Trade Of The Year: Reverse Margin Call


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]


Connection To A Company Called "Yeah Baby" Not Even The Best Part Of "High School Buddies" Insider Trading Scam

Over the past several years, much has been made about the supposed incompetence of the Securities and Exchange Commission. The regulator failed to realize Bernie Madoff had been running an illegitimate Ponzi scheme, despite more or less being told by Bernie Madoff himself, "I am running an illegitimate Ponzi scheme." It went after David Einhorn, when it should have been going after Allied Capital, the company the hedge fund manager told them was committing fraud. Its proposal for stepping up investigators' games was to start a Fraud College.* Until recently, it employed individuals in the office responsible for "ensuring exchanges follow guidelines audits, security, and capacity" who had "little or no experience with exchange technical matters." At this point, there have been so many stories about the SEC getting things wrong that the default is to assume it fucked up, even when that is not actually the case. What's more, even when Team Schapiro is on top of its game, resources are so strained that many scams that should be caught fall through the cracks. So you can maybe understand why a group of "high school buddies," along with a few other guys they picked up along the way, who were engaging in securities fraud, weren't too worried about getting caught.