tv Book TV CSPAN April 25, 2010 7:00am-8:00am EDT
7:02 am
>> gregory zuckerman, senior writer at the "wall street journal" talks about john paulson whose hedge fund made $20 billion by betting against the housing market in 2007 and 2008. mit's sloan school of management in cambridge, massachusetts, hosts the 50-minute event. >> thanks very much. i appreciate the opportunity to come speak about my book. a passion of mine and it's my baby and i love it interesting and i hope you will too. i'm going to talk a little bit about my motivations and some lessons behind the from my book. and i'll also talk a little bit about what's going in wall street and some of the big traders that i cover day-to-day.
7:03 am
what they're betting on and betting against. and i'll leave some time foreperson q & a. i often find in these kind of settings people have an interest in discussing journalism, financial journalism per se. perhaps "wall street journal." and what we're focused on, those kinds of things so feel free kind of to ask about the book or any of those kinds of questions as well. my book called "the greatest trade ever" it's about the winners in the whole crisis. and just taking a step back i'll tell you a little bit about myself and sort of how i found this project. i've been at the "wall street journal" about 13 years. and i covered different things, the bond market and the heard on the street column i've written. and i write about hedge funds. i've been -- always been very interested in, fascinated by big trades. and strikeouts and big home runs
7:04 am
as it were on wall street. i guess it's my -- i'm a sports guy so i like big story home runs and i feel as a writer there's a lot of drama and lessons to be learned from people that make really good decisions. and do really well as well as those kind of who make mistakes and you can learn from those as well so those always have the most drama and the most interest to me. so here i was in the fall of 2007 sitting at my desk. and things were starting to get bad. wall street firms were losing lots of money. merrill lynch, citi. and i was covered some of the stuff. a lot of my colleagues and kind of figuring out who's next to fall and who's going to have more problems and eventually things got much worse obviously. and i got a call from a big hedge fund manager. and this is sort of what i do. we trade information. and he said, greg, i just played tennis with a guy.
7:05 am
his name was john paulson and i cannot believe how much money he's making while everybody is losing money. here's a guy who was doing well as the world was starting to implode but also because my contact who was among the biggest hedge fund managers out there on wall street and most respected investor, he hardly knew much about this guy john paulson. i had heard of john paulson and met with him a few times. but he wasn't exactly on my radar screen at the time. so he didn't know much about him. and yet he was the one who figured this one out so it got me really excited. so i started working on this project. i wrote a front page story for the "wall street journal" and then i followed it up about a year or so of work on my book. and my book is about -- it's about the winners in this crisis as i said. john paulson and others.
7:06 am
but behind it all what propels it all is a conundrum that it shouldn't have been john paulson. it shouldn't have been these investors that i write about. who made the billions and figured it out and anticipated this collapse. the investors who should have been the ones i was writing about included people george soros who bet against the british pound and at the time was the greatest trade ever until john paulson and the other investors i wrote about. warren buffett, you know, the greatest investor of the century, of the past century or so. he could have done it. he didn't do it. mike veranos is an expert on securities and that's what john paulson threw himself in analyzing and betting against and mike didn't do this trade. and jim chanos is the most
7:07 am
famous short seller out here. this trade is a short seller and jim didn't do this trade. david tepper who's someone i wrote about more recently he made $7 billion last year and he's known for his big trades, big bets. he doesn't care if things go up, go down. he didn't do this trade. he was told about this trade. friends of his and including some of the people that i write about said, hey, you need to be doing this trade and he didn't. and that kind of fascinates me. and continues to do so. and yet -- so it wasn't these group of kind of big names on wall street. and those that did it include john paulson as i mentioned and just to tell you a little bit about john paulson, he spent a year -- i'm sorry. spent a career on wall street. went to nyu under grad and went to harvard business school again did well. started off as an investment
7:08 am
bank and bear stearns and then he went out and did his open investing and hedge funds. what he specialized on was merger arbitrage which is among the safest kinds of investing. basically you buy the stock that's being acore and you sure it or bet against the company that's doing the acquisition. and you have to shake it up a little bit and sometimes he did. but it's not full of risk. you can do better than the next guy. and john paulson had a good career and had a good track record but he was a merger arb and he never did 15 or 20% gains in a single year and yet he was the one who did this trade. his right-hand man, the run really key in this trade is a gentleman named paulo pelligrini. and he is unlikely to play a
7:09 am
greater role in the greatest financial coup. he was kicking around wall street. he was a banker there. he never got the promotion that he never really wanted. never really rose very far. ended up leaving lazar freur. did some trading on his open. he didn't do as well. he traded -- tried traded as one -- he's twice divorce and traded some of his wife's money a little bit. didn't really work out so well. and he had some of these great ideas. yeah, you don't want to do that too much. he always had great business ideas. was an innovative guy. didn't work out so well. again, sharp as they can. -- they come. and he calls up the spring of 2005. he was out of a job. he was living in westchester. north of new york city. one bedroom apartment. he had two children from his
