Who is John Paulson, and why is he worthy of an entire book?
John Paulson spent a career on Wall Street underappreciated as an investor, in relative obscurity. Only on Wall Street can you be worth about $100 million and still be in relative obscurity. He had slowly built up his hedge fund, and by 2005 or so he started getting nervous about this whole housing market and tried to think, maybe I should bet against it. And he wound up making the greatest trade in financial history. In 2007 alone he made $15 billion for his firm—by way of comparison, George Soros made a billion dollars betting against the British pound [in 1992]—and in the next, in 2008, he transformed the trade into more of a bet against financial firms and made another $5 billion.

In a span of just three years, hedge-fund manager John Paulson went from practically unknown to practically unparalleled. After a series of smart bets against the housing market made Paulson's hedge fund billions of dollars—including days where it made more than $1 billion—he earned a place alongside George Soros and Warren Buffett as an oracle of investing. In his new book, The Greatest Trade Ever, Gregory Zuckerman, a reporter at The Wall Street Journal, examines how the unlikely team of Paulson and assistant Paolo Pellegrini—as well as a few other investors—bucked conventional wisdom and saw through the housing hype

hey decide that they want to raise a fund to do this trade on a very large scale, but they have a tough time convincing people to go in.
His idea was that if he could raise a specific hedge fund dedicated to betting against housing, he could make a fortune. So he went to everyone and anyone to make that argument. They had all these interesting arguments why he was wrong—the contracts are illiquid and hard to trade, the government would act to stop any collapse, etc. Paulson ended up with about $147 million, which sounds like a lot. But at the time, hedge funds were raising billions of dollars for different funds.

So he decides essentially to devote an entire fund to this strategy. When did things start to come good?
In the middle of '06, he started making these trades. Just to back up a bit, he wasn't the first. There's was a doctor-turned-hedge-fund manager up in Northern California named Dr. Michael Burry who comes up with this thesis that housing's going to fall apart and that he should be investing in CDS contracts a good year or so before Paulson. He just couldn't convince his investors to back him. And while he starts the strategy in the middle of 2006, it's not working so well early on. But in the winter and spring of 2007 the indexes he's betting against start to move dramatically. His own investors were skeptical. He was up 66 percent in February of 2007 and his investors called up thought it was a misprint. They thought it was 6.6 percent. This is a singles hitter—his whole life is banging out singles, and here he is with this unbelievable grand slam. Some of his investors actually were nervous. They thought he was taking too much risk. He was making billions of dollars a day on some of these days.

His biggest gains are in '07, which now strikes us as a relatively placid time in the market. But in 2008, he was still bearish on housing and pivots to buying credit-default swaps on the institutions that were peddling subprime mortgages, like Bear Stearns. One of the most interesting passages in the book is where he's at this meeting with Bear Stearns.
In early 2008, and John Paulson is a big name at that point, he got invited by Bear Stearns, along with a number of other hedge funds, to come over for a nice lunch. Bear was having problems, and it was trying to make sure these hedge-fund managers would come back into the fold as clients. I really think that was the key to the weakness at Bear Stearns, that hedge funds up and down the street were pulling their money out. Halfway through this lunch, when it looked like they were making some good arguments and the hedge-fund guys were coming around, John Paulson stands up and starts objecting to what the Bear Stearns executives are saying. He says, "You don't understand the problems in your own firm," and he starts listing them. By the end of the lunch everybody else in the room was like, "Wow, John Paulson actually knows what he's talking about, the Bear Stearns guys don't. Instead of bringing my money back to Bear Stearns, I'm going to start shorting that stock." And that to me is a final nail in the coffin.

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