The Greatest Trade Ever Book Notes: The Investors of the 2008 Financial Crisis

The Greatest Trade Ever is about the 2007/2008 financial crisis and how some people who made money, when everyone else was losing money
As I write this we are in the middle of Covid, so these notes are to see if you can take lessons learned from 2008 financial crisis and apply it to 2020 Covid’s financial impact
Rereading my notes from this book, I am further convinced that 2008 financial crisis and Covid 19 are different in very subtle ways and one should not draw too many conclusions.
History might rhyme but it does not repeat.

Some high level takeaways from this book:

While there are many similiariies with COVID-19 and 2008 financial crisis, a big difference is that there was a financial asset which was directly correlated with the impact of the crisis that (CDOs and CDS) , no such product exists for COVID.
In life, find opportunities with asymetric upsde: your downside cost is low and capped, but your upside is high and potentially uncapped
It’s not enough to be correct, you need to be correct at the right time in a very specific way
Being right on the thesis but wrong on timing and being just plain wrong are in effect, almost the same thing
There is a high social cost to being contrarian, but if you are right, there is a huge upside
There are interesting ethical implications of inveting in a crisis. It seems socially unpleasant but it can be a useful counterbalance to preventing markets from going too high or too low

Sidebar: After reading my notes, I realize that the movie and book, The Big Short, has a misleading title. First, I really like the movie and I would recommend it. But what these guys did is the exact opposite of shorting. When you short, your upside is capped and your downside is unlimited. Which is a horrible strategy compared to using Credit Default Swaps and Collaterized debt Obligations. Essentially, it’s much better to buy reverse insurance: you pay a small premium with a very high insurance payout

I have notes from other books handwritten, but don’t have the time to type them. If you want me to send you a picture of the notes and you can type them for me so I can add it to my book notes, let me know. Email me (ta@tomiwa.ca) or on twitter @tomiwa1a. I would really appreciate it.

Notes

When you find a great opportunity, be aggressive [90] [95], this is something that Charlie Munger also often says
Credit Default Swaps have asymettric payoffs. Just like insurance, worst case scenario you pay 1-3% of assets in premium, but if stock price falls you can make 100X your premium payments. Such asymettric payoffs, also exist, e.g entrepreneurship and working for a startup. When you find a good way, take a bet on it [81]
Markets can stay irrational longer than you can stay solvent [99]
Meta-point about how ability to predict future is slightly overrated, which is why most people don’t bother trying
People in media are frequently wrong but if you are entertaining and charismatic, no one cares, “often wrong, never in doubt”
Even if someone “discovers” something “first”, if they can’t capitalize and build a moat around it, the rewards goes to the one who can learn/copy fast, iterate quickly and capitalize on the discovery
Michael Burry, Hank Paulson, Pellegrini all faced moments when others doubted them and they doubted themselves
It is a bit surprising (but maybe it shouldn’t be), how often succesful people deal with self-doubt
There’s no difference between being wrong and being early. Marc Andressen: “When it comes to technology, asumme that everything is going to happen. The interesting question becomes, ‘When?’”
Having conviction when everyone thinks you’re wrong [102]
Heads I win $1 billion, tails I lose $80m/year [102]
Details: $80m insurance on $1 billion of BBB bonds
Greg Lipmmann expected a 6-fold gain so that means they were expecting ( $80 * 6) = $480 M worth of assets in the $1 b pool to go bankrupt
Note the heads or tails analgy is actually very misleading because : “We are looking at a sixfold gain, but there isn’t a six to one chance that California real estate will keep going up because they can’t go up forever”
Not a very convincing thesis to be honest, but it is direconally very accurate
Doing great work can be very cratifying [106,107]
Pllegrinis Chart and data cruhcning data [107-109]
Interesting to see 3 different people reach the exact same conclusion independently
“No one saw this coming” is often said during a major event but it’s rarely true. What you probably mean is, “No one I listen to saw this commin.”
You should probably update your priors and listen to better people
Brilliant quote from Keynes: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally [112]
Sidenote: Keynes and Galbraith are top two most quotable economists
Honourable mention to Nassim Taleb and Robin Hanson
interesting anecdote of Ben graham’s trading indulgence, I thought he was frugal [113]
history lesson of all the greats being wrong (Soros, Druckenmiller, Robertson) [115]
Reference to irrational exuberance which I’ve read (unfortunately before I started taking book notes [tk add link to my book notes]) [116]
“Let’s hope we are retired and wealthy by the time this house of card falters” – S&P executive 2005 [117]
Bill Ackman saw this coming in 2002
Question, if you see a crisis coming 5 years before it happens, does it even matter? you can’t trade on a thesis that is 5 years out, especially because standing at 2002, you don’t know if it’s 1 month out or 5 years out?
Also, I write this in May 2020 (read the book in March?) in the middle of Covid and Ackman recently went on TV and said that the President should

