Trader of the Year
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Trader of the Year
The place to be in 2007 was short subprime, and no one executed this position with more gusto than John Paulson. His immense, insightfully crafted bet against pools of perilous home loans produced unprecedented profits for his various credit funds, while helping to generate at least $3 billion in management- and performance-fee revenue — although the final figure (neither confirmed nor denied by Paulson & Co.’s external publicity representative) will end up, by our reckoning, much higher. Paulson’s subprime play wasn’t just the trade of the year — it might well have been the greatest trade of all time. How massively did the 51-year-old Manhattan-based portfolio manager’s short subprime play pay off? Consider that Paulson & Co.’s four “Credit Opportunities” funds (the largest, for offshore clients, is Paulson Credit Opportunities Ltd.; the others are Paulson Credit Opportunities II Ltd., Paulson Credit Opportunities LP and Paulson Credit Opportunities II LP) started the year with a combined $1 billion. The standout Credit Opportunities LP fund returned 590 percent in 2007. At year’s end, the entire quartet totaled roughly $9 billion. Paulson’s firm, which runs 12 funds altogether — including a series of merger-arbitrage and event-driven strategies — started the year with a combined $7 billion in assets under management; it was expected to finish the year having quadrupled that. The trade-of-the-year debate is over: All hail John Paulson. In the four years Trader Monthly has been tracking trades — the four most lucrative in history — Paulson’s haul ranks as the largest profit ever logged. Paulson and Paolo Pellegrini, co–portfolio manager for the firm’s credit strategies, determined in 2006 that the U.S. housing bubble was ready to pop, a projection based on meticulous proprietary research. Paulson and Pellegrini then skinned the subprime cat two ways, via an ABX index position and by shorting individual CDO names. Their real score came through the second approach, which involved a huge purchase of credit default swaps tied to certain handpicked CDOs; Paulson homed in on the most troubled mortgage pools, regardless of rating-agency or Wall Street assurances. The value of the CDS instruments he amassed went through the roof when the CDOs’ value plummeted as subprime borrowers, many with adjustable-rate hikes kicking in, began to default. How, exactly, did Paulson envision this? One trader familiar with his activities says that in 2006, Paulson began to notice that premiums on the protection of CDOs were out of sync. “He shorted CDOs packed with residential mortgage-backeds by buying credit default swaps when the premiums were only a few basis points,” this trader says. “As homeowners [became unable to] pay their ARMs, the performance on the ‘insured’ credit deteriorated.” In time, Paulson’s CDO insurance — the CDSs, that is — became far more valuable than the CDOs it was designed to protect. “The market for CDSs is actually quite liquid,” the trader points out. “With lots of traders trying to cover their asses and stopgap their losses, they were willing to pay more for credit protection.”
Those double-digit basis-point premiums jumped to triple digits. And while a few forward-thinking traders were playing well in the CDS sandbox, Paulson was in one all by himself, buying swaps featuring covenants requiring the seller to post collateral — in the form of cold, hard cash — when the protection premiums reached 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. The lesson here for traders: When you really believe in a trade, go hard or go home. Trade of the Year (Runner-Up) Stiff Upper Lippmann It can’t have been easy for Deutsche Bank’s Greg Lippmann to rage against the very mortgage-backed-securities machine being fueled, in large part, by his employer. But that’s just what the bank’s headstrong 38-year-old global chief of ABS/CDO trading did in 2007. He and his team (analyst Eugene Xu was singled out by some on the Street as having played an important role) not only endured blowback from DB colleagues who were orchestrating a late charge into the CDO market; he also personally helped engineer the standardized credit-derivatives contracts with which his game of housing-bubble blackjack was played. In the first quarter of ’07, the Lippmann-led ABS squad reportedly hauled in a half-billion-dollar profit when most everyone else on Wall Street was choking. “He really is an outlier,” says one bond broker who has known Lippmann for years. “Speaking out externally to short the housing market while his firm is selling CDOs was a courageous approach.” New York attorney general Andrew Cuomo apparently still has some lingering questions about Deutsche’s mortgage activities, though here’s all you really need to know about the hellacious housing hedge pulled off by Lippmann and his deskmates: The trade is estimated to have generated at least $1 billion in profit for the bank in 2007. Somebody’s getting a nice bonus this year. Trade of the Year (Second Runner-Up) Lahde Bats 1,000 Some traders who leave the safety of someone else’s money-management firm to start their own shop achieve decent performance . . . but fail to raise significant assets. Others, such as Andrew Lahde, a former analyst at Dalton Investment Group in Los Angeles, step up to the plate and knock the ball out of the park. After just one year in business, Lahde’s firm, Santa Monica, California–based Lahde Capital, is giving money back to investors as his dedicated short subprime vehicle
