Bad News Bears: The Guys Who Bet Against the Bubble and Won

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Photo: Courtesy Random House

Most people lost money when the subprime market collapsed in late 2006, taking the economy down with it. But Wall Street Journal reporter Greg Zuckerman's new book, The Greatest Trade Ever, tells the story of the handful of hedge-funders who actually made money from the ensuing crisis by betting against a housing bubble that few, at the time, believed was real. It's a great read, not just because our semi-irregular column If We Were Friends With John Paulson is briefly mentioned, but because of the colorful cast of characters, all of whom might have been described as screwups before they executed the trade that scored them billions of dollars in profits. Reading the stories of how this ragtag bunch managed this feat, individually and, in some cases, together, you can't help but root for them, even as you remind yourself that their win was everyone else's loss. Let's take a look at the backstories of some of the eccentrics, nerds, and late bloomers who made bank as the economy burned.

John Paulson

LOCATION: New York
BACKSTORY: Back in 2006, Paulson & Company was "just another ham-and-cheese operation in a crowded space," and its founder was known mostly for the parties he had held back in the nineties at his Soho loft, which featured "good food, plentiful drink; and access to an assortment of recreational drugs for those who chose to partake." Even after Paulson grew out of his bachelor phase, he wasn't taken seriously in his field — and, as the following passage suggests, he knew it.


At times, Paulson didn't seem completely put together. When Brad Balter, a young broker, came to visit, Paulson chain-smoked cigarettes and had spots of blood on his shirt collar from a shaving mishap. Paulson's head of marketing was stretched out in agony on a nearby couch, moaning about his back.

"I didn't know what to think. It was a little surreal," Balter recalls.

At times, Paulson became discouraged. His early investment performance was good but uneven, and he continued to have few clients. He was sure of his abilities but questioned whether he could make the fund a success.

One especially glum day, Paulson asked his father, "Am I in the wrong business? Is something wrong with me? "It was hard to be rejected, it was a lonely period," Paulson recalls.


HAPPY ENDING Paulson's firm, which was the most successful of the ones who shorted subprime, made $15 billion in 2007, earning the founder a personal payday of $4 billion, the respect of his peers, and now, a prominent place in this book (although his spokesman tells us he is not pleased with Zuckerman's work, finding "the writing style... indicative of a gossip tabloid rather than respected financial journalism").


Andrew Lahde

LOCATION: Santa Monica, California
BACKSTORY: With his "chilled-out surfer" attitude and "chiseled features," Andrew Lahde was successful as a high-school pot dealer — and with the ladies. But his issues with authority kept him from professional success. By the summer of 2006, he'd been fired from his hedge-fund job, and though he'd started his own fund, Lahde Capital Management, with the idea of buying insurance on the risky mortgage bonds he was sure would soon be "toast," he was having trouble convincing investors to buy into his apocalyptic vision. "Andrew's not a perfect guy to persuade you to invest," a friend who is the founder of Perfect 10, a porn magazine, tells the author. "He's a youngster and he's a little strange ... nervous around people."

When the ABX index suddenly snapped back in the spring and Lahde suffered losses, it seemed like a death knell for his ambitious plan. He ignored calls from friends and family, desperate to find investors to back him. His savings were almost depleted. Dispirited, Lahde spent much of the day at the nearby beach, suntanning and ogling bikini-clad women. Fuck it, I'm just going to hang out at the beach, he thought. The way Lahde figured it, he hadn't made much money. And yet, the ABX had dropped 10 percent since he started pitching his trade, making protection more expensive than it had been when he dreamed up the trade and tried to capture the interest of investors. If they didn't care about his trade then, they surely wouldn't care now that it was more expensive. He seemed out of luck.


HAPPY ENDING: Lahde eventually convinced an investor to give him $6 million with which to purchase CDS, and his fund netted $75 million on the trade, $10 million of which he pocketed personally. Afterward, Lahde fired off an amazing F.U. letter to the world at large and has since retreated to "a distant island," where he "snorkels most days while searching for a suitable young female partner to join him on his adventure."


