Trader Made Billions on Subprime, by Gregory Zuckerman

An A1 story on John Paulson, weeks after this profile from Bloomberg. Anyway, I didn’t remember that he once worked for the great Leon Levy. Other interesting bits:

“Merely holding a different opinion from the blundering herd wasn’t enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, ‘you can’t short houses’ … One trade was to short risky CDO slices. Another was to buy the credit-default swaps that complacent investors seemed to be pricing too low.

In the middle of 2006 investors gained a new way to bet for or against subprime mortgages. It was the ABX, an index that reflects the value of a basket of subprime mortgages made over six months. An index of those made in the first half of 2006 appeared in July 2006. The Paulson funds sold it short. In the fall of 2007, the ABX subprime-mortgage index crashed into the 20s. Credit-default swaps that the funds owned soared. And the debt slices the funds had bet would lose value, indeed fell — to nearly worthless.

Mr. Paulson benefited from an earlier housing slump 15 years ago, buying a New York apartment and a large home in the Hamptons on Long Island, both in foreclosure sales.”

Paulson was early but not too early and he stuck to his guns — an advantage enjoyed by the well-funded, i.e. remaining solvent longer than the market can remain irrational, you remember, that old crack from Keynes.