(established in December 2006 to capitalize on imminent subprime woe, and which has since closed) achieved returns in excess of 1,000 percent, turning a grubstake of $5 million into $50 million. Lahde’s admirers liken his trade to John Paulson’s both because of its shrewd implementation (using credit default swaps) and its low inherent risk. “This was no suicide mission,” says Allen Cooke, a portfolio manager at Westwood Investment Strategies, who knows Lahde from when he was still at Dalton. “He had around 75 percent in cash in the trade — [even] if the market had not melted down, he would have been fine.” Fine, that is, instead of spectacular. Long Equity Trade of the Year Atticus Drills One Last summer, as the stock market convulsed and credit markets collapsed, rumors swirled that Atticus Capital was in big trouble. “They’re going around with hat in hand,” one trader whispered at the time. “We hear they could be going under.” Quickly, however, reports of the demise of the firm, cofounded by Tim Barakett, proved quite exaggerated. What was not exaggerated was the extraordinary run the company enjoyed in 2007 thanks to its significant stake in mining juggernaut Freeport-McMoRan. Predicting a copper-supply shortfall, Atticus PMs Barakett and David Slager made a move three years ago to acquire a roughly $29 million stake in Phelps Dodge. When that mining outfit was acquired by Freeport-McMoRan (a deal announced in November 2006), Atticus was its largest shareholder. The transaction paid, per share, $88 cash and an additional two-thirds of a share of FCX stock. FCX continued to climb higher and higher throughout 2007, as demand for copper surged in developing countries and supply constraints persisted. As of the end of 2007, the Atticus position was worth around $3.1 billion — a 100bagger. So much for those rumors of their demise. Long Equity Trade of the Year (Runner-Up) Passport’s Passage to India As a fundamental investor who takes a long-term macro view, John Burbank doesn’t necessarily consider himself a “trader” — but he executed his bang-up bet on India’s burgeoning middle class with the prescience and conviction typically associated with the legends of the industry. Now Burbank, the founder of San Francisco–based Passport Capital — and, before 2007, a relative unknown — is on his way to iconic status. Starting in 2004, the Passport Global Strategy Fund began to accumulate shares of Reliance Capital, a Mumbai-based money-management company. Burbank’s view — that India’s economic boom would create a surge in demand for financial services among
many Indians previously inclined to stuff their spare rupees under the mattress — prompted him to make Reliance his single biggest position at the start of ’07, when the firm’s shares were trading at just over $13. By mid-December, shares of Reliance (RCFT-IN) had reached nearly $64. The wager helped Burbank’s fund achieve a return of greater than 200 percent. “This was a position based on two concurrent macro themes: wealth creation in emerging markets and the globalization of capital markets,” he explains. Note to traders everywhere: Burbank believes these trends will continue to accelerate. Equity Short of the Year Ackman Makes Mincemeat of MBIA Two years ago, Pershing Square founder Bill Ackman began an aggressive campaign to crush MBIA, shorting the stock in the low 60s while buying CDS instruments pegged to the bond insurer’s holding company. To say this trade “worked out” last year is a bit like saying the New England Patriots’ 2007 acquisition of Randy Moss also “worked out.” Ackman’s predicament early last year, when MBIA reached $70, cannot be understated; his short position, a roundabout tie-in to the soon-to-emerge subprime/CDO mess, was not looking promising. MBIA lingered around that price until autumn, when capital concerns sparked speculations about a credit downgrade — not a good thing for those in the credit-assurance business. Meanwhile, Ackman’s public accusations that the company was hiding losses caught the attention of the SEC. No sooner did the 41-year-old begin his end-zone celebration this past December, however, than MBIA recovered an onside kick in the form of a $1 billion investment pledge from Warburg Pincus, including an immediate $500 million purchase of common stock. MBIA stock then spiked from $30 to $38. Ackman shrugged off the private-equity firm’s bid and the ensuing vote of confidence from MBIA bulls, telling the Wall Street Journal: “It’s likely [Warburg Pincus] will lose their entire investment.” On December 19, MBIA, the world’s largest bond insurer, admitted it had $8 billion worth of exposure to some of the most toxic CDOs, sending its stock free-falling into the high teens and wiping clean $1 billion of market cap. Ackman’s tenacity had paid off. He didn’t just short MBIA stock; he used his experience in mortgage financing (obtained while working for his father’s real-estate firm early in his career) and his knack for analyzing cash flows to eviscerate the company. While other traders were covering their MBIA shorts in early November, Ackman held out, knowing the fun was only beginning. He had quietly doubled down on his bearish bet via credit default swaps on the holding company at 30 to 40 basis points.
