Contrarian Jeff Greene got rich investing in real estate and superrich betting against it. These days he's buying distressed assets and hoarding cash.
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Jeff Greene got rich investing in real estate and superrich betting against it. These days his contrarian instincts have him buying distressed assets and hoarding cash.
If the rich are truly an eccentric bunch, newly minted Forbes 400 member Jeffrey Greene will fit right in. The Los Angeles real estate mogul insists he shuns publicity and extravagance--yet his public relations firm directed a reporter to meet him aboard Greene's 145-foot yacht, Summerwind, docked at the Sag Harbor wharf amid the playlands of New York's tony Hamptons.From the yacht's highest deck, on a cloudless summer day, the other, far smaller pleasure craft anchored nearby look like toy boats bobbing in a bathtub. When Greene is not sailing he bounces between five homes, including a 63,000-square-foot one in Beverly Hills, Calif. Greene dubbed the mansion Palazzo di Amore prior to using it last year to host his $1 million wedding, which the 53-year-old is quick to point out was his first. Boxing bad boy Mike Tyson was Greene's best man. Celebrities like director Oliver Stone looked on as reporters chronicled the affair.
Greene heads down the circular stairs to the living room of his yacht and reclines on a large, L-shaped leather sofa. His wife, Mei-Sze, svelte, tan and two decades Greene's junior, settles in next to him wearing white jeans and a barely there tunic. She places a hand in her husband's and, like a high school sweetheart, leans in every once in a while for a kiss.
"I got into real estate very much by accident," says Greene, tan and wearing white shorts and a polo shirt the color of money. "But I've never had more fun than now."
Making Greene's life so much fun these days: money. After making and losing and making back a sizable fortune over two decades betting on real estate, he has amassed a supersize one the past two years betting against it. Greene is one of those rare people who smelled trouble in housing when times were flush and made a contrarian bet that they wouldn't last.
He did so by creating his own virtual hedge fund and buying credit default swaps that rose in value as subprime mortgages fell. Greene says the trade was up 1,400% in 18 months until the fall of 2007. That seems to have earned him a quick $800 million profit and catapulted Greene onto The Forbes 400 with a net worth of $1.4 billion.
Greene's winning trade says a lot about him. It was brilliant, brash and, in running counter to everything he'd spent his life doing, infused with insecurity, opportunism and contradiction.
In that, at least, there's an element of consistency. Greene is the son of working-class Jewish parents from Worcester, Mass. His father ran a business selling textile mill machinery, lost it and struggled to make a living. His mother was a Hebrew school instructor who taught Greene to save his pennies, look for value and never pay retail.
A nerdy teenager, Greene played classical trumpet in the Doherty High School band and took extra classes to get a head start on college. Admitted to Johns Hopkins, Greene paid his way by selling circus tickets over the phone. Quickly promoted to manager, he traveled the country during his summers off in his Datsun 510, overseeing telemarketing centers and eating at Pizza Hut buffets to save money. Greene graduated after two and a half years. He spent the following three years saving up $100,000 from his telemarketing sales and then entered Harvard's M.B.A. program in 1977.
Greene began putting his savings to work in business school. He put down $7,400 to buy a three-family home, and rented out rooms so he could live for free. By the time he graduated in 1979 Greene owned 18 properties and was generating more than enough income to cover his $4,500 annual tuition. He sold out a few years later for what Greene says was ten times his cost, pocketing a $1 million profit.
"In real estate you make 10% of your money because you're a genius and 90% because you catch a great wave," he says. "I caught the biggest wave in the history of New England."
Convinced the West Coast offered more opportunity, Greene moved to Los Angeles in 1980 and began buying properties. By 1991 he had amassed $35 million worth of equity. Then property prices collapsed. Within a year Greene figures his holdings were worth $15 million less than the debt he owed against them.
He scraped by long enough for the market to begin recovering and sold an apartment building at a $2 million profit. Greene immediately reinvested the proceeds in the rising market. By 2006 he had amassed nearly 7,000 rental units in southern California that pushed his net worth to $700 million.
He hasn't been bashful about throwing some elbows along the way. In one case Greene took actor and movie director Ron Howard to court. The dispute erupted after Howard and his family rented a contemporary glass home Greene owned in the ritzy Brentwood section of L.A. for $28,500 a month while filming a movie. Howard moved out a month into his six-month lease, claiming the house was infested with rats, leaked and had faulty appliances and polluted water.