“shut everything down”

Paul Singer and Seth Klarman, two hedge und legends saw it coming but didn’t trade more on the housing crash thesis (Not sure what meant by “trade more”).

they considered it a “reputational risk”

Bill Gross also saw it coming but the culture/structure of his fund (mostly bonds at PIMCO, I believe ) so he was unable to close the deal [120]
intereting meta takeaway here that it’s not enough to just know or see an opportunity, are you agile enough to pounce on that opportunity? Another subtle point, are you willing to be non-conformist, contrarian and handle the “reputational risk” and go against “social norms” to follow a conviction you have?
This isn’t to suggest that Paul Singer is worried about “social norms” (see: Elliott Management and Argentina bondsd ) but it’s speaking to the fact that sometimes people with high reputations can be straightjacketed by their prestige and be less agressive about pursuing opportunities
innovator’s dilemma, all these people saw an opportunity but they couldn’t act on it
Funny Bill Gross quote about how he felt that he couldn’t capitalize on the housing Crash: “It made me gross, miserable, I couldn’t fall asleep” [118]
Reminds me about Jeff Bezos quote about the two types of people who passed up on investing Amazon. Some people were still very depressed about it and regretted it deeply. The other group of people realized that sometimes in life, things like that happened and there is no point in wallowing in gregret and realistically to be in a position where you can even pass up on Amazon, you are already incredibly privieleged and have many things to be grateful for.
I was a bit disappointed there was no mention of Mark Spitznagel (Universa investments) and Nassim Taleb. The whole idea of capped downside, huge upside, is ltierally the entire thesis of Antigragile and Black Swan
Antifragile is to Wall Street what Ayn Rand is to Libertarians
I get the feeling that Paulson’s temperament is given 100 simulations, he doesn’t get to round 50 before going bust (not sure wht I mean’t when I wrote this in my notebook, I am just rewriting here for posterity)
I prefer Seth Klarman’s margin of safety approach
Though, I admire Paulson’s conviction and chutzpah
This book really motivated me to read Paulson’s next book, The Man Who Knew Markets about James Simons and Renaissance Technologies, Gregory Zuckerman is a great writer
We found the El Dorado of investments
Funny story about how Pellegrini had to change his email signature, speaks to how status and image conscious Wall Street is (I forget what it was before and what he changed it to)
Really funny to watch in hindisht all the people who said no [130], James Altucher makes a guest appearance ? [128]
What is the modern day equivalent?
Jim Clark of Netscape randomly makes an appearance, in the book LOL ( has a dinner with Hank Greene investor guy)
Funny for me because I have read this guy’s story about him, Marc Andressen and Netscape in the New New Thing (another good book)
Chief memory of him is that his primary goal in life is to: 1. Have more money than he currently has, 2. Be richer than the other people around him
Clark teaches Jeff Greene how the John Paulson trade works
The streongth of the Harvard alumni connection, very useful for finding investors and employees, that is why many firms will try to exclusively hire Harvard, it’s also why non Ivey-leagues who break into Wall Street reach a glass ceiling as they get into upper-level management positions
I talk about this in my ebook, the Atila Schools and Jobs Guide: the best Canadian Universities for getting jobs at Goldman Sachs, Google, McKinsey, Pfizer and more
Apparently, Paul Allen, co-founder of Microsoft also tried investing in housing crash via his Goldman Sachs Broker [147]
Jeff Greene is impressive, went from knowing nothing about CDS to creating his own CDS [148]
Paulson shows great Chutzpah in ignoring naysayers
execution trumps idea, numerous people in this book had the same basic idea that housing market was about to crash, some people even thought of investing via Credit Default Swaps, but only a few were able to: create an investable product to invest in the housign market, stay solvent long enough for the trade to play out, ensure the counterparty also stayed solvent long enough to repay their investment and there was liquidity in the newly created CDS market that would buy the product at a reasonable price
This is why I often say that ideas are underrated, it’s not enough to know that housing was due to crash, you had to get all those other things right, it seems out of numerous people in the book who had the same “idea” (who are all very smart people) only John Paulson nailed the execution the best, Michael Burry and Steve Eisman deserve honorary mention for coming close
In under an hour of Greg Lippmann of pitching Phil Falcone on the idea, Falcone invested and made a lot of money [169]
Impressive that Falcone grasped the potential of the idea so quickly
But maybe he already knew about the trade
“Then it dawned on Burry that Greenblatt wasn’t saying anything new. He had no information that in any way negated or chagned Burry’s original investing premise” [164]
Very important quote, when someone tries to change your mind on something, ask yourself, are they telling me anything I don’t already know?
More respect for Burry for sticking to his convictions [164]
Reminds me of the Drake Line from Deep Pockets: “Back when Big Apple sold dreams, I stuck to my own thing”
It did have a mental effect on Michael Burry [166]
A lot of complexity and details on how they setting up the CDOs, the little thigns matter [180]
Is shorting the housing market, investing in a housign crash unethical [180],

