The Greatest Trade Ever

by Gregory Zuckerman

  Joining Bear Stearns in 1984, Paulson, now twenty-eight, quickly climbed the ranks, working as many as one hundred hours per week on merger-and-acquisition deals. Four years later he was rewarded with the title of managing director, catching up to and surpassing classmates from his graduating class. Other bankers boasted of their deal-making prowess and tried to impress clients with insights into high finance. But Paulson often took a more low-key approach, chatting about art or theater before discussing business. While he could snap at subordinates if they made mistakes, and often was curt and direct, Paulson impressed most colleagues with a cheerful, confident disposition.

  “It was all about M&A in the eighties; bankers were Masters of the Universe. But John didn’t take himself very seriously; he got the joke,” recalls Robert Harteveldt, a junior banker at the firm who sometimes socialized with Paulson. “A lot of guys walked into a room, said they worked in M&A, and expected girls to melt, but John was debonair. He tried to charm women and was more interested in them than in saying who he was.”

  Paulson gravitated to Michael “Mickey” Tarnopol, a handsome senior banker and absolute force of nature. Upbeat and outgoing, Tarnopol was admired for the big deals he reeled in for the firm. He was held in equally high esteem for the lavish parties he hosted at his Park Avenue and Bridgehampton homes, his exploits on the polo field, and for a surprisingly sturdy marriage to his high-school sweetheart.

  Paulson was impressed when Tarnopol succeeded in convincing a valued secretary to cancel her planned move to California, after Paulson and others failed to persuade her to stay at the firm. Amazed, Paulson asked him how he did it.

  “A salesman’s job starts when the customer says no,” Tarnopol responded, a comment Paulson would take to heart and repeat years later.

  Tarnopol opened doors for Paulson on Wall Street and introduced him to key investors. For his part, Paulson considered Tarnopol, who had no sons of his own, something of a “second father,” according to one friend. Paulson was included in family occasions, played polo with Tarnopol in Palm Beach, Florida, and spent weekends at Tarnopol’s Greenwich estate. Rather than emulate the veteran banker and settle down, however, Paulson became increasingly enamored with a newly discovered passion: New York’s after-hours world.

  JOHN PAULSON didn’t seem like an obvious candidate to embrace the city’s active social scene. Though friendly and witty, Paulson could be quite stiff and formal, usually donning a jacket, if not a tie, in the evening hours. If a conversation bored him, Paulson sometimes walked away midsentence, leaving companions befuddled.

  But Paulson thoroughly enjoyed socializing and soon hosted parties for several hundred friends and acquaintances in a loft he rented in Manhattan’s trendy SoHo neighborhood, where he mingled with wealthy bankers, models, and celebrities like John F. Kennedy Jr. Throngs attended Paulson’s annual Christmas party, and he would place small presents for his guests under a tree.

  Many evenings, Paulson and a group of friends enjoyed a late dinner before hitting popular dance clubs like Nello’s, Xenon, or The Underground. Sometimes the group traveled from uptown clubs to downtown spots, all on the same night. Paulson joined Le Club, a members-only venue on Manhattan’s East Side owned by fashion designer Oleg Cassini, where Paulson would chat with high-rollers such as billionaire arms dealer Adnan Kashoggi, record impresario Ahmet Ertegun, and Linn Ullmann, daughter of Ingmar Bergman and actress Liv Ullmann.

  Despite his charm and flash, Paulson often chose to live in apartments that seemed grim to others, or were furnished in surprisingly pedestrian ways, with odd, plastic trees or ragged furniture. One of his apartments was located above a discount-shoe store.

  At Bear Stearns, Paulson regaled younger colleagues with self-deprecating stories of dates that went awry, an appealing contrast to other bankers who took themselves far too seriously. Others at his level had cars waiting outside the office, but Paulson usually grabbed a bus or the subway, sometimes splitting a cab with Harteveldt, his junior colleague.

  Before long, Paulson began to chafe at Bear Stearns. He was working long days and into most evenings, but too many bankers laid claim to the deals he had worked on, shrinking his slice of the profit pie. Paulson didn’t play the political game very well, and was uncomfortable cozying up to the firm’s partners, who determined annual bonuses.