The day MBIA revealed its dangerously high CDO exposure, that spread blew up, rising 112 basis points. The CDS protection premium reached nearly 600 basis points, giving Ackman plenty of margin for error as he continued to clamp down. A source familiar with Ackman’s game plan insists he intends to take this trade the entire length of the field, not letting up until MBIA files for bankruptcy and his CDS spreads skyrocket even higher. When it’s all over (as of press time, the scenario was still playing out), Ackman’s fund stands to reap as much as $3 billion. Talk about riding your winners. Equity Short of the Year (Runner-Up) Chanos Lays Sallie Down Woe to the publicly traded company whose ticker symbol comes under the clairvoyant gaze of Kynikos Associates’ short-selling superstar Jim Chanos. The precognitive prowess of the man who was among the first to call Enron a house of cards was fully engaged in 2007. This time, his target was student-loan behemoth SLM Corporation, better known as Sallie Mae. Speaking at a Reuters conference in New York last April 11, Chanos revealed that he was short student-loan companies in anticipation of revelations of their allegedly fraudulent practices. Five days later, the Reston, Virginia–based lender issued a public proclamation of its own: It agreed to sell out to a group of investors led by J.C. Flowers & Co. for $25 billion. But over the summer, with New York attorney general Andrew Cuomo probing college-lending practices and President Bush signing a bill reducing federal subsidies for same, might Chanos have been in a position to have the last laugh? Indeed — the Flowers buyout eventually collapsed amid concerns over rising defaults. SLM has since flunked out of school, going from its nearly $58 high to around $20 as of the end of December. In fact, its shares fell 21 percent in a single session on December 19 after a contentious analysts’ call in which SLM chief executive Albert Lord bid adieu to his listeners by muttering, “Let’s get the f--- out of here.” (He was probably still angry about having taken a bath thanks to a company arrangement that required him to unload a big chunk of his shares on the open market.) Chanos declined to comment. Maybe he doesn’t like to gloat. Or maybe he was just doubled over with laughter. Commodities Trade of the Year (Metal) The Golden Surfer What does a hang-10 diehard get when he brings his wave-riding instincts to bear in the impossible-to-predict, absurdly fickle gold market? The ride of his life.
Meet Todd Edgar, 35, who was named managing director at JPMorgan in February and soon began to mastermind the bonanza of his career. Heading the bank’s London-based commodities prop desk and entrusted with a $2 billion portfolio, Edgar (whose favorite surfing spot is in the Mentawai Islands west of Sumatra) wasted no time loading up on gold futures and options. He also bought some spot gold in the physical market, doing so when the metal was at its dead low for the year. He kept building on that position as gold prices encroached upon their 1980 record high, hitting $833.50 the first week of November. According to one New York–based commodities trader who witnessed Edgar’s feat, his position has made JPMorgan some $250 million so far. That’s a Fort Knox–size heist, but what makes this trade exceptional is its sheer degree of difficulty. “To have the cojones to stick with a trade like that in a year when everyone is selling is unbelievable,” says the commodities trader. “Typically, no one can ever make that much on gold, because it traditionally doesn’t offer that kind of volatility.” One of the key techniques Edgar employed to maximize the value of his gold bet, says one trader close to him, was increasing his gold holdings whenever the market dipped, then lightening up on that load in lockstep with the market’s streak to its record high. “By doing that, he captured the whole range of trading for the year — you could not have done it better,” the trader says. “Todd has a unique ability to capitalize on opportunities others miss. He got the perfect storm. And he rode it out perfectly.” Sometimes, a yearround surfing habit can sure come in handy. Commodities Trade of the Year (Energy) Vitol’s Backward Thinking Pays Off Vitol is one of the world’s biggest (and most publicity-averse) independent oil-trading operations. It does not like attention. But the Geneva-based energy firm emerged from the shadows twice in 2007. The first time was in November, when it was fined $17.5 million after pleading guilty to having paid kickbacks to Saddam Hussein’s regime. The second came when it pulled off what some consider the finest oil trade of the year. Despite last year’s crude price run-up, no energy trade compared with this one in calendar option spreads on crude-oil futures, carried out by Andrew Serotta in Vitol’s Houston office and notable for its counterintuitive audacity. Last July, Serotta made significant buys of the spread between December 2007 and December 2008 crude, apparently acting on the assumption that the market, which had been in contango for nearly two years, would suddenly pull an about-face. “We just watched, thinking they were going to get run over,” says one peer in Houston. “To a bystander it looked crazy. It was so far out of the money. It just seemed batty.” Yet no sooner had Serotta scooped up roughly 40,000 crude-oil calls on the listed and off-exchange markets than oil did exactly what no trader thought it would: In July, it neatly flipped into backwardation — a situation in which near-term oil prices rise above