7:10 am
marriages, one of his two children and he didn't want to leave to go back to italy and leave his children's it's a young person's kind of business. the financial industry. and he was aware. he called up john paulson asking for a job and they overlapped a little bit at bear stearns and paulson took his call. this is 2005. and paulson said the only job that i only have here paulo who's an analyst while they went to business school. paulo said no, i'll take that job. and he ended up joining paulson & company. and again, unlikely, two years later in the fall of 2007, he was on vacation with his third wife. and talk about the greatest trade ever. [laughter] >> so he's on vacation with his new wife, i believe it's
7:11 am
st. bart's. and they stop to check the atm. she stops to just get some money out of the atm. and he hadn't really told his wife too much about the trade they were working on. he's a little superstitious. and he didn't want to jig it too much. -- jinx it too much. and she's at the atm and she checks it and she's like, paulo there's $45 million in our account. and at that time he really had very little money in his bank account, which is kind of shocking. that $45 million was part of the $175 million that he made as a bonus for that trade for that year in 2007's trade. so he goes from having nothing really in a one bedroom apartment in 2005 to two years later he's got $175 million in the bank in st. bart's having a good time. again, he's unlikely. the other characters i track equally unlikely.
7:12 am
there's a doctor turned investor in northern california named michael bury. and michael bury was early on this trade before paulson and before paulson. he's a headstrong guy. he's a little bit stubborn and he didn't get on so well with his own investors. he's a doctor and he was doing really well with betting on stocks. but this -- as we'll talk about in a second is traded it has nothing to do with stocks. it was derivatives and it was mortgages. and a lot of his open investors didn't believe in him. and burry is persistent and he's a kind and generous guy and he can be a little stubborn one and unlikely. and an interesting guy to have pulled this off. in southern california, another gentleman i.>yñ write about, jey green who was this cliched holy type.
7:13 am
he was a real estate investor who made a lot and lost it all and had made it more afterwards and he basically steals the idea from john paulson. and runs with it. and they were good friends. and he did a lot of his own work. he's not kind of the obvious guy to pull off the greatest trade in financial history. there's a young guy, andrew loti in santa monica, california, who looks more like a surfer than an investor and he's very passionate his investors and the only thing he's passionate about is legalizing marijuana. and he can really go off on both of them. the guy you wouldn't predict and there's a guy named doug likeman. he's a trader on the wall street, still is. he's told housing is going to hold up and he really risks his career to bet against housing
7:14 am
and bet against subprime mortgages. and to pull this trade off. so in my view, these guys are climbing up a mountain and they're going to the top and paulson makes it to the top and a few others come close but not all do. some slide back down. and why some succeed and why some didn't is a fascination of mine. and that's sort of why i wrote this book and why these guys and not the so-called experts. that kind of drives the book. as well as the dynamic of writing about winners. i thought it would be more enjoyable to write about and to read about the individuals who figure this out and we can learn from these people as well i think as opposed to to those who made the mistakes. so that's another reason why i threw myself in this book and this project. and i still find it kind of fascinating. first thing i kind of wanted to discuss why the experts didn't see it. that kind of runs through my whole book because it's a
7:15 am
fascinating period in our -- in our financial system and our nation as history because the very people that created this toxic kind of mortgage and toxic investments, all these kinds of things that blew up were the very people that got burned the most by that. and there's this view now that those investment bankers were sort of evil and they're out to get the investors. i don't think that's the case. and the proof being that they got hurt the most. if you think about it, citi group, merrill lynch and a lot of other major names, the names on the wall street are the ones who created this stuff. it's almost like a butcher who has this poisonous meat. knows it's poisonous and maybe knows it should be poisonous i guess that's the point and brings it home instead of sellingz3$ñ it all and brings i home and sells it to the kids.
7:16 am
and that's a fascinating thing why that's the case. again, there's this sort of understanding that a well, they knew what they were doing and they kind of hoisted it on the investors and they really didn't. i some of these people. i was a gentleman in my community in my little town in new jersey. and he created.o3js he worked at lehman brothers so i talked to these people. that's sort of what i do. and i got some observations as it were to try to answer that question. 'cause i've always been curious about it. and some of them are kind of more obvious this others, i think. if you think about it, there's been an evolution. maybe there always has been. andrew and some others are more experts than i. there was an evolution in the creation of some of these investment mortgages. first you had mortgages and then mortgage-backed securities and then lutz take these mortgage-backed securities and put these cdos.