  In one deal, Paulson helped score a $36 million profit for Bear Stearns after the bank, along with an investment firm called Gruss & Co., made a $679 million buyout offer for Anderson Clayton Company, a food and insurance conglomerate. The $36 million score was a drop in the bucket at Bear Stearns, where it was divided among hundreds of partners. But Paulson noticed that Gruss, which hadn’t previously undertaken a buyout, divided the same $36 million among just the firm’s five partners. To Paulson, there seemed to be a limit to how much money he could make at a large firm like Bear Stearns, especially since most of its profit came from charging customers fees rather than undertaking deals like Anderson with a huge upside. Yet those were the ones he pined for.

  Few were surprised in 1988 when Paulson told Bear Stearns executives he was leaving to join Gruss. They long ago figured that Paulson at some point would want to launch a career making investments of his own.

  Gruss & Co. specialized in merger-arbitrage, taking a position on whether or not a merger would take place and investing in shares of companies being acquired. The firm hadn’t undertaken buyouts on its own, but the Anderson experience convinced the firm’s founder, Marty Gruss, to test the waters more deeply. He asked Paulson to lead a new effort to do similar buyout deals, hoping to potentially rival firms like KKR. Gruss was so eager to hire Paulson that he agreed to make Paulson a general partner and give the young banker a cut of profits racked up by other groups at the firm.

  Watching Gruss and his father, Joseph, up close, Paulson quickly picked up the merger-arbitrage business. By buying shares of companies being acquired, and selling short companies making acquisitions, Gruss was able to generate profits that largely were shielded from stock-market fluctuations. The ideal Gruss investment had limited risk but held the promise of a potential fortune. Marty Gruss drilled a maxim into Paulson: “Watch the downside; the upside will take care of itself.”

  Paulson’s buyout business never really took off, however. The 1989 indictment of junk-bond king Michael Milken and a slowing economy made it hard to finance buyouts, and Martin Gruss seemed distracted, perhaps due to a recent second marriage. Soon he and Paulson parted company.

  Despite Paulson’s fierce ambition and his love of making money and landing big deals, other urges were pulling on the thirty-five-year-old.

  “John was throwing great parties in his loft; he was enjoying his bachelorhood, shall we say,” Gruss recalls. “John was very bright but he was a little bit unfocused; he had a tendency to burn the candle at both ends.”

  On his own, Paulson had more time to devote to his extracurricular interests. He certainly didn’t feel undue pressure to make money. Several years earlier, Jim Koch, a colleague in a nearby cubicle at Boston Consulting Group, came to Paulson to ask for an investment in a brewery he was launching. Koch told Paulson that others at the consulting firm, along with several Harvard alumni from Paulson’s graduating year, were investing in his company, and that Paulson would regret it if he passed on the opportunity.

  Paulson gave him $25,000. Now the company, the parent of the Samuel Adams brand, was a raging success, and Paulson’s investment was worth several million dollars. He also retained an interest in some of Gruss’s businesses, receiving regular checks from the firm.

  Paulson searched for new interests. He invested in a Manhattan night club, a disco, and various real estate deals. He bought an apartment building in Westchester with a friend, completed a triathlon, and traveled throughout the East Coast scouting various properties.

  While many of his contemporaries had begun families, Paulson’s circle of well-educated, highly cultured, and privileged friends tended to focus on en
joying life, too distracted to settle down. The group spent much of the summer in the Hamptons, the wealthy enclave on the south shore of Long Island. Weekends sometimes began with a lunch of grilled salmon and pasta for as many as one hundred people at a friend’s home in Sagaponack, a town known for having the highest median income in the country. Lunch started around 1 p.m. and continued into the evening, with new arrivals joining as they came from work or nearby parties. The gatherings usually featured engaging conversation among friends in business, fashion, and the arts; good food; plentiful drink; and access to an assortment of recreational drugs for those who chose to partake.

  Paulson often rode a beat-up ten-speed bicycle, usually with a baseball cap on backward, between friends’ homes in the Hamptons, sweating as he arrived.