Paolo Pelligrini

LOCATION: New York
BACKSTORY: When John Paulson hired Paolo Pelligrini, he was essentially unemployable. He'd been fired by two investment banks, and had just endured his rather harrowing second divorce. "I was forty-five and had zero net worth," Pelligrini says. "And from my perspective, I had no prospects." He lived alone, like a Mediterranean Jay Gatsby:

He had no television in his small one-bedroom rental. He chose to live close to a train station and his favorite golf course. For entertainment, Pelligrini began to catch up on classic American writers, such as Edith Wharton and Henry James, authors he never had a chance to enjoy in school. Pelligrini found a connection with their stories of outsiders struggling to break into high society; including New York's upper crust scene, something he had failed to do.

"I could see the divide between people who are successful and optimistic and those at the other end, having trouble keeping up," Pellegrini says. "There's sadness about not realizing one's hopes and expectations."

HAPPY ENDING: Pellegrini's late-night research convinced his employer of the existence of the housing bubble, which the firm proceeded to short. He made tens of millions of dollars for himself on the trade, which allowed him to buy some "entry-level supercars," as well as a much better apartment.


Michael Burry

LOCATION: San Jose, California
BACKSTORY: "I always was a bit of an outsider," says Michael Burry. That's putting it mildly. Burry, a trained doctor, has a glass eyeball, a penchant for heavy metal, and Asperger's syndrome, which helped feed his obsession with the stock market. At first, it didn't go that well ("I'm single and I have one eye and a lot of debt" was the personal ad he placed to meet his wife). But by 2006, his Scion Capital was managing $621 million, and Burry was convinced he was about to make the trade of his life. Unfortunately, his investors disagreed, and fought back when he started buying what they saw as useless credit default swaps. Things got rough:


In a tailspin, Burry withdrew from his friends, families, and employees. Each morning, Burry walked from the firm and made a beeline to his office, head down, locking the door behind him. He didn't emerge all day, not even to use the bathroom. His remaining employees, who were still pulling for Burry, turned worried. Sometimes, he got to the office so early, and kept the door closed for so long, that when his staff left at the end of the day, they were unsure if their boss had ever come in. Other times, Burry pounded his fists on his desk, trying to release his tension, as heavy-metal music blasted from nearby speakers. The growing toll the trade placed on Burry seeped into an unusually frank letter that he sent his clients at the end of 2006: "A money manager does not go from being a near nobody to being nearly universally applauded to being nearly universally vilified without some effect."

HAPPY ENDING: Eventually, pressure from his investors forced him to sell some of the CDS insurance he had purchased, but Burry still managed to generate gains of 166 percent in 2007.


Greg Lippman

LOCATION: New York
BACKSTORY: With his brown pinstriped suits, pretentious hobbies (like his sushi spreadsheet), and "unusually long and thick" sideburns, Greg Lippmann, a mortgage bond trader at Deutsche Bank, "never quite fit in on Wall Street." When he started selling credit default swaps, he became an actual object of derision.

Behind his back, some on Wall Street called Lippman names, such as "chicken little" or "bubble Boy" chuckling at his quixotic effort. At conferences, some traders teased him, saying, "Your crazy trade is losing money."

HAPPY ENDING: Lippman had the last laugh: When the ABX subprime index, which tracks the demand for credit default swaps, tanked in February of 2007, he and his crew raked in $100 million in a single week.


Jeff Greene

LOCATION: Los Angeles, California
BACKSTORY: In the late eighties, Jeff Greene had built his high-school job making sales calls for the circus into an empire: He had millions of dollars of real estate in Los Angeles, a Mercedes, a mansion, and a side business managing family-oriented music groups. Then the housing market collapsed, and he nearly lost everything.

His holdings — five office buildings and about 350 apartments — suddenly were worth just $50 million while Greene was facing a debt of $60 million. His lenders threatened to foreclose on Green's properties, leaving him broke. "I was blindsided — I didn't see it coming," Green says.

HAPPY ENDING When his old friend John Paulson told him the next housing bubble was on the horizon in hopes of getting him to invest in his fund, Greene wanted to act. But instead of investing in Paulson's fund, he replicated the trade himself. He lost a friend in Paulson, but gained $500 million, and a reputation as an investing genius. "Now, when I say things off the cuff, people listen," he said. "It's scary." Yes it is, Jeff.