7:17 am
and then you've got more synthetic versions and credit default swaps and things really evolved and became much more complicated each year. and everyone kind of tried to outdo the next in terms of creating these products. and to me it got to the point where the very people at the investment banks didn't really understand them the way they should have. and what happened was, in my view, you had sort of two tiers. you had the summer people. now, the senior people -- the robert reubens of the world and the chuck princes and stan o'neals who ran merrill lynch the first two gentlemen helped run citi group, and they were just too senior and they really didn't know what these products were or their risk and they deferred to the people below them. and you can criticize them for that but they deferred both to the people below them who were the experts as well as the models that everyone was relying on. and these models were based on historic data and a lot of that was based on just the fact that
7:18 am
housing never in our country had ever fall on a national level. at least more than, you know, a small blip. and so the models all kind of said well, this stuff is safe, relatively safe. and the rating agencies all said it's safe. so it was a little bit of passing of the buck and well, i can't really understand it myself so i'm going to defer to these experts and the experts were either relying on models or they were focused on their competition. and on wall street unfortunately we're at the point where everyone is worried about the next guy and everyone is worried about the next quarter and meeting earnings so my friend in my town -- he's not a bad guy. he knew if he wasn't creating this cdo if he wasn't creating it somebody else would be. they got caught up with this. the bigger these firms got the more each group -- and i've talked a lot.
7:19 am
each group knew about their own area. and the risk level and maybe they said well, yeah i can see with a that can happen but they didn't have a larger view -- how the dominos could fall and the overall risk of the firm. there were some firms that were better than others. goldman sachs does a much better job of drilling down and seeing where the risk is throughout the whole system. goldman sacks was late at catching this as well. they get a lot of credit and people either love them or hate them but. in the spring -- or late summer of 2006 josh burmbaum at goldman sachs was at paulson & company and he was over there and invited by john paulson on this short on these toxic mortgage
7:20 am
products and he was bullish and paulson voted him over there and he gets a lot of credit and i think there's a real lesson there that paulson invited groups of analysts, many of whom who were bullish over to the firm to challenge their thesis and burmbaum sits across from the experts at paulson and he's the number one guy on the street and he knows this stuff better than paulson. paulson was a merger arb for map years and he was learning about this stuff. burmbaum said whatever you're selling i'm going to guy. was he trying to help them out or fake them out? maybe he was satisfying their other side of the positions and maybe he was holding too much and he was trying to tell them, hey, stop it so much. they weren't really sure. all they knew the top guy in the business was warning them. and yet they kept with their trade. and again, that says to me, yeah, paulson gets a lot of credit but goldman sachs was a little like this too.
7:21 am
to their credit they turned down a dime and they realized in late '06 and early '0 f-they learned how dangerous some of this mortgage property was in their books and they turned around not only shed some of it but they started shorting it and that's the mark of a great investor in a great firm so they get a lot of credit. back to my earlier theme the experts really didn't see this coming. and part of it is they're too caught up in their own worlds. and, you know, when it comes to the experts who are investors, who should have seen this coming -- those who dealt with mortgage products dealing with this for years and years and this is what they did and this merger arb guy, this john paulson who realized how toxic it was. part of it is because -- it's all relative value on wall street. and you don't really make home runs too often in this world in the mortgage-backed bond world
7:22 am
so it was all sort of pool of mortgages look better than this one. i'm not going to buy this one. i'll short this one if i can. it was all relative value. no one took a step back. and that speaks to kind of a problem on wall street. and if you think about it, the people that rise to the top at the firms are people who play by the rules. are the people that kind of the -- are really good in the institutions, the geithners and the bernanke, hank paulson, moynihan, bank of america. they're people that really could within these firms. but these firms don't really have people sitting around thinking about the tails, the bad things. what bad could happen and taking a step back. chuck prince is saying we have to keep dancing until the music is over. that's still the attitude on wall street. yeah, maybe i'm a little worried about this product that i've got on my books or that i'm selling to investors. but if i don't sell it, if i
7:23 am
don't put it on my books then someone else will and i'm going to lose a few cents in the next per share et cetera and that's a real problem on wall street where you don't really have the people that think a little differently and the hedge fund world pays so well and it draws out talent but it doesn't draw out talent the moynihans and the bernankes and all those kind of people they're as smart as the hedge fund people. it's what i enjoy writing about them. they think a little bit outside the box. no smarter or sharper. i don't think that smarter people within the firms. but it's sort of a self-selecting group of people that take the risk and go join a hedge fund or go try to run a hedge fund. they don't like working for other people often. and they think about what bad can happen. often they're a little more skeptical. i found.