longer-term prices — as a surge in demand sapped the U.S. of crude inventories and prices barreled higher. The value of Vitol’s calls exploded. “That oil trade started minting money for them like a printing press,” says one Houston trader, who estimates that Serotta made Vitol some $200 million in profit. Another energy trader — who ended up on the wrong side of Serotta’s trade and barely survived to tell the tale — agreed with that assessment. “When Serotta bought the calls, they valued oil at a $3 differential that went to well above $9 before it was all over,” he said. Vitol’s spokesman, David Fransen, had no comment. As one well-respected New York– based energy trader says, “You have to admire a bet like that. Most traders don’t even bother to get into stuff that’s so exotic.” The Houston trader agrees: “It’s the very definition of a killer trade.” Commodities Trade of the Year (Energy Runner-Up) Southwest’s High Flyer Commodities futures were designed as a way for industry users to hedge away risks. Without them, speculators would be relegated to betting on jai alai. Rarely, though, does the manager of an airline’s purse strings have the same foresight as a seasoned NYMEX oil-pit trader. But in the case of Southwest Airlines, hedging against rising fuel costs has helped the discount carrier soar high above its competitors. “With our hedging advantage, we’ve enjoyed more flexibility in managing revenues,” explains Southwest treasurer Scott Topping. Southwest locked in oil at $51 a barrel prior to crude’s yearlong run-up. For the first nine months of ’07, the Dallas-based carrier realized gains of $427 million. Those hedging profits, a result of a shrewd call by Southwest CEO Gary Kelly, have kept costs down, competitors reeling — and Southwest customers free to move about the country. Currency Trade of the Year Greg Cotter and the Curse of The Wall Street Shoeshine Boy Currency desks have been feasting on the yen carry trade for years. Like a sumo wrestler at an all-you-can-eat buffet, banks, brokerages and money managers gorged themselves on what some considered that last free lunch. More would surely wager on the Miami Dolphins to win next year’s Super Bowl than to bet against the trade. So what did Greg Cotter, of Roslyn Heights, New York–based Tri Global FX, know? And when did he know it? Legend has it that Joseph Kennedy decided to pull his money from the stock market prior to the 1929 crash after receiving unsolicited tips from the urchin polishing his loafers. Fast-forward to 2007 and the carry-trading Japanese housewife: When Cotter, a 25-year veteran of forex trading and former chief dealer for Société Générale, read a Bloomberg article about Japanese homemakers borrowing yen cheaply and relentlessly selling it to fund higher-yield investments, he remembered that infamous shoeshine boy.
Cotter began betting on a yen rebound in early June, suffering some initial short-term pain as the euro and pound rose to highs against the yen not seen in decades. But as the credit crisis mounted, the yen carry trade began to unravel faster than a tattered kimono. Cotter aggressively bought more as everyone else got crushed. Not since the Russian debt default of 1998 had Japan’s currency shown so much strength. In 2007, Cotter’s $60 million Metro Forex managed-account program was up 39 percent and ranks as one of the top 20 CTA Performers in the Barclay Managed Funds Report. “Instinct told me these levels weren’t sustainable,” Cotter says. “The housewife article confirmed my hunch.” The Iron Balls McGinty Award Angelo’s Ashes Say what you will about Countrywide Financial CEO Angelo Mozilo. Sure, he’s terrifyingly tan — and, as the helmsman of America’s biggest subprime-mortgage lender, he more or less abetted a situation that might plunge the country into a steep recession or worse. But give him this much: The guy’s got some set of stones. Countrywide got torched in 2007, its shares dropping 80 percent amid massive write-downs. What was Mozilo doing? Selling hundreds of millions’ worth of shares at pre-meltdown prices. With his company going up in smoke, Mozilo’s trading yielded him an estimated $200 million profit. Two weeks before the entire mortgage market began to fall apart, the controversial executive dumped $10 million worth of stock at $28 per share. As of press time, it languished at $5. Insider selling at its most brazen. Sleep tight, Angie.
