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Real-estate tycoon Jeff Greene made $800 million shorting the last housing bubble. He explains how John Paulson inspired the contrarian bet, and how he's protecting his wealth today.

Jeff Greene
Jeff Greene.Chris O'Meara/AP
  • Jeff Greene told the story of his lucrative wager against the mid-2000s housing bubble to Insider.

  • John Paulson told Greene about his iconic trade, which "Big Short" investor Michael Burry also made.

  • The real-estate billionaire shared how he's protecting his wealth against a potential downturn.

Jeff Greene, one of the few investors to successfully short the mid-2000s housing bubble, expects the US economy to slump and home prices to drop. He discussed his winning wager, and how he's preparing for another downturn, in an interview with Insider this week.

The real-estate tycoon had already weathered a severe crash by the early 2000s, when the dot-com bubble burst and the Federal Reserve responded by slashing interest rates, sending asset prices skyward over the next few years.

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"I was nervous, and I was looking for a hedge," Greene recalled.

He sought the advice of a longtime friend, John Paulson. The hedge fund manager revealed to Greene that he was betting against mortgage-backed securities, which credit rating agencies were endorsing as extremely safe even though they were underpinned by subprime mortgages with a high risk of default.

"When I looked into it, it just turned out to be so mispriced," Greene said. "Sometimes you stumble into things — I wasn't at the time thinking of a housing bubble."

The property investor said he had $1 billion of real estate and $500 million of debt at the time, and was concerned about his exposure if asset prices suddenly tanked by 30% or 40%. Prior to meeting Paulson, the opportunity to buy credit-default swaps as a form of insurance against a housing crash wasn't on his radar.

"It was almost like a perfect storm," Greene said about the chance to bet against securities priced as investment-grade when a "tidal wave of foreclosures" was headed their way. "It didn't make any sense."

Greene personally made an estimated $800 million from the trade, according to Forbes. Paulson's play generated $15 billion for his clients, and was chronicled in a book titled "The Greatest Trade Ever." Michael Burry also made a killing with a similar bet, which was immortalized in the book and movie "The Big Short."

Warren Buffett, during Congressional testimony in 2010, underscored how contrarian it was to bet against the housing market at that time.

"The Cassandras were there, but who's going to listen to John Paulson in 2005 or 2006, or Michael Burry?" the famed investor and Berkshire Hathaway CEO asked.

Ready for more trouble

Greene told Insider that he isn't buying credit-default swaps today, as they're fairly priced and the market is efficient.

"That subprime trade that I did was a very mispriced opportunity," he said. "I don't know of any right now."

Instead, the real-estate billionaire has protected himself by conserving cash, borrowing little, and avoiding any big risks. Greene expects a tough period for commercial real estate as higher debt costs, downward pressure on asset prices, tighter credit, and longer-term factors such as artificial intelligence and remote working take their toll.

"My hedge is that I'm not leveraged, thank God," he said, noting he only has a little variable-rate debt. "I don't like those big interest payments, they drive me nuts."

"I'm being careful – saying no, not making any new deals, maintaining my liquidity," he continued. "That's what I recommend to everybody."

Greene is also focused on finishing One West Palm, a pair of 30-story towers in West Palm Beach, Florida. Completing them will free him from a monthly repayment and generate some cash flow, he said.

Read the original article on Business Insider