7:24 am
and, unfortunately, they get drawn out of these firms. and what's left are really smart people that are worried about the quarter to quarter too often. and it's interesting goldman sachs does really well and i think part of the reason is because they keep a relationship -- people know -- by definition the more entrepreneurial people who want to start a hedge fund they know that path. many of the hedge funds are started by ex-goldman sachs guys so maybe by definition it's a self-selecting groups to go to goldman sachs and goldman sachs keep in touch with the ex-goldman sachs people. and maybe that's some kind of lessons that some other firms can learn by. but there's this sense that i had that each of these firms became more leveraged. and didn't realize the overall scope of the risk and instead kind of saw the subsets in their
7:25 am
open worlds and no one was able to take a step back. and the other part was you make so much money on wall street that there aren't map people with great experience, institutional experience. and the long-term capital management and in the other industry they stick around and they don't make so much that they can retire but these guys can retire after, you know, 10 or 15 years if you're really good. so the really good ones often left to start a hedge fund and retire and live on some island and unfortunately the ones that were left were often younger. and they hadn't remembered in the early '90s how the market actually did have some problems. in boston you remember that. in california. and there wasn't a national scale but clearly there was some history. and some of the older people actually remembered that. john paulson was approaching 50
7:26 am
years old as was apollo peligrini and the investor out in california he was approaching 50 so there's something to be said having that experience or having someone in the firm with some of that experience and too often some of the firms, i think, on the street don't have those kind of people with that kind of experience. the other thing is things move incrementally and you have to have patience. and that's not a virtue that's rewarded in many firms. again there's a lot of competition. and, you know, things change slowly. and they really did -- it took years. i mean, it's a myth that people weren't bearish on housing. and weren't worried about housing. like my brother, ezra has written some of those issues and it's documented that there were all kinds of people who bet against housing in 2003 and 2004 and they got burnt.
7:27 am
and some who could hold on ended up doing really well and making a lot of money but it's hard to when we're in a world where it's much easier to compare -- to be compared and compare yourself against others, your other managers or other investment firms. and people used to be maybe up a quarterly basis and a yearly basis and now it's daily. and people look at these screens and they know what they're doing. they know they are p & l profit and loss but they have a sense for their competitors. you'll be surprised. i talk to these guys all day long. and people often kind of criticize me, criticize "the wall street journal." you always write negative stories about funds and the industry. and these stories come from people in the industry because they all hear each other are doing and they're the first ones to kind of call up who's blowing up and doing poorly. that's because they're very focused on each other. they're focused on their own returns and doing well for their investors but they're very focused on their competitors, their rivals.
7:28 am
it's a fascinating thing where their very worth is often determined by that computer screen. and the p & l for that day -- and you could have done really well the year before. or you could have a career of making so much money you don't have to rourke. -- work. a lot of these guys i talk to they don't have to work and they should probably be curing cancer but they're not. instead, they're really focused on this trade, this trade and this year and this quarter and today. and trying to beat the next guy and half of them are former athletes or they want to be and got that adrenaline. that makes them happy and that's another discussion for the free flow of capital and the allocation of capital. that could be a good thing. we clearly have too many of these guys focused on these kinds of trade but we need sharp people allocating capital the way where it should be. so these people are very focused on themselves and on their
7:29 am
competitors and these firms were very focused on their competitors and that cost them i think in the end. and they saw these incremental changes and they didn't take a step back and what kind of detail might be. the other fascinating thing i found in my research for my book a lot of reasons why people didn't do this trade and i'll explain it in a second it cost money. i'll explain it now. the subprime trade is the one that john paulson and the other investors that i focus on is -- basically, i'll kind of take you to john paulson. and here he was in 2005 or so. and he's got these vague worries about housing. he's not a housing guy. he bought a house or two and sold a house or two. and he's not a housing guy and he's looking for protection on his overall portfolio. but puts on the s & p 500 and
7:30 am
they were expensive at the time and he was looking for something to hedge himself. and peligrini, said, i don't know you might want to think of these credit default swaps and they sound complicated but they're not really. they're basically a derivative. it's a way to kind of insure yourself and you can do it on any kind of debt basically. if debt defaults and you buy that debt and you got believe insurance, this credit default swap insurance then you're protected. peligrini said to paulson, boss, you should look at this credit default stuff. it protects your downside and just like any kind of insurance contracts your downside is protected because you pay a certain amount for a protection like anticipate insurance premium. you pay an annual kind of fee and you're protected. so paulson was like, wow, i don't know much about this.
7:31 am
i vaguely heard about this credit default swap derivative instrument and learned about it. that's one of the most impressive things those who did that trade. and again, if you think about that many of his investors were approaching 50. and they'd already done really well and credit default swaps are complicated. and they can be very complicated and their derivatives. and warren buffett has warned about derivatives, weapons of mass destruction. and i talked to some of the top investors and why they didn't do this trade. bill gross is the bond king out in california. derivatives aren't what i really do. i could do it greg but my investors don't want me to do some of it. investors are a little wary of credit default swaps. these derivative investments and they eventually helped led to the down fall of aig and there's a reason to be wary of them but john paulson threw himself into learning about them and the ins and outs of them and peligrini as well.