The place to be in 2007 was short subprime, and no one executed this position with more gusto than John Paulson. His immense, insightfully crafted bet against pools of perilous home loans produced unprecedented profits for his various credit funds, while helping to generate at least $3 billion in management- and performance-fee revenue — although the final figure (neither confirmed nor denied by Paulson & Co.’s external publicity representative) will end up, by our reckoning, much higher. Paulson’s subprime play wasn’t just the trade of the year — it might well have been the greatest trade of all time. How massively did the 51-year-old Manhattan-based portfolio manager’s short subprime play pay off? Consider that Paulson & Co.’s four “Credit Opportunities” funds (the largest, for offshore clients, is Paulson Credit Opportunities Ltd.; the others are Paulson Credit Opportunities II Ltd., Paulson Credit Opportunities LP and Paulson Credit Opportunities II LP) started the year with a combined $1 billion. The standout Credit Opportunities LP fund returned 590 percent in 2007. At year’s end, the entire quartet totaled roughly $9 billion. Paulson’s firm, which runs 12 funds altogether — including a series of merger-arbitrage and event-driven strategies — started the year with a combined $7 billion in assets under management; it was expected to finish the year having quadrupled that. The trade-of-the-year debate is over: All hail John Paulson. In the four years Trader Monthly has been tracking trades — the four most lucrative in history — Paulson’s haul ranks as the largest profit ever logged. Paulson and Paolo Pellegrini, co–portfolio manager for the firm’s credit strategies, determined in 2006 that the U.S. housing bubble was ready to pop, a projection based on meticulous proprietary research. Paulson and Pellegrini then skinned the subprime cat two ways, via an ABX index position and by shorting individual CDO names. Their real score came through the second approach, which involved a huge purchase of credit default swaps tied to certain handpicked CDOs; Paulson homed in on the most troubled mortgage pools, regardless of rating-agency or Wall Street assurances. The value of the CDS instruments he amassed went through the roof when the CDOs’ value plummeted as subprime borrowers, many with adjustable-rate hikes kicking in, began to default. How, exactly, did Paulson envision this? One trader familiar with his activities says that in 2006, Paulson began to notice that premiums on the protection of CDOs were out of sync. “He shorted CDOs packed with residential mortgage-backeds by buying credit default swaps when the premiums were only a few basis points,” this trader says. “As homeowners [became unable to] pay their ARMs, the performance on the ‘insured’ credit deteriorated.” In time, Paulson’s CDO insurance — the CDSs, that is — became far more valuable than the CDOs it was designed to protect. “The market for CDSs is actually quite liquid,” the trader points out. “With lots of traders trying to cover their asses and stopgap their losses, they were willing to pay more for credit protection.”
Those double-digit basis-point premiums jumped to triple digits. And while a few forward-thinking traders were playing well in the CDS sandbox, Paulson was in one all by himself, buying swaps featuring covenants requiring the seller to post collateral — in the form of cold, hard cash — when the protection premiums reached 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. The lesson here for traders: When you really believe in a trade, go hard or go home. Trade of the Year (Runner-Up) Stiff Upper Lippmann It can’t have been easy for Deutsche Bank’s Greg Lippmann to rage against the very mortgage-backed-securities machine being fueled, in large part, by his employer. But that’s just what the bank’s headstrong 38-year-old global chief of ABS/CDO trading did in 2007. He and his team (analyst Eugene Xu was singled out by some on the Street as having played an important role) not only endured blowback from DB colleagues who were orchestrating a late charge into the CDO market; he also personally helped engineer the standardized credit-derivatives contracts with which his game of housing-bubble blackjack was played. In the first quarter of ’07, the Lippmann-led ABS squad reportedly hauled in a half-billion-dollar profit when most everyone else on Wall Street was choking. “He really is an outlier,” says one bond broker who has known Lippmann for years. “Speaking out externally to short the housing market while his firm is selling CDOs was a courageous approach.” New York attorney general Andrew Cuomo apparently still has some lingering questions about Deutsche’s mortgage activities, though here’s all you really need to know about the hellacious housing hedge pulled off by Lippmann and his deskmates: The trade is estimated to have generated at least $1 billion in profit for the bank in 2007. Somebody’s getting a nice bonus this year. Trade of the Year (Second Runner-Up) Lahde Bats 1,000 Some traders who leave the safety of someone else’s money-management firm to start their own shop achieve decent performance . . . but fail to raise significant assets. Others, such as Andrew Lahde, a former analyst at Dalton Investment Group in Los Angeles, step up to the plate and knock the ball out of the park. After just one year in business, Lahde’s firm, Santa Monica, California–based Lahde Capital, is giving money back to investors as his dedicated short subprime vehicle