  Few heads turned when Paulson walked into a room. But he often was surrounded by good-looking women. Of average height and build, with dark hair and brown, almost doleful eyes, Paulson was clever and intelligent, a good listener with an impish grin. Though the late 1980s were a time when brash, cocky traders and investment bankers ruled the New York social scene, Paulson chose not to flaunt his wealth or his education. There was something accessible, even vulnerable, about him, making it easy for friends to turn to Paulson for advice or a quick loan, or to borrow his Jaguar for a date.

  “John was charming and fun; women always loved him,” recalls Christophe von Hohenberg, a photographer and member of Paulson’s pack. “He threw great parties and went to the best restaurants and clubs, and girls knew it.”

  Paulson was wary of those who seemed especially interested in his money, and appreciated it when one of the women, or a friend, volunteered to pick up the bill for dinner or drinks, although he usually grabbed it before anyone had a chance to open a wallet or purse.

  Sometimes Paulson let the good times get a bit out of hand. Over Memorial Day weekend 1989, he was arrested for driving while intoxicated. He paid a $350 fine for the lesser infraction of driving while impaired.

  But by 1994, the life of leisure was getting a bit tiresome to Paulson. He still dreamed of earning great wealth. It was time, he realized, to go back to work.

  “Time was getting on; I realized I needed to focus,” Paulson says.

  The surest path to genuine wealth seemed to be investing for himself. So he started a hedge fund, Paulson & Co., to focus on merger-arbitrage, the specialty he had picked up from Gruss.

  Paulson reached out to everyone he knew, mailing more than five hundred announcements about his firm’s launch. But he didn’t get a single response, even after waiving his initial $1 million minimum investment. Paulson never had managed money on his own, didn’t have much of a track record as an investor, and wasn’t known to most potential clients. He described some of his coups at Gruss and elsewhere, but it was hard for investors to tell how much responsibility he’d had for those deals.

  Paulson called on bankers from Bear Stearns, some of whom had worked for him and now were well-heeled partners at the firm. They, too, all said no. A few wouldn’t even return his calls. Others set up meetings, only to cancel them. Even Tarnopol, his old mentor, took a pass. Paulson had no more luck with his peers from business school who had become successful.

  “I had lots of contacts and I thought money would pour in,” Paulson recalls. “Some people said they would give me money, but only if they got a piece of my business. It was humbling.”

  David Paresky, owner of a big Boston travel agency and a potential client, asked Paulson to take a personality test, as he did with employees of his agency. He passed on Paulson’s fund after telling a friend that Paulson’s scores were underwhelming, the friend recalls.

  So Paulson started his firm with $2 million of his own money. It was a full year before he found his first client, an old friend from Bear Stearns, Howard Gurvitch, who gave him roughly $500,000. At this point, the firm consisted of just Paulson and an assistant; it was located in a tiny office in a Park Avenue building owned by Bear Stearns and shared by other small hedge-fund clients of the investment bank.

  Paulson continued to woo investors, paying to speak at industry conferences and working with marketing professionals to hone his pitch and spread word of his new fund. He carried himself with a confidence that surprised some, given his limited track record.

  Paulson even had a tough time finding people to work for him. At a 1995 dinner at a steak restaurant near Rockefeller Center in Manhattan, Paulson tried to convince Joseph Aaron to join his firm to help market the hedge fund to investors. After exchanging pleasantries, Paulson launched into a pitch detailing why he was sure he would succeed, emphasizing his rich pedigree.

  “I finished number one in my class,” Paulson said, Aaron recalls. A few minutes later, Paulson repeated how well he had done in school, boasting that he had graduated from Harvard University.

  Aaron, a Southerner with deep connections in the hedge-fund world who courted investors with a charm and politeness that masked a keen understanding of the business, was amused by Paulson’s obvious self-confidence.

  “Really? Well, I graduated from the eleventh-best school in Georgia.”

  The tactics Paulson outlined sounded run-of-the mill to Aaron, who figured Paulson wasn’t willing to share his insights—or just didn’t have any.

