William (Bill) Patalon III is the Executive Editor and Senior Research Analyst for Money Morning. Before he moved into the investment-research business in December 2005, Bill spent 22 years as a journalist, most of it covering financial news as a reporter, columnist, and editor that included stints withGannett Co. Inc., and The Baltimore Sun.
Today Bill is the creator and editor of Private Briefing. With his latest project, he takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.
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In Wall Street lore, it’s known as the “Greatest Trade Ever.” It’s also known as “The Big Short.”
In 2006, John Paulson was a relatively unknown hedge-fund manager, just another face in the crowd.
But Paulson was smart, observant – and had the courage of his convictions. He understood something that most others didn’t even suspect…
The U.S. housing boom was a sham – especially in the area of “subprime” mortgages.
Paulson was schooled in mergers and acquisitions (M&A), so mortgages weren’t at all his bailiwick.
But he believed the mortgage market was poised for a free fall. He wanted to make a big bet against this market – a “big short.”
He just wasn’t sure how to make that wager…
Paulson and several other renegade investors like Michael Burry and Jeffrey Greene made big bets against the risky mortgages using complex financial instruments known as “credit default swaps,” or CDS.
Initially, the trade went against these mortgage doomsayers – putting them tens of millions of dollars in the red as the mortgage market continued to rocket. But instead of closing the trades and accepting the losses, Paulson and these few others effectively doubled down.
By the middle of 2007, the credit markets stumbled and then careened downward.
As the year came to a close, it was clear that Paulson had pulled off “The Greatest Trade Ever,” having earned $15 billion for his firm – a total that dwarfed investing icon George Soros’s billion-dollar currency play of 1992.
Over time, the Paulson trade gained a second moniker – one besides “The Greatest Trade Ever.”
Thanks to a best-selling book about the mortgage crisis that was written by Michael Lewis, the Paulson trade became known as “The Big Short.”
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