(established in December 2006 to capitalize on imminent subprime woe, and which has since closed) achieved returns in excess of 1,000 percent, turning a grubstake of $5 million into $50 million. Lahde’s admirers liken his trade to John Paulson’s both because of its shrewd implementation (using credit default swaps) and its low inherent risk. “This was no suicide mission,” says Allen Cooke, a portfolio manager at Westwood Investment Strategies, who knows Lahde from when he was still at Dalton. “He had around 75 percent in cash in the trade — [even] if the market had not melted down, he would have been fine.” Fine, that is, instead of spectacular. Long Equity Trade of the Year Atticus Drills One Last summer, as the stock market convulsed and credit markets collapsed, rumors swirled that Atticus Capital was in big trouble. “They’re going around with hat in hand,” one trader whispered at the time. “We hear they could be going under.” Quickly, however, reports of the demise of the firm, cofounded by Tim Barakett, proved quite exaggerated. What was not exaggerated was the extraordinary run the company enjoyed in 2007 thanks to its significant stake in mining juggernaut Freeport-McMoRan. Predicting a copper-supply shortfall, Atticus PMs Barakett and David Slager made a move three years ago to acquire a roughly $29 million stake in Phelps Dodge. When that mining outfit was acquired by Freeport-McMoRan (a deal announced in November 2006), Atticus was its largest shareholder. The transaction paid, per share, $88 cash and an additional two-thirds of a share of FCX stock. FCX continued to climb higher and higher throughout 2007, as demand for copper surged in developing countries and supply constraints persisted. As of the end of 2007, the Atticus position was worth around $3.1 billion — a 100bagger. So much for those rumors of their demise. Long Equity Trade of the Year (Runner-Up) Passport’s Passage to India As a fundamental investor who takes a long-term macro view, John Burbank doesn’t necessarily consider himself a “trader” — but he executed his bang-up bet on India’s burgeoning middle class with the prescience and conviction typically associated with the legends of the industry. Now Burbank, the founder of San Francisco–based Passport Capital — and, before 2007, a relative unknown — is on his way to iconic status. Starting in 2004, the Passport Global Strategy Fund began to accumulate shares of Reliance Capital, a Mumbai-based money-management company. Burbank’s view — that India’s economic boom would create a surge in demand for financial services among
many Indians previously inclined to stuff their spare rupees under the mattress — prompted him to make Reliance his single biggest position at the start of ’07, when the firm’s shares were trading at just over $13. By mid-December, shares of Reliance (RCFT-IN) had reached nearly $64. The wager helped Burbank’s fund achieve a return of greater than 200 percent. “This was a position based on two concurrent macro themes: wealth creation in emerging markets and the globalization of capital markets,” he explains. Note to traders everywhere: Burbank believes these trends will continue to accelerate. Equity Short of the Year Ackman Makes Mincemeat of MBIA Two years ago, Pershing Square founder Bill Ackman began an aggressive campaign to crush MBIA, shorting the stock in the low 60s while buying CDS instruments pegged to the bond insurer’s holding company. To say this trade “worked out” last year is a bit like saying the New England Patriots’ 2007 acquisition of Randy Moss also “worked out.” Ackman’s predicament early last year, when MBIA reached $70, cannot be understated; his short position, a roundabout tie-in to the soon-to-emerge subprime/CDO mess, was not looking promising. MBIA lingered around that price until autumn, when capital concerns sparked speculations about a credit downgrade — not a good thing for those in the credit-assurance business. Meanwhile, Ackman’s public accusations that the company was hiding losses caught the attention of the SEC. No sooner did the 41-year-old begin his end-zone celebration this past December, however, than MBIA recovered an onside kick in the form of a $1 billion investment pledge from Warburg Pincus, including an immediate $500 million purchase of common stock. MBIA stock then spiked from $30 to $38. Ackman shrugged off the private-equity firm’s bid and the ensuing vote of confidence from MBIA bulls, telling the Wall Street Journal: “It’s likely [Warburg Pincus] will lose their entire investment.” On December 19, MBIA, the world’s largest bond insurer, admitted it had $8 billion worth of exposure to some of the most toxic CDOs, sending its stock free-falling into the high teens and wiping clean $1 billion of market cap. Ackman’s tenacity had paid off. He didn’t just short MBIA stock; he used his experience in mortgage financing (obtained while working for his father’s real-estate firm early in his career) and his knack for analyzing cash flows to eviscerate the company. While other traders were covering their MBIA shorts in early November, Ackman held out, knowing the fun was only beginning. He had quietly doubled down on his bearish bet via credit default swaps on the holding company at 30 to 40 basis points.
