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The Thesis
Paulson identified that subprime mortgage-backed securities were drastically mispriced and used credit default swaps to bet against them before the housing market collapsed.
The Story
John Paulson, a relatively unknown merger-arbitrage hedge fund manager, made the single most profitable trade in Wall Street history. Starting in 2006, Paulson's team meticulously analyzed the US housing market and concluded that a massive bubble had formed. Mortgage underwriting standards had collapsed, and securities rated AAA were backed by loans that would inevitably default. Paulson bought billions of dollars in credit default swaps — essentially insurance policies that would pay off when mortgage bonds failed.
When the housing market collapsed in 2007-2008, Paulson's funds generated approximately $15 billion in profits. His personal take was roughly $4 billion in a single year. The trade was so extraordinary that author Gregory Zuckerman wrote a bestselling book about it titled "The Greatest Trade Ever." What made Paulson's achievement remarkable was his thoroughness: he didn't just have a hunch, he did loan-level analysis, hired housing experts, and built the trade methodically over months while being ridiculed by Wall Street peers who thought housing was safe.
Key Insight
Do your own research, go deep on the fundamentals, and have the courage to act on your convictions even when everyone disagrees.
“I've always been a contrarian. When everyone is going one way, I look the other way.”
John Paulson
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See how Glen Bradford applies these principles to his own investing. Long Fannie Mae & Freddie Mac junior preferred — conviction meets patience.