NPR logo

Making Billions Betting Against Toxic Investments

  • Download
  • <iframe src="https://www.npr.org/player/embed/126054983/126054964" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Making Billions Betting Against Toxic Investments

Making Billions Betting Against Toxic Investments

Making Billions Betting Against Toxic Investments

  • Download
  • <iframe src="https://www.npr.org/player/embed/126054983/126054964" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

The client implicated in the fraud Goldman Sachs is accused of is one of the world's largest hedge funds, Paulson & Co. The fund is run by John Paulson, who made billions by betting against subprime mortgage securities. Robert Siegel talks with Gregory Zuckerman, author of The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.

ROBERT SIEGEL, host:

Gregory Zuckerman of The Wall Street Journal wrote the book "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History." He talked about Paulson here last November and he joins again now. Welcome back to the program.

Mr. GREGORY ZUCKERMAN (Author, "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History"): Hi, how are you doing, guys?

SIEGEL: And the complaint is against Goldman Sachs and against one 31-year-old French banker at Goldman. Is Paulson himself at all vulnerable to an SEC for this?

Mr. ZUCKERMAN: So far it doesn't look like he is. I mean, what's interesting is he basically has taken a step back. He wanted to bet against as much as could. And he went to some of these banks. It wasn't just Goldman. He went to Deutsche Bank, Credit Suisse, Bear Sterns and he said, hey, if you create some of this toxic mortgage product, I can bet against it. So he never had anything to do with the actual sale of these products to investors.

SIEGEL: Now, according to the SEC complaint, ACA, a firm that actually selected securities for this investment instrument called Abacus, thought that John Paulson, who was invited in on the selection process, was investing in it, not investing against it. So, in early 2007, how widely known was Paulson's interest in shorting the subprime market?

Mr. ZUCKERMAN: Well, it's a good question. Frankly, on Wall Street, it was pretty well known at that point that he was betting against housing, and not just that, he was sort of dismissed as something have a fool, a little bit of a Cassandra at the time. So, one could argue that maybe they should've known that he actually was betting against it, not betting on it. That said, in some of these customized deals, where he went to a mess of banks and had them create it for him, he did buy some of the riskiest tranches, riskiest slices of these mortgage products.

So maybe that's the kind of suggestion they were making. Well, yeah, he's buying part of this, although, they didn't tell him the whole story, that he was betting against most of it.

SIEGEL: If ACA really didn't know what Paulson was up to, would the investors who eventually bought Abacus, if they had seen the name John Paulson on it, do you think in 2007 they would've said, whoops, that's a red flag, that guy is actually betting against this house?

Mr. ZUCKERMAN: You know, it's a great question. That might not have changed anything had they known it. I mean, bottom line is, when you make an investment, you make a trade in the Street, you often think that somebody's on the other side. And these are big boys. These aren't kind of mom and pops, they're not individual investors. So, they would've been a little naive to think that there wasn't anybody sophisticated on the other side.

That said, they should've known a little bit more about the process in which Paulson and company basically went and they said, hey, here's a number of securities that we're going we'd like to be used as the basis for this CDO. And basically they picked the most dangerous.

SIEGEL: In her story just now, Yuki Noguchi referred to this email that the Goldman Sachs banker sent in January 2007 in which he said more and more leverage in the system the whole building's about to collapse anytime now. Only potential survivor, the fabulous Fab, his name was Fabrice, he's referring to himself...

(Soundbite of laughter)

SIEGEL: ...standing in the middle of all these complex, highly leveraged exotic trades that he created without necessarily understanding all of the implications of those monstrosities. What do you think of that as a document in January 2007 on the state of subprime-backed, collateralized-debt obligations?

Mr. ZUCKERMAN: Well, he looks like he knows what he's talking about. Also looks like the SEC would argue that he shouldn't have been selling this stuff to investors then if he was so bearish and skeptical about subprime and about housing. I mean, you know, it's a very interesting gray area of law about how much you need to tell investors, especially if they're sophisticated investors. Do you need to tell them that someone's on the other side and someone has worked to make this as dangerous as possible - debt security? It's a good question.

SIEGEL: You mean there's a question as to whether this particular banker was obliged to say personally I think this is a bunch of junk and it's all going to collapse.

Mr. ZUCKERMAN: Exactly. It's not for me to say. That's for the legal minds to figure out. But I think it's a real gray area. Do you need to be telling people this? And the SEC is arguing, yeah, you do.

SIEGEL: Gregory Zuckerman. Greg Zuckerman is a senior writer at the Wall Street Journal. He's also author of "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History."

Copyright © 2010 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.