The Greatest Trade Ever (20 page)

Paulson was thrilled to hear from Jeffrey Greene when he called in the spring of 2006. Greene, an owner of millions of dollars of real estate properties, was eager for a way to protect them from the downturn he was sure was coming. And he and Paulson were longtime friends. Greene was an obvious candidate for the new fund, someone who could write a big check and help get it off the ground.

Greene was one investor that Paulson would come to regret hearing from, however.

J
EFFREY GREENE CAME ACROSS AS SOMETHING OF A HOLLYWOOD CLICHÉ.
A lifelong bachelor in Los Angeles, Greene dated would-be starlets and wannabe models. When he wasn’t hosting parties for friends like Mike Tyson, Heidi Fleiss, and Paris Hilton, Greene was relaxing at one of his spectacular homes, including an estate on five acres overlooking the Malibu shore, where he had enough space for his miniature horse, Winston, to run free. Gracious and down-to-earth, Greene stood out in the Hollywood scene with his easy laugh, Harvard education, and winning touch in business.

But by the spring of 2006, Greene’s laid-back image masked growing concerns. The six foot tall, youthful-looking fifty-two-year-old, sporting thick brown hair and arched eyebrows, had spent over a decade accumulating more than seven thousand apartments and a handful of office buildings in Southern California, as if they were properties on a Monopoly board. They were valued at more than $500 million, according to the overheated prices of the time.

But as he woke one morning in his Malibu home and opened the
Los Angeles Times
, Greene’s face tensed. Reading fresh details of the raging local housing market, Greene was reminded that another downturn could leave him broke. He was too old to go through that again. Somehow, he had to protect himself from a collapse.

Greene called everyone he knew, from stockbrokers to business associates, asking what to do. Sell some properties and wager against shares of home builders? That wasn’t nearly good enough. Finally, Greene reached out to his longtime friend John Paulson. Paulson told him he
was working on an interesting idea, something to do with shorting mortgage bonds. He invited Greene to come to New York to discuss it.

Shortly afterward, Greene walked into Paulson’s offices, excited to see his old friend. They had first met back in 1990, introduced by a mutual acquaintance over dinner at a popular Southampton restaurant. When Greene asked Paulson to join him and some young women at a barbecue the next day, Paulson eagerly accepted the invitation, riding his bicycle thirty miles to the Amagansett home where Greene was staying. Over the years, they remained close; Greene served as an usher in Paulson’s wedding; John and Jenny stayed at Greene’s Malibu home during their honeymoon. The two were a contrast in styles—Greene relaxed and outgoing, Paulson more serious and reserved. But Greene was drawn to smart people and he got a kick out of Paulson’s dry humor and expert storytelling.

As Greene patiently waited for his friend in the main conference room at the hedge fund, he glanced around the office and was impressed. Greene always had been the wealthier and more successful of the pair. When Paulson came to the West Coast, Greene usually would ask his chef to prepare a gourmet meal; when Greene was in New York, Paulson lugged bags of groceries from an upscale market before making dinner. Paulson’s firm’s previous offices had been a simple, 2,000-square-foot space.

This time, though, Paulson had new, expansive digs. On one wall of the conference room was an abstract painting by Louisa Chase of disembodied hands and feet in a swirl of blue and white; in the corner were assorted drinks and a shiny ice chest. The glass paneling provided a view of young, well-dressed traders and analysts walking briskly through the halls. As Paulson walked in, Greene was about to compliment his friend on the look of his operation. But Paulson had an intense look on his face, and a colleague was a step behind him. Paulson closed the door firmly and extended a hand to Greene, who responded with a warm hug. Paulson seemed uncomfortable with the display of affection, surprising Greene.

Sitting across a long, polished wood conference-room table from Greene, Paulson launched into an overview of the housing market, a
speech he had given endless times to prospective clients. Greene was dressed casually, in a jacket, an open-collar dress shirt, and slacks; Paulson wore a full suit and tie. Greene realized Paulson was making a business presentation, not greeting a good friend.

A few minutes into the pitch, Greene tried to offer a point of his own, but Paulson cut him off.

“Just
listen
,” Paulson said sharply, his voice rising.

Greene wasn’t sure what to make of Paulson’s bizarre behavior. He offered no smile, leavened his speech with no humor, and maintained a strange formality. Why weren’t they chatting in Paulson’s private office, as they usually did?

