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How to make a fortune in the subprime and avoid its fall out

How to make a fortune in the subprime and avoid its fall out
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First Published: Tue, Jan 29 2008. 11 47 PM IST
Updated: Tue, Jan 29 2008. 11 47 PM IST
Afew months ago I had dinner with an old friend who told me an amazing story.
Two years before, a nice guy with no experience at all in real estate had come to him and said that there was a fortune to be made betting against the US housing market. This fellow hoped to raise money for a hedge fund whose sole purpose was to do this, by shorting the subprime mortgage market. He asked my friend to invest with him, but my friend turned him down. Now my friend felt foolish.
“It all happened exactly like he said it would happen,” he said. “In every single detail.”
The hedge fund creator’s name was John Paulson. And —as Bloomberg’s Jenny Strasburg and Anthony Effinger and The Wall Street Journal’s Gregory Zuckerman laid out recently—by making between $3 billion (Rs11,820 crore) and $4 billion for himself in 2007, he appears to have set a Wall Street record.
In the long history of money-making, no one has ever made so much so fast. As the Journal story also showed, Paulson’s instincts now tell him to lay low and avoid calling attention to his fantastic triumph over his fellow Wall Street man.
“He is reluctant to celebrate, while housing causes others pain,” the Journal explained. To which Paulson added, “We think a lot of homeowners have been victimized.” And, to prove his point, he donated $15 million to something called the Center for Responsible Lending, an outfit that works on behalf of homeowners facing foreclosure.
It’s possible, just, to take Paulson at face value. True, two years ago he saw what was happening in the US housing market, and to the American homeowner, and thought of it mainly as a chance to short. But, perhaps, even then he was simply trying to wage financial war on behalf of ordinary folks, by depressing the value of their securitized debts.
For all I know, Paulson can now scarcely drag himself out of bed in the morning to reply to his emails, or haul himself to the office in pursuit of a measly few hundred million more, or indeed, do anything but ponder the sad plight of the American homeowner.
On the other hand, he may have seen just as clearly the future politics and public relations implications of the US housing collapse as he did the event itself, and is now positioning himself accordingly. For not since Michael Milken bootstrapped hostile raiders of public companies has Wall Street been so directly implicated in the misery of the little guy.
The fallout has just begun.
And right now the only thing missing from the subprime-mortgage market collapse is a truly satisfying villain. All sorts of people are being sued, but most of them lost money, just like the victims. The first rule of financial villainy is that the villain must have made off with a pile of loot.
Ordinarily, some big Wall Street firm could be dragged in to play the role of Evil Mastermind. But, with the exception of Goldman Sachs Group Inc., the people who work at big Wall Street firms don’t seem smart enough to have masterminded anything. Enter Paulson—and, no doubt, other shrewd short sellers of whom we’ll soon hear.
He, and they, may face a real social risk: Having made their fortune, they must now subject it to public inspection. Articles will be written, hearings held, and lawsuits filed—and all of these will be drawn inexorably toward the people who profited from the misery of others. For them, life is about to become more complicated. But they can minimize their discomfort by following a few simple rules:
Rule 1: Don’t hide from the press.
Other rich people will no doubt advise you to do this. Ignore them, as they will one day ignore you—the day you’re first hauled into court.
Times have changed: Trading is now a spectator sport. The public interest is too great, too many people are willing to blab to the press, and too many media outlets are happy to publish authoritative accounts of your activity based on third-hand information.
A trader who has, in a single year, become one of America’s richest men by betting against the American Dream has effectively lost his right to privacy. The world will not rest until it understands fully how he did what he did, and why.
Rule 2: Don’t listen to the people who tell you, “Just be yourself.”
You just made your fortune by betting against the American Dream! You are too quick to see the folly of your fellow man. You are dark and complicated, a man of shadows. Men of shadows don’t fare well in financial scandals. You must do your best to impersonate a sunny and straight-forward regular guy, much like everyone else. (Even though everyone else lost money.)
In recent history only one wildly successful financier, Warren Buffett, has managed to remain loved. And he’s done this by seeming ordinary. (Even though he isn’t.) He lives in Omaha, Nebraska, which is an advantage, as it not only makes him seem ordinary but also leads people to feel slightly sorry for him.
Probably you don’t live in Omaha, but some frantic city, or neurotic suburb, so you’ll need to work harder than Buffett does to seem like an average American.
But everyone has something ordinary seeming about themselves, some habit or trait. Cultivate yours!
Paulson seems to understand this. In the Journal story it was revealed that he still “rides the bus to work every day from his townhouse.” Nicely done, Mr. Paulson!
Rule 3: Lower your social expectations.
People who have just made a lot of money often expect to be happier, quickly. When they aren’t, they set out to buy happiness, in the form of higher social standing. They throw big parties in their honor, give away money ostentatiously, and otherwise use their new wealth as a pole vault to leap over some invisible fence.
But the best thing you can do after you’ve made a new financial fortune—especially when you did it by shorting the American Dream—is to pretend to be poorer than you have ever been.
Put away the black tie, pick up the remote, and spend the evening with ESPN. Let it be known to all those people now asking you for money that you intend to be generous, of course, but don’t actually part with your money just yet.
Rule 4: Beware the handlers.
Whatever you do, don’t attempt to orchestrate positive publicity about yourself. There is an industry of consultants and image makers who will tell you that what you really require is their services. Ignore them. The sort of publicity that can be bought will simply arouse the suspicion and interest of the journalists you failed to allow into your life.
What you’re looking for, oddly enough, is a journalist you can’t entirely trust, but who doesn’t have the energy to dig too deeply into your trading books, or your soul. Avoid teams of reporters from The Wall Street Journal, The New York Times or Bloomberg. Embrace the would-be artist from the New Yorker.
The perfect profile is one that makes you wince here and there, throws your enemies a bone without actually doing you any serious long-term damage, and seems like the last word on the subject of you.
With a bit of luck, that word will never be written.
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First Published: Tue, Jan 29 2008. 11 47 PM IST