The Greatest Trade Ever
By Gregory Zuckerman
Broadway Business, 2009
Reviewed by Timothy Krause, Supporting Faculty Adjunct Professor of Finance
In 2007, the financial world experienced an unprecedented upheaval, as markets were shocked by the implosion of mortgage-related derivative securities. The resulting tumult saw the demise of venerable Wall Street firms, such as Bear Stearns and Lehman Brothers, not to mention insurance giant AIG and government-sponsored organizations, Fannie Mae and Freddie Mac. Many of the derivative securities responsible for this crisis, however, were created as a “zero-sum game,” where for every loser there is a winner. This book tells some of those winners’ stories.
The tale’s foremost character is a formerly middling investment banker, John Paulson, whose hedge fund netted profits over $15 billion in 2007, dwarfing the formerly unseen returns of George Soros’ $1 billion play against the British Pound. We are also introduced to an intriguing cast of characters: Michael Burry, a former doctor turned investor/blogger, who is anxious to cash in on the housing bubble; Paulson’s lead analyst, Paolo Pelligrini, a frustrated yet diligent researcher; Jeffrey Greene, a California real estate magnate intent on profiting from the fall in housing prices that he foresees; and Greg Lippmann, an enigmatic Deutsche Bank trader, who made billions even as other parts of his bank were hemorrhaging cash in the financial markets’ meltdown.
These characters’ tales make for interesting, if not particularly insightful, reading. As these men initiate trades, hold on through initial losses, and eventually profit handsomely, we clearly see the toll that this process takes on their personal and professional lives. At times, the narrative seems to report only the participants’ emotions, as these men experience the highs and lows of financial-markets gamblers. Although we do see some of the research that went into the trading decisions, more often than not it seems that the investors’ actions were driven by a feeling that “this is crazy.” But it turns out they were right.
Although I would like to see more of the trading process the investors went through, the book is effective in explaining arcane financial instruments, such as credit default swaps and synthetic CDOs, in a manner accessible to all readers. The Greatest Trade Ever is most engaging when the characters demonstrate unwavering belief in their research and seek access to markets previously limited to large banks and hedge funds. These players’ commitment to carry out their investment thesis required tremendous fortitude, as almost every other player in the market was taking the opposite side.
Reviewed by Michael D. Kinsman, PhD, CPA, Prof. of Finance & Accounting
Today’s financial news is filled with the Congressional hearings regarding the “financial meltdown” that occurred in 2007, partly due to the crisis in home mortgages, and partly to exuberant optimism that the price of houses would never go down significantly.
The Greatest Trade Ever is a look at the finance of what occurred – the finance that you and I lived through. Had we had the courage, we all could have taken millions of dollars in legal profits from the crisis. The data was available, the financial instruments were available, and the amount of money that needed to be invested was modest (at least compared to the rewards to be made). So why didn’t you or I make a billion or two when the opportunity was there? I, for one, was sitting in the hotbed of where the money was to be made, Southern California.
The Greatest Trade Ever is a candy store for those with an interest in finance, the politics of making money, and the study of risk and return. It is also a book that considers the ethical dilemmas we are faced with in business. In short, this book is a five star read on many dimensions.
In the early 2000s, Congress decided that it was important that home ownership be encouraged, even if the people who were investing could not actually afford the homes they were buying. “Liar loans,” aggressive loans, and even more aggressive loans became the norm. Flipping and refinancing was the way out of problems. Some financial people were worried about the soundness of the investments, but they were chastised by members of Congress, including Barney Frank, who said (in September 2003, discussing Fannie Mae and Freddie Mac): “I believe there has been more alarm raised about potential unsafety and unsoundness than in fact exists … I want to roll the dice a little more in this situation toward subsidized housing.”
It became clear to a number of observers that the loans being made were not sound. And yet the “models” showed that everything would be just fine, and those who dared come out with contrary opinions, including John Paulson, a previously modestly successful fund manager, were scorned. What was wrong with the statistical models? They assumed that the past would be like the present and the future. They failed to account for true structural change. And that left Paulson an opportunity – the opportunity to make The Greatest Trade Ever.
This is one of the top two books I have ever read, the other being The World is Flat by Thomas Friedman. I strongly recommend it to you; it is an insider’s look at today’s news and a wealth of information for someone interested in finance. Read this book. I have barely scratched the surface with this review. This is a five star read that I wish I could give six stars.