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Investors Who Bet Against the Market: Goldman Sachs Trader Convicted

Posted: 09/11/2013 10:29 am

Someone once told me that it isn't hitting the pavement after jumping out of a high-rise building that kills you, it's the sudden stop. When I first heard that, my thoughts stopped -- since it instantly made me aware that thinking in the abstract is a practiced art. That thinking in unusual, atypical -- and even deviant -- patterns can be healthy. Almost like injecting the brain directly with anatomical steroids.

This past month, Goldman trader Fabrice Tourre was convicted on six counts of securities fraud. More particularly, his malfeasance involved the sale of synthetic collateralized debt obligations (CDO) that were "incorrectly" marketed to investors. Mr. Tourre fits into those Wall Street trader/investors who neatly bet against the market, while claiming immunity when the shit hits the fan.

To a certain extent, what's really being described here is a contrarian thinker. And more particularly: market makers, financiers, real estate investors, derivative bond traders and investment bankers. These contrarian thinkers are high risk-takers that thrive on semi non-regulated environments. That may be dangerous, but they themselves can create outcomes that are mentally beneficial, physically reinvigorating and ridiculously profitable -- not to mention outrageously reckless. They don't jump out of airplanes for sky-diving kicks, but rather, jump into financial peril or ecstasy depending upon their timing.

With the mortgage subprime calamity as a backdrop, these were the players that had the goddamn audacity to bet against the market. To be clear, I'm not talking about Goldman Sachs toy soldiers, since most of those Brooks Brothers-suit-wearing goons play with other people's money.

We're talking about guys who play with their own money! They can write a check for $8 to $9 million and it won't bounce. That's what we're talkin' 'bout. This is tantamount to not only stepping on the grid iron with professional-grade athletes, but stepping out against those gladiators without protective gear -- and laughing about it.

You would almost have to describe them as the equivalent of the Six Million Dollar Man of real estate. They just aren't normal. They are prescient beasts. They knew how to keep their mouth shut about the coming of the end of the world, but were smart enough not to tell their friends about it. These guys were not only doubling down before the bust, they were doubling down on their own back hooves. Which is a fantastic metaphor, when you visualize the devil horns, hooves and all? It brings new meaning to the excuse: "The devil made me do it."

It's too bad guys like these don't donate their brains to science or periodically provide a pap smear. It might give us a better understanding of their exact chemical imbalance, the mapping of their brains and which chromosome(s) their missing.

However, the downside of contrarian thinkers is that they are often wrong. Since on the other side of every bad bet, is an ear-to-ear grin that just found another reason to go to his bank (again).


A Boy's Life

Much like sports agents, firemen, professional athletes, private investigators, and life guards, real estate is a boy's life. None of the above professionals punch in a time card, have standard operating hours and/or really answer to anyone but themselves. And the common thread they all have, since their pay scale is fairly wide, is that they have a passion for what they do. And about the only job prerequisite for having a "passion" for what you do is that you must have a boyish charm.

What this dynamic mortgage implosion did -- which was "Made in the USA," is create opportunities. Substantial opportunities in fact. It catapulted several into billionaires. Real estate investor/entrepreneur Jeff Greene, who made millions in the 1980s shortly after graduating from business school -- and then lost it all by 1991, along with the likes of Michael Milken, was known as one of the most prolific apartment investors in Southern California. As a former commercial real estate broker with Marcus & Millichap in the mid '90s, I remember his name well.

Five years ago, he was one of only a handful who engaged in unconventional investments using credit default swaps, whose value rose exponentially as subprime mortgages decreased. More particularly, when Mr. Greene sensed in 2006 that a sea change would eventually occur, he called on a select few of very, very, very close friends from business school alumni, those he knew in the derivatives market on Wall Street, and a couple of top notch lawyers and analysts just for good measure.

It is believed Mr. Greene bought at least 5 million in option derivatives that were shorting the market for a downturn. At one point, he was $20 million in the hole. Ultimately however, Mr. Greene made nearly $800 million when the ashes were finished burning and found himself a seat on the Forbes 400, with a net worth of $1.4 billion.

Although Mr. Greene epitomizes the "Boy's Life" bad guy -- which is your A-personality, high-strung, hard-charging, take-no-prisoner real estate broker type, on the other spectrum is Michael Burry, the bookish type born with Asperger syndrome. A doctor by training, who soon after graduating from medical school focused on his life passion of financial instruments, and shortly thereafter set-up shop as Scion Capital Group.

There's not too many people who have the ability to see around counters. You can however count Mr. Burry as one of them. Hands down, he was one of the first investors to prophetically recognize and invest in the imminent subprime mortgage crisis. Mr. Burry was able to read the tea leafs in early 2005, and by 2007 through 2009 earned at least $100 million for himself. His clients earned $700 million.

Probably the grand daddy of them all, and whom I would classify as one of the original "Sultans of Real Estate Decimation," is John Paulson, of Paulson Advantage Fund. Depending where you source your information, Mr. Paulson's hedge fund made roughly $15 to $20 billion between 2007 to 2009. Like his other comrades, he bet against the housing market and the large financial companies that slit their own throats by providing rigged mortgages that were engineered to exploit consumers ignorance -- but ironically resulted in self-inflicted wounds to their own companies, which was mortal.

 
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