Chapter 9Pellegrini: Behind the Great Subprime Bet

Paolo Pellegrini has a nose for trouble. He smelled it in the rising housing prices of early 2006, when he cranked through decades of home price data and concluded the bubble was poised to burst. Pellegrini then engineered a series of massive wagers against subprime mortgages that catapulted Paulson & Co. hedge funds to 2007 gains of as much as 590 percent—and firm-wide profits of more than $15 billion. The negative bets boosted Paulson, his firm, and Pellegrini himself to superstar status in the world of short sellers and beyond. (Parts of this chapter are based on an article written by the author for a Bloomberg Markets magazine article published in the November 2009 issue, as well as other stories he wrote.)

Pellegrini, a former computer programmer with an engineering degree, pocketed $175 million as a bonus for 2007, allowing him to buy a couple of what he laughingly calls “entry-level supercars”: a silver Ferrari F430 with a base price of $168,000 at the time and a black Audi R8. He decamped from a one-bedroom apartment in suburban Westchester, New York into a sprawling yet spare full floor apartment overlooking the pastoral dells and bridle paths of Central Park. Today, he sails the Mediterranean in a 48-foot sailing yacht.

The trade did more than make Pellegrini and his colleagues rich. It triggered a U.S. Securities & Exchange Commission (SEC) suit alleging that Goldman Sachs, the investment bank with which Pellegrini ...

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