7:32 am
and the thing about credit default swaps as they cost money. they're like an insurance contract and they were dirt cheap. in 2005 they were dirt cheap. in 2006 also. and yet nobody is behind too much of it. john paulson just came from this other world. here he's this merger arb and he has vague worries about housing. he said my downside is 7% or so -- and my upside is 100% a year. why isn't everybody doing this trade? and it's sort of a question mark i kept asking. and unfortunately one of the reasons is negative carry. negative carry is sort of sounds complicated again but basically just means you're paying out. at the beginning of the year everyone starts fresh and again, everyone is focusing on their competitors. i don't want to be behind my competitor and be behind half a percentage point if i even buy a
7:33 am
lot of this credit default swap. and they didn't want to be a half percentage point behind their competitor. the outsider would backed up the truck and bought this stuff as much as john paulson did. and helping an outsider which is one of the things in the book. but people on the inside that get judged day-to-day and worried about being up 7% for the year when their big competitor is up 7.5% a year. they're not piling this stuff. -- buying this stuff. a lot of people is he i understood the trade and i got it and negative carry and that's their justification. in that world you don't -- you'd rather risk being -- it's actually worse for a lot of these people, unfortunately -- it's worse being behind a half percentage point or a full percentage point some of your rivals than it is missing out the trade of a lifetime if it means everybody missed out on the trade and that's what happened. most people missed this trade so the guy that passed on the trade
7:34 am
has still got his job and he's still making a few million a year. passed on the trade, greg, hey, look at me i'm doing very well. you're not rewarded for taking these, i guess, career risks is really what it is. and it's funny. the guy that takes the most risk in my book is a guy greg litman because greg litman was within a bank. he was at deutsche bank. people made fun of him. they called him a fool because he was worried about housing and he was buying this credit default swaps. people were working with him and his senior people, his bosses, yeah, you could do this stuff but check back with us daily and we want to -- just to make money to keep his bosses happy so he could keep his trade on.
7:35 am
but if this trade hadn't worked he was the fool who bet on housing. the housing never goes down on a national basis and the fed can always cut rates. great. don't you know you're taking a real career risk and he really did. gep if he hasn't done this trade. and housing collapse all perfect storm, perfect storm. we always write a perfect storm. it wasn't a perfect storm. people made mistakes. and didn't see this thing coming. oh, yeah, perfect storm come up -- the people who blew it came up with this kind of explanation for a perfect storm. greg litman yeah i missed the trade and so did everybody else. our analysts said don't worry. so he gets real career risk and he takes the biggest risk that i write about largely because he had more downside when he come to this side. he was making good living and
7:36 am
yet he did the trade anyway. excuse me. so those are the people that should have done it. and again, i guess one of the things -- the things that come to the conclusion i've come to is wall street talks a big game about being contrarian, being a contrarian investor. there's books written. more than ever people jump on trades. and that's why i think we're in an age of bubbles. where the hot trade is communicated much more easily than ever before. and sort of maybe a separate topic but i do think we're in this period where -- as an academic you would think markets should be becoming more efficient over time. not more inefficient. you've got more information out there. there are more people going -- playing -- investing i should say. yeah, a slip of the tongue.
7:37 am
and you would think things should become more efficient and have fewer bubbles, not more bubbles over time and jerry has documented that. i think he counts maybe 26 or so financial bubbles in the past century. just think the last few years you had obviously the housing bubble, energy prices, oil prices shopped up $140 a bubble, back to $70. asian markets, asian currencies in 1997 or so. and the tech bubble obviously was a huge bubble. and it's my view that it's easier than ever for people to jump on trade. it used to be the case that if i'm a commodity expert i don't do anything about stocks. i just do commodities. if i'm a stock guy i don't do stocks. nowadays there's etf's and credit default swaps and there's other ways to express a trade and to me it's leading to more
7:38 am
bubbles and people piling on the trade. it's troublesome. it's worrisome. and you wonder kind of where we are now. maybe china, and maybe brazil was up about 100% last year. and people talking about canadian real estate as a bubble. i'm not saying that it is. i do think we're kind of at the point where there may be too many of these bubbles. and it's costly. and again, wall street is not as contrarian as it thinks so it jumps on these bubbles largely because they're worried about math -- about these bubbles. and they have pig trades, portugal, italy, ireland, greece and spain. so it's betting against those countries and the debt of those countries. and all kinds of investors are doing it. it's not just your sovereign debt experts, your bond experts people that are experts on
7:39 am
international affairs or something like that. people who never knew anything about this countries, they're piling on these trade. i'm not saying it's not a bad thing. it's an interesting dynamic and you will get more of those and it's hard to be a contrarian on the streets, harder than ever i would think. so again why it was these investors that i write about -- why wasn't john paulson, paul peligrini, jeffery green, michael burry and greg litman. there's a myth out there that everybody drank the kool-aid and everybody believed in the housing. my brother counts this data between 2000 and 2003 there were about 1400 mentions of the phrase housing bubble in u.s. publications. over the next three years there were 5500 mentions of the phrase. and there were big stories and prominent stories in other places so it wasn't the case that my investors the ones i write about were the only ones who were skeptical. there were a lot of people who were skeptical.
