregory Zuckerman. It is a terrific read. I really enjoyed it. It evolves primarily around John Paulson, and tells the story of how he managed to make billions of dollars for himself and his hedge fund investors by arranging a series of investment positions that bet against the rapidly expanding subprime positions in the market. In particular it tells the story of how he worked with banks such as Goldman and Bear Sterns to construct and facilitate such trades.
Zuckerman doesn’t waste much time judging the ethical or legal aspect of such trades. Rather, he tells a damned good story of how a few individuals predicted an event that others just couldn’t fathom, and then positioned themselves, against all prevailing notions, to ultimately reap enormous profits from their heart-felt predictions.
It is a story of the most profitable series of trades on Wall Street, and if one theme comes through loud and clear, it is that only an outsider (and somewhat of a misfit) such as Paulson (and a handful of others) could have managed to “think” so counter to the prevailing notions of the industry, and perhaps more importantly, would have dared to defy so many others in the industry to the point of personally and professionally marginalizing themselves in the process.
Paulson is not under indictment, but as we know, Goldman is being sued by the SEC in a high profile case specifically targeting the Paulson-backed synthetic CDOs. I personally would have to say that I lean toward Warren Buffet’s position that overall Goldman is not really to blame here. See the New York Times story, From Buffett, Thought-Out Support for Goldman, http://dealbook.blogs.nytimes.com/2010/05/04/from-buffett-thought-out-support-for-goldman/
According to Buffet, “I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge,” he said, adding: “It’s our job to assess the credit.” The assets are the assets. The math either works or it doesn’t.”
His point being that it wasn’t important for Goldman to disclose to fat-cat institutional buyers that John Paulson was shorting the synthetic CDOs they were buying. The buyers were professional investors, and should have looked deep inside the assets to see exactly what they were buying. Paulson certainly did.
I am now nearly finished reading The Big Short by Michael Lewis, and I must say this book—like every Lewis book I have read–is fascinating and irresistible. It deals with the same basic material as Zuckerman’s book but tells the story from various other points of view. It is quite a bit more technical than Zuckerman’s book, and in this sense, is precisely what I was looking for. Lewis has a talent for explaining complex things in simple ways, and this book goes a long way toward answering unanswered questions I had regarding “How did this all work?”
What I get out of Lewis that I didn’t get out of Zuckerman so much, is that it is the ratings agencies that are at ground-zero of the breakdown of the system. It is hard to tell if they were really stupid or really crooked or both, but certainly there had to be a good dose of both at work here. I don’t care how you package and re-package subprime loans into bonds. It should have been clear that such bonds could never be packaged in such a way as to earn a triple-A rating (same as US Government debt), and yet this was happening (and so much more). Yes, the sellers of bonds and CDOs were gaming the system, but nonetheless, the ratings agencies allowed themselves to be quite easily gamed. You might say they were easy.
The real lesson of all this is that the sub-prime collapse could have been quite readily predicted—as it was so clearly by a small number of individuals—but that there was just too much money being made and perhaps more importantly, a deeply institutionalized thought process at work here that defied those involved to even consider notions counter to the norm.
And what is the lesson for the individual trust deed investor? It is this I think: Don’t invest in trust deed style securities unless you know what you are doing. You must be able to evaluate the quality of any given loan. And most of all, never–I mean never ever–let anyone else tell you what is and is not an acceptable level of risk. Ultimately that decision is yours and only yours to make.
— Clay (clay@privatemoneysource.com)
Tags: economy, hard money investing, hard money lending, hard money loans, investing, private money investing, private money lending, private money loans, real estate, real estate investing, trust deed investing, trust deed lending, trust deed loans