Paulsons theis is: I was very transparent about his intentions and the parties involved were “sophisticated investors” that were (or should have been) aware of the risks

Passage from the book [181]

“We had threee meetings with John Paulson, we were working on a trade together says Scott Eichel, a senior Bear Stearns trade. He had a bearish view and was very open about what he wanted to do, he was more upfront than most of them.

But it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side, Eichel says

For his part Paulson says that investment banks like Bear Stearns didn’t need to worry about including only risky debt for the CDOs because, “it was a negotiation; we threw out some names,they threw out some names, but the bankers ultimately picked the collateral. We didnt create any securities, we never sold the security to ivnestrs… We always thought they were bad loans

A key takeaway from the book is that if someone is selling you an investment product, try to find out who the counterparty is, your incentives might not be aligned
The markets can stay irrational longer than you can stay solvent
Steve Pensky (spelling?) closes a fund while he was convinced the real estate market was overpriced
He was right, but he went bankrupt, so no one cares
Paulson discvoered Gary Shilling’s newsletter [192]
Reminds me of David Perell, Bryne Hobart, Andrew Chen, Scott Galloway, some great newsletters I subscribe to
So much great information is hidden on the “closed internet”
I remember reading The Great Deleveraging in my sophmore year (I wish i took notes) and Gary Shilling predicted a lot of this stuff
I’m always surprised someone so smart isn’t richer, but he seems to be very happy which is ultimately what matters
And he has his honey! so what more do you need?
John Paulson made more money in the financial Crisis than George Soros’ bet against the pound [196]
Also, Paulson’s trade had way better risk return I believe
Soros’ bet was a huge gamble because he was literally betting against one of the most powerful governments in the world
I could be wrong but I think he tried it other times and it didn’t work
Crisis was averted by making a big fuss [204]
This book is why I think investment bankers (and investors) are an interesting social group to hang out with, especially in university
They are extremely pragmatic and logical in how they analyze things
They also tend to have a very sarcastic, cutting sense of humour
Very similar to engineers like me actually, but they tend to have a financial interest in being correct
So they might actually be better truth seekers than engineers
How did the skeptical people start raking in profits? [212]
interesting scene of a receivership in downtown LA to bid on a property with two other top 40 wealthiest people in america [218]
Jeff Greene found out there was a government program calle dHpope New, called them to investigate and preteneded to be a troubled homeowner, very creative and thorough [220]
Fascinationg how Greene and Libert view etihics of CDO instance [226]
Libbert felt very uneasy about it

While Green said: “I didn’t even think about it… If more people had been shorting mortgages early on then things wouldn’t have got so crazy. The world would have been a better place had more people been shorting. We had nothing to do with what happened to home owners”

Part of Libbert agreed with his friend. But he couldn’t shake his qualms. It all left him a miserable ball of nerves”

Now that they are right there is pressure for Burry and Paulson to sell and leave whil they are ahead from investors [229]
Reminds me of the Shopify Angel investor who has held on to his original investment and not sold, despite massive winnings so far
Stephen A. Schwarzman and Blackstone’s real estate group just started buying up bargain priced assets and they ended up doing very well for themselve when the economy recovered
Fast forward, and he is on Gary Vee doing a podcast and promoting his book, how interesting times have changed
Interesting anecdote about not paying phone bills and when their service gets cut off they just move on to the next provider [239]
Paulson’s nanny for his kids would sign up for multiple credit card bills, list the Paulson’s address as hers and just ignore the payments
Interesting that the same debt and leverage that Paulson used to become very wealthy, is the same debt that ruined this woman’s life
Debt is an amoral tool, it’s a question of how you use it that matters
Apparently Paulson was bewildered by this, he tried to track down her debts and get the collection agencies to get them off her back