7:40 am
so why was it they that came up with it. one of the reasons is they were -- some of them were a little late to the game and that can help good fortune here is important as well. so there were investors who put on this trade who bought credit default swaps this insurance on subprime mortgages. and they bought it in 2003, 2004 and nothing happened. and their bosses got upset. and they took the trade off or they took the trade off themselves and their investors got upset. and their clients weren't thrilled with it. they were losing money. and other people bet against home builders or tried to come up with another way to bet against housing. there weren't a lot of great ways. there were -- if you bet against let's say a home builder, it didn't really work for a long time. even if you were convinced that eventually it would work there's a lot of consolidation in that industry and maybe the one that you bet against would actually end up doing pretty well and there's that dangerous and a lot
7:41 am
of times it hurt people. so there were a lot of ways to get cautious about housing. you could move the mrs. and the kids out of the house because of the rent and they've got a lot of stuff in the house. that's not easy to do. and those that were worried and figured these credit default swaps out early, it took actually a while for them to be really great trading mechanisms. and it's one thesis that it took -- it took till 2005 and early 2006 for there to be a really great way to bet against housing, bet against subprime mortgage and that was these credit default swaps and they introduced synthetic ones where you can bet against a pool. you didn't to have own the pool. and basically just kind of buy some insurance. and then there's abx index which tracks subprime mortgages so that was all introduced kind of '05 and '06 and maybe it's not a coincidence that perhaps things
7:42 am
started imploding but it wasn't easy to bet against housing and it was better to be late than to be early on this trade. and that's what john paulson and some of these people had going for them in that they got nervous about housing. in 2005 and then 2006 is when things started flattening out and in 2007 that's when the implosion when things fell apart, the housing market. it helped being late and having some good fortune there. and it helped ignoring the experts. john paulson to his credit invited all kinds of analysts, top guys into his firm to challenge their thesis and to their credit, they stuck with the thesis. and they held on to it. and i give them more credit for that than i do just for kind of putting up a trade and being early holding on to your conviction. and it's a remarkable temperament. you have to be self-confident
7:43 am
and ignore everybody else and what happened is peligrini came up with this chart. and it showed housing prices on a national basis over the past, i think, 75 or 80 years or so. basically it was right in front of them. it was clear -- things were slowly growing and, boom, they shot up and they figured out wow, and peligrini came to paulson and he's like boss, check this out. and paulson sat back in his chair literally wow, look at this data. it's right here. it's clear. we should start betting against housing. robert schiller had already published it maybe a year earlier but peligrini came up with it himself. and he became convinced of it as did paulson and they held onto their conviction and it's pretty impressive because it's hard when you have all the experts telling you one thing and your clients were nervous. i mean, there are a lot of investors their own clients who didn't really believe in the trade. some did.
7:44 am
and some realized there was very little downside and a huge upside. hey, here's a stock guy merger arb guy john paulson why is he buying all this subprime protection for and that's why paulson was smart in that he had a lot of it in his own funds. but he said, you know, if i'm really going to make a big huge bet here i've got to really set up a new fund just dedicated to this trade. a one-trade fund and now a lot of people are doing that. bill did one for target and these others. but at the time there weren't that many people -- it was seen as you're not supposed to. how do you have one trade in a fund and when he first started raising money john paulson had real difficulty. he only raised $147 million at the get-go in early 2006 with his dedicated funds. he was rejected time after time. he went to harvard and they said, we don't see it. we don't get it. there's other ways to express this trade and they didn't do this trade. but they felt they had a better way to do it. he got rejected there. and he got rejected a lot of different places. and the experts all told him
7:45 am
housing didn't fall on a national basis. the fed could always step in. how are you going to do your trade and things like that and paulson stuck to his guns and that kind of conviction is kind of impressive. as is -- i'm really impressed by how he held on to the trade. and i'm going to tell you in 2007, february, 2007, they made 66 in a single month. just to give you some context they never really made a few percentage points in a single point. they made 66% in one month. they made more in one morning than george soros made betting against the british pound. and george soros made about a billion dollars for the british pound for his hedge fund only. and paulson was making billions. and peligrini hadn't really been paid much and we should be taking some of this tradeoff, right? paulson said no. look at the data. don't forget the data. and it helped him paulson was
7:46 am
already wealthy so he didn't need to take his profits like other people would have been tempted to. he held on -- he stayed with his conviction. again, they're up 66% in a month. and their open investors called up and they said, you mean 6.6%. it's a typo, right, guys? and they said 66%. and some of them said take the trade off. some sort of encouraged them to. some of them said well, move me to another fund which doesn't have as much exposure to these subprime cds credit default faults which is what the trade is. he held on to this trade and again, that trade is kind of impressive. the other kind of theme that i learned from paulson and his trade and i've learned from sort of other people that have done really well and that i've written about is the idea and buffett and soros have both gotten into this before. the idea of going for the juggler.
