The man who wrote the book on Paulson
19 April 2010
The Globe and Mail
NEW YORK — Gregory Zuckerman is a senior writer at The Wall Street Journal and author of The Greatest Trade Ever: The Behind-the-scenes Story of How John Paulson Defied Wall Street and Made Financial History.
Thanks to a huge and successful bet that the U.S. housing market would crumble, John Paulson’s firm, Paulson & Co., made $15-billion (U.S.) in 2007. He personally took home $4-billion (U.S.).
Here, Mr. Zuckerman speaks about the controversial 2007 deal that made Paulson & Co. $1-billion and prompted the Securities and Exchange Commission to file civil fraud charges against Goldman Sachs Group Inc. on Friday.
In your book, you describe some of the exact transactions that have now landed Goldman in hot water. How did you hear about them?
Covering the story at the Journal I heard rumblings and complaints for over a year. All kinds of competitors levelled accusations. There were investment bankers, at some of the top firms on the street, who criticized [Paulson] behind the scenes. So there was a lot of smoke – so I figured there must be some fire as well.
Many of the accusations were blatantly wrong. I got to the point where I was comfortable reporting what had happened. Then there’s the question: Was there something improper or not? I’m of the belief that it’s a really fascinating grey area. Especially for Paulson, one can level criticism and there may be some ethical issues, but it’s much harder to say it’s illegal.
You wrote that not every bank was willing to do these kind of deals. So why some and not others?
The ironic thing is that at Bear Stearns, of all places, a senior banker there turned Paulson & Co. down. They may have had some notion of how it might look on the front pages, which is what Goldman Sachs is seeing right now. Clearly, selling these deals to investors is a whole other level than what Paulson did, which was going to the banks and asking them to create this … paper.
You also have to remember what the period was like back then. This was late 2006, early 2007, when people still thought that John Paulson was tilting at windmills, that he was a merger-arb [specialist] who didn’t know that much about real estate. Now we look back and say, “How do you not warn investors that Paulson had a role in creating these things?” At the time, even if he told investors, I’m not sure how many of them would have run the other way.
Some reviewers have said you’re too nice to Mr. Paulson in the book.
I don’t see him as either as a hero or a villain. He’s a great character to me and I love great characters. I’ve been accused of lionizing John Paulson, but he has condemned the book and won’t speak with me … If some people think he was unethical I can understand that view. Other people think he did nothing wrong whatsoever. I’m open to that argument as well. I don’t think it’s my job to shove an opinion down the throat of my reader.
You can argue that he should have been satisfied in betting against billions of dollars of potentially dangerous mortgages and he shouldn’t have taken the step of going to various investment banks and asking that they create more products so he could short them. By the same token, he didn’t sell any of the stuff to investors.
Yes, more toxic mortgage assets were created because of John Paulson and his team, but someone had to be on the other side. These were big boys and sophisticated investors, and [Paulson] had no obligation whatsoever to tell them not to take the other side of this trade. Paulson was very, very focused on making a lot of money from what he saw as a coming collapse of the mortgage market. I don’t believe they saw [these deals] as improper.
Do you think more investigations connected to similar deals will be forthcoming?
You would think so, because this was one of many that John Paulson and his team entered into and that other hedge funds also worked on. I know there are lists of CDOs that [regulators] have been examining since late 2008, if not earlier, so they clearly have been digging into all this stuff. It could be this one was the worst.
In the book, you profile others who also bet against the housing market, including some little-known investors who made huge profits. What did these people, John Paulson included, have in common?
It’s just startling to me, and remarkable, that the experts who should have known better got it wrong and it’s these outsiders who made the most money: John Paulson, who was a merger-arb [specialist]; Paolo Pellegrini, who just a couple of years before doing this trade was living in a one-bedroom apartment with no money in the bank and no job; Michael Burry, a doctor-turned-investor, who knew stocks, but didn’t know anything about mortgages.
It took some outsiders to figure out that a historic collapse was coming. In some ways it gives all of us encouragement that maybe we know a little bit more, and have a little bit more of a perspective than perhaps those on Wall Street, the so-called experts.