“Can you believe she doesn’t pay her bills and she’s still getting new credit-card promotions left and right?” Paulson asked Andrew Hoine

Some stats on how much money they made [254]
Pellegrini made $45 -> $175 million, apparently it was all wired in to his ATM and wired to his account whil in vacation in Anguilla

On the screen before Pellegrini’s wife was a figure she had never seen before, at least not on an ATM: $45 million, newly deposited in their joint account. “Wow,” his wife said quietly, still staring at the ATM. Then they left, arm in arm, to meet a chartered boat to take them to nearby St. Barts

Paulson also did well for himself, the fund made a total of $15 billion and he personally made $4 billion. “It was the largest one-year payout in the history of the financial markets.” [254]
I wonder though if Paulson can repeat that kind of success again, you know a lot of people in life just have “one really good idea” but that can last them a lifetime so that’s okay (google: “Snow informer”)
Author mentions a lunch with Paulson, hedge fund Managers and Samuel Molinaro Jr COO and CFO of Bear Stearns in feb 20, 2008, Molinaro is trying to convince hedge fund people that the investments are okay (almost exactly 12 years to the day that I wrote these notes) [255]
Pretty funny that the author writes exactly what they ate (salad, grilled chiken and chilled string beans)
interesting question that Paulson asks the hedge funds about if they know how many Level 2 and Level 3 assets Bear Stearns asks (level 3 assets are assets that are illiquid and hard to value, level 1 is liquid and easy to value and level 2 neither liquid nor illiquid and neither easy or hard to value) [256]
Bear Stearns admits that they don’t know, Paulson gives the number and the other hedge fund people realize that Bear Stearns is in trouble
Highlights importance of asking the right questions
Hedge fund people realie bear stearns is in trouble, Renaissance shifts $5 billion [257]
Renaissance realized late, but they moved quick, which is why it’s not always about getting an idea first, it’s about being a fast follower and excellent execution
Lehman brothers needed more funding but no one wanted to lend to them [260]
meanwhile Paulson made another $5 billion from shorting banks
the difference between amateurs and professionals, and the importance of liquidity, on paper, Jeff Greene’s investment thesis was correct, but no one would buy his Credit Defalt Swaps, eventually he did exit, but for less money (and stress) than he could have got if there was more liquidity [264]
Interesting that Greg Lippmann’s personal account rokse $400k but his Deutsche shares fell $800k, perhaps if he had more conviction he should have sold some of his Deutsche shares and bet more in his personala ccount
Michael Bury’s email to Wall Street Journal after Paulson was a front page story [269]

After a front-page story in The Wall Street Journal described John Paulson’s winnings from his subprime trade, Burry shot off an e-mail to the reporter that was bitter as it was factual: “Well I was first. If anyone can be show to be one that really did his own work and created this strategy from scratch, it’d be me… A physician with no true education strategy in anything in Wall Street. Completely self-taught, working by myself”

I am a big Michael Burry fan, I plan on meeting him some day. I acutally admire this email. But ultimately people will say it doesn’t matter. Paulson made more money so he “wins”.
But for someone like Burry, who I feel reminds me of Don Quixote, maybe money isn’t what he uses to keep score. He might be in it for the intellectual challenge and maybe even a moral fight. Which makes me respect Michael Burry even more.
“Paulson tried to keep a low profile… naming a building after himself wasn’t his style”. Meanwhile, 12 years later we have the Paulson School of Engineering [270]
After Greene made so much money, people started to listen to him. He was giving Oliver Stoen real estate advice and noticed that while he was talking, Oliver, had pulled outa pen to start taking notes “Now when I say things off the cuff, people listen,” says Greene with some amazement “it’s scary” [275]
Jeff Greene is actually a very interesting and clever guy, after he made $500 million from the trade, he hires a PR firm to spread the news and got glowing features in Nightline and CNBC.
Challenge conventional wisdom, most fiancial pros form their views by the same maisntream news and articles, “creating an opening for those on the outside willing to challenge the conventional wisdo” [281]
“It would suggest that dissidents who dare to raise questions and wager against markets should be encouraged, rather than scorned” [281]

Buy the Greatest Trade Ever on Amazon

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