7:47 am
and when you see an opportunity there aren't many. it's like in sports. too many of my metaphors in my book are sports and i apologize for that. but it's very much like sports where at bat you have up with or two pitches to hit. some are going to be bad pitches and some are pitches you can't really handle but you're going to get one or two. and those are the ones you really got to pounce on and you got to hit in thebaum. -- bipartisan. -- ballpark. paulson, soros, tepper you're not going to have too many of these opportunities but when you've got them you got to go for them and you don't have too many and that's where sort of paulson gets a lot of credit. he saw this huge opportunity and he jumped on it and he backed up the truck. and he ignored everybody else. it's sort of a cliche be confident in yourself. they've got this remarkable ability. these guys, paulson and others -- they've got the ability to kind of turn on a dime. and paulson, for example, so in
7:48 am
2007 the firm made $15 billion betting against housing and betting against subprime mortgage again by far the greatest trade in financial history. soros had made a billion dollars betting against the british mound so he makes $15 billion in 2007 and in 2008 he made another $5 billion transforming the trade and this is where he gets a lot of credit as well in my book in my eyes, no pun intended shifting the trade from one against housing to one against financial firms because he saw where the dominos are going to fall. hold on a second, housing is fall apart. subprime is melting down. who's holding this stuff and they did the research look at citi and these firms bear and lehman and they started buying credit default swaps not on the mortgages which they had been doing but on the firms themselves. and they made another $5 billion doing that in 2008. but in early 2009 he doesn't just take the trades off. he starts going long. he starts buying the very banks that he had bet against.
7:49 am
and it's remarkable. it is impressive as an investor and i see it all the time with the best investors. they've got this impersonal kind of way of looking at their portfolio. they don't fall in love with their investments, which is what the average investor often does. someone told me you don't want to be married to these kind of people. they can kind of separate and not get tied up emotionally. it's not to say john paulson you don't want to be married to. probably a good person to be married to. is a good father and a husband. i'm told. but you don't -- but you don't fall in love with the portfolio. and it doesn't necessarily make for someone you would necessarily want to be friends with but it's a great investment in trade not to be so emotionally involved and invested as it were in your portfolio. so going for the juggler and not kind of falling in love with your investment. those are sort of some of the themes that i kind of picked up from these investors and been impressive to me.
7:50 am
i was just going to segue a little bit to what these kind of investors are doing now. the biggest trade that i've been -- there have been two actually one is the gold trade. so john paulson in late 2008 as things were melting down and we were throwing money at all the problems out there as the government. he started taking a look at gold because he was worried about the money supply leading to inflation and gold is a great way to hedge, historically it's a great way to hedge inflation. there have been other top investors who are buying gold as well. it's a fascinating investment 'cause it's very different from the housing bet 'cause there's a much more downside. we don't really know what gold is worth. it's worth 1100 today. is that cheap or expensive? i don't really know. we could dcf it as you guys maybe learn to do. it doesn't pay dividends and what's gold worth. david einhorn one of the top
7:51 am
investors he's acting vault in queens somewhere filled with gold. and he doesn't own it because his wife cheryl is a big fan of gold or anything. he likes gold because he thinks the next guy is going to like it even more. so, you know, that sounds like a greater fool kind of trade and yet historically for thousands of years gold has held up and has been an alternative to paper currency so, yeah, i get it. if you're basing your paper currency, gold is not a bad place to be. in find it to be a fascinating investment and it could be cut in half and some of the very investors that i'm writing about has shifted to do that including john paulson.''q others are betting against these countries like greece and some of the others and they've done really well with it. and it's an interesting trade. it's not clear how you're going to make money on the other side if things implodes on the other side. it's like the cds trade you have to worry about who's on thes:ñ other side of these trades when a lot of these people are betting either the euro implodes
7:52 am
and collapses or just that yields on a lot of these bonds, the debt, the rate that a lot of the countries are paying is just going to have to go higher as -- and continuing to go higher as people kind of worry about these debts and the real home run trade is japan. some of the investors is betting against interest rates in japan which have been low forever. 1.5% ten-year japanese bonds. 1.3%. they haven't been above 2% in years and yet it's cheap to bet against it and if rates go a little bit higher than japan is going to have trouble paying its debt. and they'll to have restructure. it doesn't have to go much higher before the interest costs get really high and then you have real trouble so a lot of people are betting against japan and we'll see how that does. that's the kind of big trades i'm working on right now. and i invite anticipate and all
