Guess What? The Man Who Shorted Subprime Is RICHER (Pt 1)


Remember Jeff Greene? He's a real estate investor who owns several commercial buildings in Southern California, mostly apartments. You can read my first post and see the video intervews I did with him from February in the link below.

Earlier in his career, Greene won and lost a real estate fortune, and when his portfolio rebuilt itself, he didn't want to get burned again. He wanted a hedge.

So two years ago, he "borrowed" an idea from his friend (at the time), hedge fund giant John Paulson. Paulson told Greene he was starting a fund where investors could short the subprime market though credit default swaps.

Briefly this is how it worked: you find a bond backed by risky mortgages from places like California or Florida. You invest in that bond and then buy insurance from someone else to protect yourself in case the bond defaults (this is the credit default swap). You actually WANT the bond to default. Because, even as you pay your "insurance premiums," when the bond defaults, you get reimbursed its full value, making a fabulous profit.

Greene decided against joining Paulson's fund and instead went out on his own to buy swaps. He spent a long time researching individual bonds he felt were likely to fail, then invested in them. He bought "insurance" from JP Morganand Merrill Lynch, the only two firms willing to do this sort of business with an individual investor. How did it turn out? Let's just say very well. Greene has gone from millionaire to billionaire in the last year, making Forbes 400 list of the richest Americans, with an estimated net worth of $1.4 billion. By the way, Paulson wasn't happy Greene took his idea and ran with it. More on that in my next post.

When we first interviewed Jeff Greene in February, he was trying to unwind some of his swaps and get into cash. "The problem I think in the financial markets is that there isn't enough transparency," he said on February 21st. "I just think that, for some reason, the government has not come into all of these institutions and made them come's just surprise, surprise, surprise."

Three weeks later, Bear Stearns collapsed.

Then a funny thing happened. While the rest of the market became illiquid, in Greene's corner of the universe trading ramped up. "It's the craziest thing," he says. "We're in a time where there's record illiquidity, but in these positions, starting about four or five months ago, they became completely liquid. I was able to obtain on every one of these positions multiple offers." He thinks that happened as investment houses started to clean up their books post-Bear.

But one night last week he didn't get any sleep. Suddenly it looked like "Mother Merrill" might go under, and Greene still had a lot of money tied up with swaps there.

He called JP Morgan to see if anyone there would help buy him out of his side of the deal, but no one was going to do business with Merrill. "That left me with only one place to go," Greene says, "Merrill Lynch."

He feared that Merrill might only offer him 50 cents on the dollar for bonds he thought were worth 90 cents. But, to his surprise, "they actually offered in the low 80s." Did he take it and run? No. He negotiated for more. "I didn't want to act too anxious." He eventually got out for 90 cents on the dollar. Another day, another killing in the market.

Up next, I'm going to talk about what Greene is doing now with his money.

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