Greene sued for breach of contract in California state court. Howard countersued for breach of contract and misrepresentation. Howard's lawyer says Greene knew the house was a shambles but lied about it. Greene says Diana Ross was happily ensconced in the home for a year before Howard, whose story-telling Greene says is not limited to the silver screen. A judge ultimately ordered Greene to pay Howard $616,000. Greene appealed the case to the California Supreme Court but lost.
"The moral of this story is, don't ever try to be in a lawsuit against a celebrity in Los Angeles," Greene says (the state's Supreme Court is headquartered in San Francisco).
Other celebs hold Greene in higher regard. That may be partly due to his taste for lavish, all-night parties at his 12,000-square-foot L.A. home, replete with a karaoke stage and disco. It was at such a soiree that Greene befriended Mike Tyson and Paris Hilton. Madam-to-the-stars Heidi Fleiss, another partygoer, ended up spending a year as his houseguest when Greene was single and after she had served time in prison.
"It probably doesn't look good for a single guy to have had Heidi living with me, but we weren't dating," says Greene. "She's a nice girl. I've had her over to Passover dinner with my mom."
Despite his active social life Greene kept a close eye on his business and a few years ago began fearing that a real estate bust was looming. He was especially concerned about how high prices on commercial real estate had become in relation to net rental values--rent minus operating costs. The multiples got up to 25, as high as he'd ever seen them. Meaning: Investors were paying more in mortgage interest than they were taking out of rent. They were expecting to be bailed out by greater fools.
Greene was determined not to lose his real estate fortune a second time. He started calling "every smart person I know" to find a way to hedge his portfolio. That included party buddies, business school chums and money managers.
In early 2006 Greene called hedge fund manager John Paulson of Paulson & Co., to whom he had been introduced in the Hamptons a few years earlier. Greene says J.P., as he calls Paulson, suggested he could short real estate by buying insurance on bonds backed by subprime loans. Greene says he sat down with Paulson for half an hour and looked over a ten-page offering memo for a fund that would make such bets. When he asked whether he could do the trades himself, Paulson told him he was unlikely to gain bank approval, Greene says.
"No one told me how to do the trades," insists Greene, parrying rumors that Paulson was infuriated that his strategy had been purloined (Paulson declines comment). "It was like somebody told you to short oil, but you have to go do 1,000 hours of work to figure out how," says Greene.
housing market was peaking, Greene convinced Wall Street banks to allow him to trade credit default swaps; he is believed to be the first individual to do so. Greene put up $30 million to buy swaps that would pay off from a default from paper backed by subprime mortgages. He increased the bets by $20 million over the next year, focusing on packages of California and Nevada loans and those known as 2/28s--30-year mortgages whose borrowers had been drawn in by 2-year teaser rates that were destined to be higher for the next 28 years.
Initially the market moved against Greene, and by the summer of 2006 he was sitting on a $5 million paper loss. He held on, and the market started to turn, eventually leaving Greene with his $800 million win.
These days he's cashing out his swaps and investing elsewhere. He likes muni bonds. Traditionally, he says, high-grade 30-year munis yield about 80% as much as taxable 30-year Treasurys. But recently hedge funds have been forced to sell to cover losses elsewhere, pushing muni yields to 0.3 percentage points above the yield on Treasurys.
Other Greene plays: paired trades, like one in which he is shorting Treasurys (through interest-rate swaps) and going long Ginnie Mae securities of like maturity; his thinking is that he will profit when the spread between the two narrows from 2.5 percentage points, which is double the historical norm. He's also buying collateralized loan obligations for highly rated companies like Calpine
Greene's biggest bet, which includes $800 million of his $1 billion in investable assets: cash. "Being in cash, or very near cash, is the smart place to be because things are dropping in value," he says.
Whatever the product, that's the kind of market Greene likes. "I bought it," he says, gesturing to his yacht, "six years ago from a guy in Singapore during the SARS crisis. I paid $6 million, and it would have cost $20 million new." That takes the sting out of the fact that the 350-ton vessel costs $100,000 to fill with fuel and burns 50 gallons per hour. ("Don't print that! It's a bigger carbon footprint than we'd like to have," Greene cautions.)
"A lot of my friends say, 'Now that you've made it big, aren't you going to buy a bigger boat?' I say, 'What for?'" says Greene. But hasn't he been shopping in Hong Kong for a 165-footer? "I'm a trader," he explains sheepishly. "Under the right circumstances I'd consider a new boat. I'm not ruling it out."
Nor, it seems, are Greene and John Paulson ruling out a rapprochement. The two traders exchanged greetings in jpmorgan's box at last month's U.S. Open men's final, and Greene introduced Mei-Sze. It's not Passover with Greene's mom, but it's a start.
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