7:53 am
questions about anything, "the greatest trade ever" or anything else i'm writing right now. [applause] >> i think i get the privilege of the first question. >> oak. >> we only have time for one. i find it interesting that both the greatest trade ever and the second greatest trade ever soros shorting the pound were shorts. do you think that there are more great trades among shorts than longs? >> that's interesting. they tend to be more asymmetrical. and that's what these guys look for. so the crowd generally does well. the herd as it were betting on things to go higher. and things generally have gone higher and things have improved over time. so it's the outlier kind of trade is often the short trade it's not the winning one but often it is. [applause]
7:54 am
>> i'll stick around if anybody has any questions. >> gregory zuckerman is a senior writer at the "wall street journal" and writes the papers hed on the street column. for more information, visit gregoryzuckerman.com. >> we're here at this year's cpac conference talking with margerie ross president of regnery publishing. marjorie, can you tell us what is the latest in your series of politically incorrect guides? >> sure. this is a series that we launched about four years ago.
7:55 am
and it was based on the idea that people have a sense in the conservative movement that they're not really getting the facts, the information, the history on a lot of subjects, whether it's in school or from the mainstream media. and our goal was to bust some ths and to try to tell the real story without worrying about political correctness. we started with the politically incorrect guide to american history, which was a big bestseller. and we now have 20 books in the series. the most recent one is just out called the politically increase guide to the vietnam war. it's particularly nice to have these books at cpac because there are so many students and so many young people and this is a series of books that's really in a lot of ways positioned for a younger market who again feel that they don't really know the truth about what happened. they hear things about the vietnam war and they hear the
7:56 am
vietnam war compared to the war on terror. and yet they have a sense that they're not getting the real story. and so this book is designed to say you didn't get the real story on the vietnam war and you're probably not getting the real story on the war on terror from the current administration because of their political agenda. >> last year you had the ultimate man's survival guide. was that a big seller for you? was that the beginning of another series possibly? >> thank you for asking. we are actually talking about starting a series of ultimate man's survival guides. it was a very successful book for us. it's a lot of fun. and it's also the kind of book that covers a wide range of topics from a conservative family values -- sort of rugged independence kind of point of view. and again, this is another book
7:57 am
that has appealed greatly to a younger audience. and i don't have people i know bought the book and gave it to their son when they graduated from college, when they just got married. it's a very fun and interesting book. and it's something that we will do more of. >> who have is your bestselling author at present? >> you. our hot book, if i can say it that way is account courting disaster and it came out a few weeks ago and it's from a former chief speechwriter in the bush white house. and the book makes a very, very strong accurate that the cia interrogation program was the reason that there was not another attack against us after 9/11. it was really pretty remarkable. most people agree it was pretty remarkable and there was not been an attack since then. he argues that's because of the cia interrogation program. and that when president obama came into office and dismantled
7:58 am
that program, it was really a very dangerous and risky thing to do. he also has a very, very interesting argument about the whole question of torture and whether or not the tactics really did qualify as torture. he makes a strong argument on a practical sense and a moral sense that it wasn't torture. and that not only did wego out really valuable information but that we were actually very, very careful about staying on the right line of those tactics. it's gotten a lot of talk. even last sunday on the talk shows when you heard dick cheney and joe biden debating, they were debating this very subject and i think this book sparked a lot of that current debate. >> and what's coming up for 2010? >> ah, what's coming up. well, you see newt gingrich here in our booth. and we have a big new newt gingrich book coming out in april.
7:59 am
we pushed his last three big nonfiction political books. and they'vell been best sellers. his last big political book was called "real change" and it came out during the president campaign. so he hasn't had a book since president obama has come in to office and now is his chance to give a report card on how the obama administration has done. and what he feels we need to do to get the country back on track. >> and we see that ann coulter which is one of your writers. >> and human events has been in business for over 60 years. and ann coulter is one of their best loved writers and she writes for human events, participate in h
223 Views
IN COLLECTIONS
CSPAN2 Television Archive Television Archive News Search ServiceUploaded by TV Archive on