The day MBIA revealed its dangerously high CDO exposure, that spread blew up, rising 112 basis points. The CDS protection premium reached nearly 600 basis points, giving Ackman plenty of margin for error as he continued to clamp down. A source familiar with Ackman’s game plan insists he intends to take this trade the entire length of the field, not letting up until MBIA files for bankruptcy and his CDS spreads skyrocket even higher. When it’s all over (as of press time, the scenario was still playing out), Ackman’s fund stands to reap as much as $3 billion. Talk about riding your winners. Equity Short of the Year (Runner-Up) Chanos Lays Sallie Down Woe to the publicly traded company whose ticker symbol comes under the clairvoyant gaze of Kynikos Associates’ short-selling superstar Jim Chanos. The precognitive prowess of the man who was among the first to call Enron a house of cards was fully engaged in 2007. This time, his target was student-loan behemoth SLM Corporation, better known as Sallie Mae. Speaking at a Reuters conference in New York last April 11, Chanos revealed that he was short student-loan companies in anticipation of revelations of their allegedly fraudulent practices. Five days later, the Reston, Virginia–based lender issued a public proclamation of its own: It agreed to sell out to a group of investors led by J.C. Flowers & Co. for $25 billion. But over the summer, with New York attorney general Andrew Cuomo probing college-lending practices and President Bush signing a bill reducing federal subsidies for same, might Chanos have been in a position to have the last laugh? Indeed — the Flowers buyout eventually collapsed amid concerns over rising defaults. SLM has since flunked out of school, going from its nearly $58 high to around $20 as of the end of December. In fact, its shares fell 21 percent in a single session on December 19 after a contentious analysts’ call in which SLM chief executive Albert Lord bid adieu to his listeners by muttering, “Let’s get the f--- out of here.” (He was probably still angry about having taken a bath thanks to a company arrangement that required him to unload a big chunk of his shares on the open market.) Chanos declined to comment. Maybe he doesn’t like to gloat. Or maybe he was just doubled over with laughter. Commodities Trade of the Year (Metal) The Golden Surfer What does a hang-10 diehard get when he brings his wave-riding instincts to bear in the impossible-to-predict, absurdly fickle gold market? The ride of his life.
Meet Todd Edgar, 35, who was named managing director at JPMorgan in February and soon began to mastermind the bonanza of his career. Heading the bank’s London-based commodities prop desk and entrusted with a $2 billion portfolio, Edgar (whose favorite surfing spot is in the Mentawai Islands west of Sumatra) wasted no time loading up on gold futures and options. He also bought some spot gold in the physical market, doing so when the metal was at its dead low for the year. He kept building on that position as gold prices encroached upon their 1980 record high, hitting $833.50 the first week of November. According to one New York–based commodities trader who witnessed Edgar’s feat, his position has made JPMorgan some $250 million so far. That’s a Fort Knox–size heist, but what makes this trade exceptional is its sheer degree of difficulty. “To have the cojones to stick with a trade like that in a year when everyone is selling is unbelievable,” says the commodities trader. “Typically, no one can ever make that much on gold, because it traditionally doesn’t offer that kind of volatility.” One of the key techniques Edgar employed to maximize the value of his gold bet, says one trader close to him, was increasing his gold holdings whenever the market dipped, then lightening up on that load in lockstep with the market’s streak to its record high. “By doing that, he captured the whole range of trading for the year — you could not have done it better,” the trader says. “Todd has a unique ability to capitalize on opportunities others miss. He got the perfect storm. And he rode it out perfectly.” Sometimes, a yearround surfing habit can sure come in handy. Commodities Trade of the Year (Energy) Vitol’s Backward Thinking Pays Off Vitol is one of the world’s biggest (and most publicity-averse) independent oil-trading operations. It does not like attention. But the Geneva-based energy firm emerged from the shadows twice in 2007. The first time was in November, when it was fined $17.5 million after pleading guilty to having paid kickbacks to Saddam Hussein’s regime. The second came when it pulled off what some consider the finest oil trade of the year. Despite last year’s crude price run-up, no energy trade compared with this one in calendar option spreads on crude-oil futures, carried out by Andrew Serotta in Vitol’s Houston office and notable for its counterintuitive audacity. Last July, Serotta made significant buys of the spread between December 2007 and December 2008 crude, apparently acting on the assumption that the market, which had been in contango for nearly two years, would suddenly pull an about-face. “We just watched, thinking they were going to get run over,” says one peer in Houston. “To a bystander it looked crazy. It was so far out of the money. It just seemed batty.” Yet no sooner had Serotta scooped up roughly 40,000 crude-oil calls on the listed and off-exchange markets than oil did exactly what no trader thought it would: In July, it neatly flipped into backwardation — a situation in which near-term oil prices rise above