  “I’m not the guy for you,” Aaron told Paulson at the end of the dinner.

  At times, Paulson didn’t seem completely put together. When Brad Balter, a young broker, came to visit, Paulson chain-smoked cigarettes and had spots of blood on his shirt collar from a shaving mishap. Paulson’s head of marketing was stretched out in agony on a nearby couch, moaning about his back.

  “I didn’t know what to think; it was a little surreal,” Balter recalls.

  At times, Paulson became discouraged. His early investment performance was good but uneven, and he continued to have few clients. He was sure of his abilities but questioned whether he could make the fund a success.

  One especially glum day, Paulson asked his father, “Am I in the wrong business? Is there something wrong with me?” Alfred Paulson, who at that time was retired but helped with his son’s accounting, tried to cheer him up, telling Paulson that if he stayed with the fund, it would succeed.

  “It was hard to be rejected; it was a lonely period,” Paulson recalls. “After a while I said, this is too much. He lifted my spirits.”

  Paulson clung to the message of a favorite quote from a commencement speech given by Winston Churchill: “Never give up. Never give up.”

  Paulson had more success in the then-struggling real estate market. In 1994, he heard about an attractive home available in Southampton. The couple who owned the house were in the middle of a divorce. Paulson contacted the wife, who sounded eager to sell the property, and together they agreed to a $425,000 price. At the closing, though, Paulson was shocked to learn that the home wasn’t the woman’s to sell—there already was a big mortgage on the property. For months Paulson kept an eye on the home, as it went through foreclosure and then was handed between banks before landing with GE Capital. He was told that the house would be auctioned the following Tuesday on the steps of the Southampton courthouse.

  Paulson showed up early that August morning, just as rain began to fall. When he asked if the auction could be moved indoors, he was told that by law it had to be held outside the courthouse. Soon the rain picked up and some prospective bidders took off. The auction, with bids to increase in increments of $5,000, began with a bid by GE Capital at $230,000. Paulson quickly responded with an offer of $235,000. GE didn’t respond, no one else emerged, and Paulson was able to walk away with his dream home at a bargain-basement price. Later that year, he purchased a huge loft in the SoHo neighborhood of Manhattan that also had been in foreclosure.

  Paulson realized that if he could improve his investment performance, investors eventually would find their way to him. Because the firm was so small, he could focus on attractive merger deals that competitors wouldn’t bother with or didn
’t have much faith in, such as those involving overlooked Canadian companies. Sometimes he would stray into investments unrelated to mergers, such as buying energy shares and shorting bonds of companies that seemed to have flimsy accounting.

  By 1995, Paulson & Co. was big enough to hire two more employees; he pushed his young analysts to find investments with a big upside yet limited downside. “How much can we lose on this trade?” he would ask them, repeatedly.

  The gains were solid but usually unspectacular, and sometimes Paulson appeared glum or cranky. When a trade went awry, he often closed the door to his office tightly and slumped in his chair. At times he would clash with his analysts. The yelling would get so loud that people down the hall sometimes popped their heads into the office to make sure that nothing was amiss. One time, Paulson turned beet red and got so close to analyst Paul Rosenberg’s face that Rosenberg became scared. “Why are you acting like this? I’m on your side,” Rosenberg said, according to someone in the room. Paulson just glared back.

  Paulson once told an employee to go to a doctor’s office on the Upper East Side to take a drug test, without giving him any explanation. The employee came back to the office and handed Paulson the cup of urine. He never heard about it again. Paulson castigated another employee for excessive use of the firm’s printer, one more inscrutable action that left some on his team scratching their heads.

  Paulson at times even became frustrated with his father’s deliberate work. He also criticized his attractive new assistant, Jenny Zaharia, a recent immigrant from Romania who had landed a job at the firm after delivering lunch from the Bear Stearns cafeteria to Paulson and his employees. A college student in Romania, Zaharia left her family behind and was granted political asylum in the United States after her brother, George, a track star in Romania, defected during a European competition and later moved to Queens. Jenny, who had spent some time as a television reporter for a Romanian television station in New York, was tempted to quit, but she told others that she didn’t have other options and needed the salary.