Will the real John Paulson stand up?

December 18, 2009  

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Overly dramatic novelization fails to soberly contextualize the story of John Paulson's winning trade.

By Josh Friedlander

The Greatest Trade Ever
By Gregory Zuckerman
Broadway Books
$26.00

In "The Greatest Trade Ever," Wall Street Journal reporter Greg Zuckerman serenades subprime seer John Paulson, and does a deft job of making esoteric credit default swap trades understandable in the context of a droll, and sometimes gripping, narrative. The tale includes delicious details about the ascendance of John Paulson as reformed Hamptons party animal now heralded as a genius for making billions of dollars by betting against conventional wisdom.

But Zuckerman's tome suffers from the lack of a moral framework, and his overly dramatic novelization fails to soberly contextualize the story of John Paulson's winning trade.

In his best section, Zuckerman explains how several Wall Street firms assisted Paulson in creating bespoke pools of mortgages wrapped in collateralized debt obligations specifically designed by Paulson so that he'd have more junk to bet against. Paulson provides the weak rejoinder that the banks were free to alter his designs as they saw fit and that no one was forced to buy the CDOs, which were purchased in any case by sophisticated investors. "We thought the CDOs and other risky mortgage debt would become worthless," Paulson says in the book. "But we didn't know."

Yet Zuckerman doesn't dwell on a possible characterization of Paulson as a wilier operator than his Wall Street victims, instead portraying him as a buttoned-down underdog Everyman. "When it rains and he can't find a cab, Paulson still hops on a New York City bus," writes Zuckerman. How shocked Zuckerman must have felt when Paulson attacked the book.

"The book is a disappointment. It contains numerous inaccuracies and fails to capture the essence of the credit bubble," said Paulson in a press release. "The writing style is indicative of a gossip tabloid rather than respected financial journalism. Unfortunately, the opportunity to create a meaningful documentation of an important time in financial history was lost." Paulson's credibility suffers, however, from his refusal to say what the inaccuracies were.

Zuckerman has responded that the book "wasn't intended as a hagiography, but as a portrait in full. I stand by its accuracy, as does my publisher."

But one grows more understanding of Paulson's position when considering Zuckerman's depiction of him as a loser who finally made good with one brilliant insight instead of a through-and-through Wall Street success story, which is what Paulson is.

The book jacket says that Paulson had "spent a career as an also-ran on Wall Street" and the introduction states that "By 2005, Paulson had reached his twilight years in accelerated Wall Street-career time."

Paulson managed only $300 million at the end of 2002, but by July 2006, when he launched his credit funds, his firm managed $4.81 billion, putting Paulson within the top 100 hedge fund firms in the world. He was already known as a man capable of finding gold nuggets in a compost heap, as Absolute Return pointed out in its April 2005 cover story.

Through mid-2006, Paulson's flagship Paulson Partners had produced a compound net annualized return of about 16% since its inception in July of 1994, and had suffered only one down year (1998). This is excellent performance. It requires a funhouse mirror view of history to paint Paulson as anything but a man in the prime of his professional life when he began to implement his short-subprime trade.

Yet Zuckerman, while printing these facts, finds ways to downplay them, reverting to a focus on Paulson's personal life or his mood or his mode of dress when the story of his firm's ascendance in assets and prestige might disrupt the tidy Rocky-style narrative arc he's tried to construct.

In its ultimate hyperbole, the book goes a bit far in claiming that Paulson's $4 billion in personal take home pay from his 2007 trades was the "largest one-year payout in the history of the financial markets." Accounting for inflation, that distinction, at least in modern times, belongs to a sum conferred by another "JP," JPMorgan, to Andrew Carnegie in 1901: $226 million to incorporate his empire into U.S. Steel. Narrowly computed, Carnegie earned perhaps $6 billion, but in 1900, his take was 1.17% of that year's gross domestic product. In 2007, that would equal $164 billion. AR





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