longer-term prices — as a surge in demand sapped the U.S. of crude inventories and prices barreled higher. The value of Vitol’s calls exploded. “That oil trade started minting money for them like a printing press,” says one Houston trader, who estimates that Serotta made Vitol some $200 million in profit. Another energy trader — who ended up on the wrong side of Serotta’s trade and barely survived to tell the tale — agreed with that assessment. “When Serotta bought the calls, they valued oil at a $3 differential that went to well above $9 before it was all over,” he said. Vitol’s spokesman, David Fransen, had no comment. As one well-respected New York– based energy trader says, “You have to admire a bet like that. Most traders don’t even bother to get into stuff that’s so exotic.” The Houston trader agrees: “It’s the very definition of a killer trade.” Commodities Trade of the Year (Energy Runner-Up) Southwest’s High Flyer Commodities futures were designed as a way for industry users to hedge away risks. Without them, speculators would be relegated to betting on jai alai. Rarely, though, does the manager of an airline’s purse strings have the same foresight as a seasoned NYMEX oil-pit trader. But in the case of Southwest Airlines, hedging against rising fuel costs has helped the discount carrier soar high above its competitors. “With our hedging advantage, we’ve enjoyed more flexibility in managing revenues,” explains Southwest treasurer Scott Topping. Southwest locked in oil at $51 a barrel prior to crude’s yearlong run-up. For the first nine months of ’07, the Dallas-based carrier realized gains of $427 million. Those hedging profits, a result of a shrewd call by Southwest CEO Gary Kelly, have kept costs down, competitors reeling — and Southwest customers free to move about the country. Currency Trade of the Year Greg Cotter and the Curse of The Wall Street Shoeshine Boy Currency desks have been feasting on the yen carry trade for years. Like a sumo wrestler at an all-you-can-eat buffet, banks, brokerages and money managers gorged themselves on what some considered that last free lunch. More would surely wager on the Miami Dolphins to win next year’s Super Bowl than to bet against the trade. So what did Greg Cotter, of Roslyn Heights, New York–based Tri Global FX, know? And when did he know it? Legend has it that Joseph Kennedy decided to pull his money from the stock market prior to the 1929 crash after receiving unsolicited tips from the urchin polishing his loafers. Fast-forward to 2007 and the carry-trading Japanese housewife: When Cotter, a 25-year veteran of forex trading and former chief dealer for Société Générale, read a Bloomberg article about Japanese homemakers borrowing yen cheaply and relentlessly selling it to fund higher-yield investments, he remembered that infamous shoeshine boy.
Cotter began betting on a yen rebound in early June, suffering some initial short-term pain as the euro and pound rose to highs against the yen not seen in decades. But as the credit crisis mounted, the yen carry trade began to unravel faster than a tattered kimono. Cotter aggressively bought more as everyone else got crushed. Not since the Russian debt default of 1998 had Japan’s currency shown so much strength. In 2007, Cotter’s $60 million Metro Forex managed-account program was up 39 percent and ranks as one of the top 20 CTA Performers in the Barclay Managed Funds Report. “Instinct told me these levels weren’t sustainable,” Cotter says. “The housewife article confirmed my hunch.” The Iron Balls McGinty Award Angelo’s Ashes Say what you will about Countrywide Financial CEO Angelo Mozilo. Sure, he’s terrifyingly tan — and, as the helmsman of America’s biggest subprime-mortgage lender, he more or less abetted a situation that might plunge the country into a steep recession or worse. But give him this much: The guy’s got some set of stones. Countrywide got torched in 2007, its shares dropping 80 percent amid massive write-downs. What was Mozilo doing? Selling hundreds of millions’ worth of shares at pre-meltdown prices. With his company going up in smoke, Mozilo’s trading yielded him an estimated $200 million profit. Two weeks before the entire mortgage market began to fall apart, the controversial executive dumped $10 million worth of stock at $28 per share. As of press time, it languished at $5. Insider selling at its most brazen. Sleep tight, Angie.