It’s as if he doesn’t know me
, Greene thought.

Paulson spoke for twenty more minutes, leafing through an elaborate marketing document that featured Pellegrini’s housing data. He described how Paulson’s new “credit” fund would buy protection on subprime mortgages. Greene, shrugging off his friend’s odd behavior, tried to keep up with him.

Although Greene didn’t know it, Paulson was in a difficult position. An investment from Greene would help Paulson get his new fund off the ground. But once again Paulson felt torn; if he shared too many details of his moves with his friend, others might hear of the trade and ape him, reducing any gains.

“It doesn’t take much for investors to catch on, and I had just a fixed amount I could spend” on the insurance, Paulson says, explaining his behavior.

Greene was intrigued by the presentation but remained noncommittal about the fund. He was more than a bit confused about how it all would work. Moreover, he wasn’t sure why he needed to pay to invest in a special fund to short the market, rather than just doing the trades himself as he had with previous tips from Paulson.

“Can I just do it on my own?”

Paulson looked disappointed. “There’s no way you can get ISDAs,” he responded, referring to the formal documentation from the International Swaps and Derivative Association necessary to trade the sophisticated CDS contracts.

They met again Friday night for dinner. Paulson seemed friendlier this time and more himself, putting Greene at ease.

“Jeff, this trade could be huge,” Paulson confided in Greene. “This could take me to another level.”

Greene still didn’t quite follow Paulson’s idea, though.

“I didn’t know what the hell J.P. was talking about, tranches and credit-default swaps,” Greene recalls. “It was hard to understand. You’re not shorting, exactly; it’s a derivative that mimics the bond … I figured I needed a tutor or something.”

Greene asked an old friend, Jim Clark, to join them for lunch the next day. He hoped that Clark, a mathematician and Ph.D. in computer science who helped found pioneering Internet company Netscape Communications, among others, could give him some guidance. But after lunch at Nello’s, a popular Upper East Side restaurant owned by one of Paulson’s friends, Clark told Greene that he couldn’t quite follow Paulson’s idea either.

Back in Los Angeles, Greene couldn’t stop thinking about Paulson’s trade. Buying cheap insurance on other people’s risky mortgages sounded too good to be true. Paulson said Greene couldn’t do the trades by himself. But Greene had built a fortune on his own; maybe he could protect it with these mortgage investments.

G
REENE HAD BEEN BORN
in Worcester, Massachusetts, in a blue-collar community that seemed a galaxy removed from jet-set Los Angeles. Greene’s father, Marshall, worked in the textile-machinery business, much like his own father before him, reselling machinery parts. Jeffrey sometimes tagged along as his father visited mills around New England, selling knitting spools, parts, and other machinery.

The Greene family owned a three-bedroom, one-bathroom home in a close-knit, mostly Jewish neighborhood. His mother, Barbara, taught Hebrew school three days a week. He had a sister who was two and a half years older, and a younger brother, eight years his junior. The family couldn’t afford to send their three children to summer camp, but they
rented a cozy two-bedroom house near Nantasket Beach on Massachusetts’s South Shore, two blocks from the ocean.

Jeff was close to his maternal grandfather, a peddler from Eastern Europe who sold needles, thread, and other household items. Spooked by crime in the area, he had closed his store and gone door to door, extending credit to his neighborhood customers for their purchases. He often took his grandson along on his rounds.

Studious and clean-cut, Greene was on the verge of nerdy. He didn’t touch drugs and he played the trumpet in his high-school band. He never had a serious girlfriend. Slow dancing to the Bee Gees in a friend’s wood-paneled basement was as wild as it got for Greene.

Marshall Greene’s business deteriorated in the late 1960s, as mills moved south seeking cheaper labor. So he followed his customers, traveling to cities like Chattanooga, Tennessee; Spartanburg, South Carolina; and Fort Oglethorpe, Georgia. When Marshall called home, his son could detect disappointment in his voice; it was a dramatic change for the normally affable salesman.

“He’d try to sound optimistic, but I could sense things weren’t going well,” Greene recalls.

