{"id":256,"date":"2010-05-24T11:49:27","date_gmt":"2010-05-24T18:49:27","guid":{"rendered":"http:\/\/privatemoneysource.com\/blog\/?p=256"},"modified":"2010-05-24T11:49:27","modified_gmt":"2010-05-24T18:49:27","slug":"those-who-shorted-subprime","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/blog\/?p=256","title":{"rendered":"Those who shorted subprime"},"content":{"rendered":"

Clay Sparkman<\/em><\/p>\n

I just recently finished reading The Greatest Trade Ever<\/span>, the 2009 book by Wall Street Journal reporter Gregory Zuckerman.\u00a0 It is a terrific read.\u00a0 I really enjoyed it.\u00a0 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.\u00a0 In particular it tells the story of how he worked with banks such as Goldman and Bear Sterns to construct and facilitate such trades.<\/p>\n

Zuckerman doesn\u2019t waste much time judging the ethical or legal aspect of such trades.\u00a0 Rather, he tells a damned good story of how a few individuals predicted an event that others just couldn\u2019t fathom, and then positioned themselves, against all prevailing notions, to ultimately reap enormous profits from their heart-felt predictions.<\/p>\n

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 \u201cthink\u201d 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.<\/p>\n

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.\u00a0 I personally would have to say that I lean toward Warren Buffet\u2019s position that overall Goldman is not really to blame here.\u00a0 See the New York Times story, From Buffett, Thought-Out Support for Goldman, <\/strong>http:\/\/dealbook.blogs.nytimes.com\/2010\/05\/04\/from-buffett-thought-out-support-for-goldman\/<\/a><\/p>\n

According to Buffet, \u201cI don\u2019t care if John Paulson is shorting these bonds. I\u2019m going to have no worries that he has superior knowledge,\u201d he said, adding: \u201cIt\u2019s our job to assess the credit.\u201d The assets are the assets. The math either works or it doesn\u2019t.\u201d<\/p>\n

His point being that it wasn\u2019t important for Goldman to disclose to fat-cat institutional buyers that John Paulson was shorting the synthetic CDOs they were buying.\u00a0 The buyers were professional investors, and should have looked deep inside the assets to see exactly what they were buying.\u00a0 Paulson certainly did.<\/p>\n

I am now nearly finished reading The Big Short<\/span> by Michael Lewis, and I must say this book\u2014like every Lewis book I have read–is fascinating and irresistible.\u00a0 It deals with the same basic material as Zuckerman\u2019s book but tells the story from various other points of view.\u00a0 It is quite a bit more technical than Zuckerman\u2019s book, and in this sense, is precisely what I was looking for.\u00a0 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 \u201cHow did this all work?\u201d<\/p>\n

What I get out of Lewis that I didn\u2019t get out of Zuckerman so much, is that it is the ratings agencies that are at ground-zero of the breakdown of the system.\u00a0 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.\u00a0 I don\u2019t care how you package and re-package subprime loans into bonds.\u00a0 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).\u00a0 Yes, the sellers of bonds and CDOs were gaming the system, but nonetheless, the ratings agencies allowed themselves to be quite easily gamed.\u00a0 You might say they were easy.<\/p>\n

The real lesson of all this is that the sub-prime collapse could have been quite readily predicted\u2014as it was so clearly by a small number of individuals\u2014but 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.<\/p>\n

And what is the lesson for the individual trust deed investor?\u00a0 It is this I think: Don\u2019t invest in trust deed style securities unless you know what you are doing.\u00a0 You must be able to evaluate the quality of any given loan.\u00a0 And most of all, never–I mean never ever–let anyone else tell you what is and is not an acceptable level of risk.\u00a0 Ultimately that decision is yours and only yours to make.<\/p>\n

— Clay (clay@privatemoneysource.com)<\/p>\n","protected":false},"excerpt":{"rendered":"

Clay Sparkman I just recently finished reading The Greatest Trade Ever, the 2009 book by Wall Street Journal reporter Gregory Zuckerman.\u00a0 It is a terrific read.\u00a0 I really enjoyed it.\u00a0 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[21,26],"tags":[37,40,41,42,43,49,50,51,53,54,58,59,60],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/256"}],"collection":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=256"}],"version-history":[{"count":0,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/256\/revisions"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=256"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=256"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=256"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}