Betting Against Subprime: Big Risk Led To Big Gains

March 10, 2008— -- 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

"There's no question I got the idea from him, he didn't get the idea from me!" Greene said. "He kind of showed me in 30 minutes or so with his slides of how it worked. And his fund wasn't really ready at the time to invest in [it]."

"I said, 'John, can I do this on my own?' And he said, 'No, you'll never get approved. It's an institutional trade.'"

Dozens of hoops and 17 bank executive signatures later, Greene became the first individual investor to trade in subprime mortgage backed bonds.

While much of Wall Street placed their bets on these subprime loans, Greene saw that it was a shaky foundation and couldn't last forever.

"What made me believe that, was that I could see this whole market was propelled by looser and looser credit," he said.

He saw it because he lived it in the early 90's when his empire collapsed with a similar problem, only in commercial loans. Greene said his success was not at the expense of the American homeowner.

"My trade was with Merrill Lynch and JP Morgan," he said. "I made a bet — that these bonds would not be paid off because housing prices would not go up any further and couldn't go up any further, because nobody could afford them already where they were."

However, Greene does believe that homeowners were victimized. He says that, by 2005, banks had issued $500 billion in subprime mortgages.

"Buying a home is the American dream and they relied on their local real estate agent, they relied on their local mortgage broker and jumped in and had a very bad result."

Greene said that investment banks need to "come completely clean" with their records in order to bring the market back to normal.

"I think that people don't really know the extent of the toxic waste that's in some of the largest investment banks, and banks in the world," Greene said. "Until that is defined, and we really know the conditions and financial markets, we won't really know where the real estate market is going."

The Pay-Off

Greene is now focused on the life he shares with his new wife Mei Sze in their 43,000 square-foot estate.

"This big house takes some getting used to," he said. "I don't really understand how people can live in these big palaces at this point, but maybe we'll get used to it as time goes on."

Or perhaps they won't get used to it. Greene and Sze spend most of their time at their modest Malibu home that rests on five spectacular oceanfront acres. They share it with their dog and funny miniature pet horse named Winston.

"This is home," Greene said, referring to his more modest Malibu estate. "It has a certain simplicity and peacefulness which I think is really what everyone strives for in their lives. As much as you try to surround yourself with all these big homes and cars and planes and complications, at the end of the day, I think, basically, most people just want to be in a beautiful place with friends, family, people they care about. That's what this means to me."

Because, even for Greene, there are some things you just don't risk.