His mother, a child in the Great Depression, was a genius at stretching the family’s dollars, becoming a regular at Filene’s Basement, the local discount giant. One year she fitted her children with irregular velour shirts; the stitching was a bit off but not so much that Greene’s friends noticed. Marshall Greene had a very different perspective on money from his wife, spending whatever he made as quickly as it came in, leading to growing tension in their marriage.

“My parents always argued when I was growing up,” Greene recalls.

Marshall bought a rubber stamp business for a time, and then became an auctioneer. Eventually he acquired a soda-vending business in West Palm Beach, Florida. Nothing really worked, though.

Making money came more naturally to his son. On snow days, Jeff Greene was the first up in the neighborhood, grabbing a shovel to clear neighborhood walkways, beating the better-off kids with their snow-blowers. He mowed lawns, had a paper route, made $5 playing trumpet
at Memorial Day parades, and caddied for the wealthy, saving enough money to eventually buy a used yellow Datsun 510.

When Marshall decided to move his family to Florida to be with him, Greene resisted, unwilling to leave his friends. So his parents let Greene, just fifteen at the time, move into a spare bedroom at a great-aunt’s home.

“I didn’t drive yet and she didn’t, either,” Greene says, “so I got a lot of rides.”

During vacations, Jeff flew south to help with his father’s business. They would load a van full of soft drinks to restock vending machines in local motels, businesses, and farms, sometimes donning long boots to walk through mud and around snakes.

“My dad was always proud,” Greene recalls. “But he struggled the rest of his life.”

When she wasn’t teaching nursery school, his mother worked as a waitress at Palm Beach’s storied Breakers Hotel.

In high school, Greene didn’t particularly stand out. But he was part of a competitive class, many of whom gained acceptance to some of the top schools on the East Coast. Greene received a partial scholarship to attend Johns Hopkins University in Baltimore, a halfway point between his Boston home and his parents’ in Florida. He took extra courses and graduated in three years, partly to save money.

One day in 1973, Greene spotted an advertisement in a local newspaper for “telephone sales positions.” Few had heard of telephone marketing at the time, but Greene was intrigued. The pay, $2.50 an hour or commission, beat the $1.60 an hour minimum wage at the time. The job was to sell circus tickets to local business groups. Customers assumed the proceeds went to local police, firefighter, or other nonprofit groups, putting them at ease. But the businessmen running the telephone-sales operation usually took a healthy cut of the action.

On his first morning, Greene took a spot in a long row of seats and began making calls, using the standard pitch he was given.

“Hi, I’m calling for the Fraternal Police Association. We’re sponsoring the circus at the Hippodrome this year. Care to buy some tickets?”

Greene barely made any sales. He wasn’t much of a morning person, and he quickly became bored and frustrated.

After lunch, though, Greene returned in a better mood. He decided to improvise on the canned speech.

“Hey, how are you doing?!” he’d start, with great enthusiasm, as if he was a friendly neighbor. “The Fraternal Police are bringing the circus to town. Can we count on you?!”

By the end of the day, Greene was making six times more than anyone else in the office. He claimed a commission as his pay, forgoing the hourly rate.

“It wasn’t much of a circus,” Greene recalls. “The only elephant was the one on the ticket. But I was making a hundred dollars a day, and I realized I loved sales.”

Greene stayed with the business and continued to work on his delivery. Soon he was making $500 a week, more than his father’s salary. One day, the operation’s manager pulled Greene aside, asking if he wanted to quit school and run his own circus-sales office in Virginia. Greene initially turned him down. But he noticed that his boss, just a year older than Greene, drove a Cadillac El Dorado. Clearly, much greater profits came to those running the operation. So he approached his boss. “Yeah, I’m ready to be a promoter.”

His parents urged Greene to drop the idea, trying to convince him that the job was too risky and the flight south too expensive. But Greene grabbed the opportunity and proved a natural.

“We’re bringing the holiday circus to town! Can we count on you again to buy a book of tickets? Great! Is it okay if we round that up to fifteen tickets?”

Greene spent the rest of the summer selling tickets. He found he could quickly read his customers, determining who might buy big blocks of tickets and who would be resistant, and he adopted unique methods to put customers at ease. When Greene dialed a family with an Irish-sounding surname, he introduced himself as Jeff O’Hara. With an Italian family, he’d adopt an Italian surname. Sometimes he’d even slip in an ethnic accent, mimicking whoever answered the phone, perhaps working in some Yiddish or even an Irish lilt.