Betting Against Subprime: Big Risk Led To Big Gains

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Chances are you've never heard of Jeff Greene. But his risky wager against subprimes loans made waves on Wall Street and scored him a fortune.

Greene shocked some of the biggest investment banking firms and earned one of the largest individual gains in Wall Street history when he traded in his subprime mortgage backed bonds. Greene made $500 million off the trade-in in 2006.

"I've always attempted things that some people say are hard to accomplish," he said. "I just felt that I'd give it a try and if it didn't work out then I wouldn't do it."

Greene is hard-wired to take risks. He grew up in a typical middle class family — the son of a salesman and waitress — where nothing was handed to him.

"When I was six or seven years old, I was knocking on doors, shoveling snow for the neighbors' houses, trying to make some extra money," Greene said. "And as soon as I was old enough to push a lawn mower, I was mowing lawns in the neighborhood. I had a paper route with about 70 customers when I was 11 years old. So I think I kind of got addicted to commerce and business at a very young age."

History of Risk Taking

At 17, Greene skipped his senior year of high school to get an early start at the prestigious John Hopkins University. Two and a half years later — before he even turned 20 —Greene graduated and went on to Harvard Business School.

He bought three apartments, one to live in and the others to rent — a risky move for a struggling college student, but one that opened the door to his future.

"By the time I finished at Harvard Business School, I had 18 properties and it had become my career, kind of just by accident," said Greene.

This "accident" began Greene's career in real estate that was unstoppable for decades. Greene acquired commercial buildings and thousands of apartments during the 1980s in southern California, where everyone, including Greene, thought the real estate boom would never bust.

"Basically, my whole career was straight up, from the paper route all the way to 1991, or so. And as a result of the savings and loan crisis, the real estate market just started to crash," he said. "I watched my real estate empire kind of crumble before me."

By 1991, nearly all of Greene's properties were worth less than what he owed.

"I kind of felt like I had a lot of guns pointed at my head, and at any second I could have been thrown into bankruptcy and wiped out financially," he said.

But Greene didn't let failure discourage him, and he stuck with the real estate market. In fact, it seems the quickest way to get Greene to do the impossible is to tell him he can't, which was an attribute that later would pay off bigger than he ever imagined.

Hedging His Bets

By 2006, the apartment building market had steadily risen for nearly a decade and Greene was nervous that a storm like the one he barely weathered in the early '90s would repeat itself.

"I thought, 'Hey, maybe there's a way to go to Wall Street and find a way to do something that will offset any loss in my real estate portfolio through some financial trade."

Greene sought advice from colleagues, including billionaire hedge fund manager John Paulson. Paulson told him he thought that bonds backed by unstable, subprime mortgages would fall apart, making it a hedge with a huge payoff. Greene credits Paulson with the idea

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