Trader Monthly's annual Trade of the Year issue is out, and as you might expect the words “short” and “mortgages” are all over the top trades. The top short equity trade goes to Bill Ackman’s shorting MBIA while the top overall trade goes to John Paulson of Paulson Credit Opportunities for his subprime play, which Trader Monthly says may be the “greatest trade of all time.” (If you don't have a subscription to Trader Monthly, you can read excerpts of the issue at FT Alphaville.)
It’s got some good detail on how Paulson achieved his 590% return by taking position shorting the ABX and shorting individual CDOs. According to Trader Monthly, Paulson bought credit default swaps that required the seller to post cash collateral if the protection premiums hit a certain threshold.
Two sources close to the action describe how, at one point last summer, Paulson put the touch on a major bulge-bracket brokerage for $500 million — a reverse margin call, as it were. A 24-hour tension-filled tussle ensued over whether the brokerage would pony up. Paulson prevailed.
This tale of the hedge funder wrestling down a bulge-bracket brokerage is pretty amazing but we’re disappointed that Trader Monthly plays all coy with the name of the brokerage. Does anyone seriously doubt that we’re talking about Bear Stearns here?
Best of 2007 : The Fourth Annual Trades of the Year [Trader Monthly]