Nerdy Football and Toxic Mortgage Bundles

The New Yorker, January 18, 2010, p. 27, Malcolm Gladwell, “The Sure Thing:  How entrepreneurs really succeed.”

Mr. Gladwell’s article highlights entrepreneurs such as Ted Turner and his television stations as well as a  wall street businessman, John Paulson.  His thesis is that entrepreneurs are, yes, predators, but carefully assess their markets and are not the risk takers people assume them to be.

Mr. Paulson, a hedge-fund manager, was a (according to Gregory Zuckerman, ‘The Greatest Trade Ever”)  a “solid investor, careful and decidedly unspectacular”…

“By 2004-05, Paulson was suspicious of the real-estate boom.   He decided to short the mortgage market, using a financial tool known as the credit-default swap, or CDS.  …At one point, incredibly, Paulson got together with some investment banks to assemble bundles of the most absurdly toxic mortgages–which the banks then sold to some hapless investors and Paulson then promptly bet against.  As Zuckerman points out, this is the equivalent of a game of football in which the defense calls the plays for the offense.  It’s how a nerd would play football, not a jock.”

To assess the risk, Paulson asked associate, Paolo Pellegrini, in 2006 to track millions of mortgages to see if there was a “bubble” in the housing market.   In the years from 2000 for the next five years, housing prices had risen 7 % a year, “to the point where they would have to fall by 40% to to be back i line with historical trends.”  Further, they found that if “home prices fell 5%, it would lead to losses as high as 17%.  Paulson and associates did more research on the cost of insurance–to insure a million dollars of mortgages;  it would cost him only $10,000.

His bet paid off.  In one year, 2008, his firm made five billion dollars.  In this case the nerdy call worked.  However, only in home games of football where the father calls the plays for his children playing offense, would a “quarterback” or the coach for the defense tell the other side what to do. And perhaps not even then.

“Quarterback” and the game of American football: see prior blogs and


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