Book Review: The Greatest Trade Ever


The Behind the Scenes Story of How John Paulson Defied Wall Street and Made Financial History

I’ve read several books lately about the people that profited from the sub prime mortgage and financial system meltdown and how they did it. The more I read about the inner workings of the Wall Street banks, the more I question why I spent so many years of my life selling financial services.

This book is about John Paulson, an average hedge fund manager, that is, until he becomes one of the early adopters of the paradigm that aggressive mortgage lending practices would lead to a real estate bust.

I have three takeaways from this book:

1.) John Paulson wanted to bet against mortgages that were toxic and he believed would fail. There is one story of him sitting with the higher ups from one of the Wall Street banks. He wanted to put together a pool of mortgages that he felt were highly likely to fail and then bet against them. The banks role was to assemble this pool of mortgages and then sell them to clients. They were selling these investments to clients in the face of one of the larger clients presenting a compelling reason for them to fail. This created an ethical dilemma for some of the banks and they passed. Some didn’t. The bank received lofty commissions, Paulson’s hedge fund received the investment they wanted to bet against and the investors on the other side of the trade got, well you can imagine what they got.

2.) History will repeat itself. This is explained in the epilogue. Here’s the logic. Wall Street is a young man’s world. People make a ton of money and then retire to their ranch to –manage their own fortunes. In 2008-2009, no one remembered the housing problems of the early 1990’s, specifically in some of the Western states. Many of the traders profiled in the book were probably in high school at the time, like I was.

I understand that the new administration in Washington has , as one of its goals, the reduction of regulations. I wonder if anyone will remember the crisis of 2008-2009. Nope! Get ready for another crisis.

3.) The Chairman of the Fed at the time was criticized for not seeing the real estate bubble and ensuing crisis coming. His explanation went something like this: “We didn’t think it could happen because it had never happened before.” Sounds like something that two economics professors, who should have retired decades ago, would conclude over their free lunch at the University.

All in all, this was a great book that did one of the better jobs of explaining the insane structure of Credit Default Swaps, Collateralized Debt Obligations and the appetite for fees at anyone’s expense.