Finance Books For The Holidays: The Greatest Trade Ever

The following is the first part in a 3-part series of finance book reviews for the Winter Holiday season.
"The Greatest Trade Ever" is aptly titled, for it is possibly the greatest book to come out of the financial crisis of 2007 -- 2008, and it's certainly up there in the top 3. More than anything else, this is down to two reasons; the first is that Gregory Zuckerman, a Wall Street Journal staff writer, is a fine storyteller. The second reason is that, unlike for most books about the subprime crisis, this one has a strangely upbeat tone, where the reader is constantly rooting for the protagonist John Paulson and his hedge fund.

Via unprecedented access to Paulson's hedge fund Paulson & Co., as well as numerous other affiliates and smaller-scale money managers, Zuckerman reveals the story behind those who correctly forecast the turn of events that led to the subprime crisis. As Zuckerman points out, merely predicting the great U.S. credit unwinding was not in itself enough of a skill to ensure a big payoff: the managers had to buy the correct assets at exactly the right time. This riveting account of how the buyers of credit default swaps -- which are insurance contracts on a company's ability to repay its debt obligations -- details with simplicity how multifarious and how risky their strategy was, despite being on the right side of the trade.

There are several details in "The Greatest Trade Ever" that you will not find in other histories of the recent financial crisis. The first is a no-nonsense, easy-to-grasp explanation of credit derivatives contracts, and how they work. In this sense, this book is one of the finest on the shelves right now, and anyone still uncertain of exactly how the U.S. economic system unraveled could do worse than to pick up a copy over the Holiday period. By taking the perspective of those acting on the other side of the trade (as opposed to Lehman Brothers, for example) Zuckermann leaves himself plenty of time to properly explore the implications of credit derivative movements without over-laboring the narrative.

Another point I wasn't aware of before reading Zuckerman's account of the subprime meltdown was that Paulson actually worked with the major banks to engineer riskier credit default obligations than they were manufacturing at the time, all so that he could potentially receive a higher return on investment when the house of cards collapsed. Thankfully, the book does not dwell for too long on the histories of the protagonists either, but rather it stays focused on the points of their careers that matter most to the climax of the book (for instance, the fact that John Paulson wasn't a big-time money manager to begin with is something worth exploring given that he ultimately grossed over $20 billion).

"The Greatest Trade Ever" takes the reader to a rather uncomfortable place, where he or she is gunning for the guy who wants to see the financial system collapse. However, there is something infinitely more satisfying in that story than in the one when everyone ends up a loser.