Jeff Greene's personal fortune may be financing his campaign for the U.S. Senate, but it's also become the chief line of attack for his Democratic primary opponent, U.S. Rep. Kendrick Meek.
Greene -- who has three (yes, 3) personal jets and a 145-foot yacht -- manages a real estate portfolio that he says once totaled $1 billion. That's not the issue, however.
What is, Meek says, is Greene's decision to hedge those real estate investments in 2006 and 2007 by investing in a complicated financial instrument called Credit Default Swaps. The investment essentially paid out when other people's mortgages went bust, or their properties fell into foreclosure. Sensing the housing collapse, Greene admits he made hundreds of millions of dollars betting that property owners wouldn't be able to make payments on bad or risky mortgages.
The investments, while perhaps unseemly, are legal. But that hasn't stopped Meek from making an issue of them in a suddenly competitive primary. In their first debate in West Palm Beach on June 22, 2010, Meek accused Greene of hoping Floridians would lose their homes. He then charged those investments helped sink the U.S. economy.
"He is the king of the undercover Credit Default Swap that brought about the destruction of our economy that we have right now," Meek said.
That's a heavy charge -- that Greene pioneered the investment strategy that wrecked the U.S. economy. Is it right?
First we need to explain just what a Credit Default Swap is. Then Greene's role. Then the role of the Credit Default Swap in ruining the economy.
And we're going to try to do all of it without giving you a headache.
Credit Default Swaps
Maybe we're kind of dumbing this down too much, but Credit Default Swaps have a lot in common with a Las Vegas casino game. Investors are essentially betting on mortgages and specifically that property owners won't pay. The bettors, or investors, put up a fraction of the money they could possibly win should they be right.
In theory, the house -- or the bank -- should win a lot more than it loses because the bets are cheaper when compared to the possible payouts. And in a normal market, banks likely would have won more than they lost. But the housing collapse changed the dynamics of the bet.
Greene talks about it another way, describing it as a type of insurance. And that's not an altogether bad description in his case.
In 2006, Greene's massive real estate portfolio stood to plummet in value if the housing market reversed. Credit Default Swaps, he said, were a way to hedge against those potential losses. If the value of his real estate portfolio declined, his swaps likely would pay off. And if the housing market continued to climb, he'd lose his bets but recoup that money in real estate gains.
Of course, he couldn't get anyone to take bets on his own properties, because he could manipulate whether or not they defaulted. So, instead, he found other properties and mortgages that he thought would be at high risk for default.
"I was buying insurance," Greene told the Palm Beach Post editorial board. "I was at risk for hundreds of millions of dollars. I ended up making hundreds of milions of dollars."
He bet on between 18 and 20 mortgage pools (accounts we've seen vary). A mortgage pool is exactly what it sounds like -- a grouping of individual mortgages.
Gregory Zuckerman, a Wall Street Journal writer, detailed Greene's gamble in the book "The Greatest Trade Ever." Zuckerman interviewed Greene and about a dozen of his friends and colleagues for the book, which also features other investors' attempts to profit off Credit Default Swaps.
Thanks to the housing collapse, Zuckerman said Greene netted about $500 million on his bets.
The book is a fascinating look at an often poorly described and little understood part of Wall Street. It also does an excellent job of documenting Greene's mindset about the trades he was making. Zuckerman agreed to speak with PolitiFact Florida about his work.
Specifically, we wanted to know if Greene's description -- that he invested in Credit Default Swaps as protection against his real estate investments -- was accurate.
"It started out as a way to protect himself, but it evolved into the greatest trade he ever found," Zuckerman said. Greene was making millions of dollars a day on his trades, Zuckerman said, and he didn't want to give it up.
Not that he had any real reason to. Greene understood that his success meant problems for a mortgage holder somewhere else -- often in California, Nevada or Florida where the housing collapse was especially accute -- and he had sympathy for the property owners, Zuckerman said.
But he believed it was the banks who were the true culprits, since they were the institutions that convinced people they could afford homes they had no business purchasing.
Greene's thinking is captured during an exchange with Boston real estate developer Jeffrey Libert that is retold in Zuckerman's book.
"Libert, why are you being so uptight about it?" Greene asked.
"It just gives me the heebie-jeebies."
"You didn't cause it!"
"Yeah, I know. But we're cheering for it."
Later, talking to the author, Greene explained his thinking. "I didn't even think about (the moral aspects of Credit Default Swaps). If more people had been (invested in Credit Default Swaps) early on, then the pricing of debt would have been higher and things wouldn't have become so crazy. The world would have been a better place had more people been shorting. We had nothing to do with what happened to homeowners."
Greene was not the first person to pursue Credit Default Swaps. In fact, he stole the idea from John Paulson, a New York hedge fund operator. And other hedge funds pursued Credit Default Swaps before Paulson.
But Greene was among the first and most successful private investors to make the gamble. "He convinced people like Merrill Lynch to do the trade when they wouldn't do it for other individuals," Zuckerman said. "Greene potentially is one of the only individuals in the country to have pulled this trade off."
Credit Default Swaps and the economic collapse
To continue the casino analogy, the housing market collapse allowed Greene and others to pick the spin of the roulette wheel time after time after time.
Zuckerman says some Credit Default Swaps paid off 40 to 1. That means, on one hand, banks were having to cut big checks to investors. It also meant money wasn't coming in from the mortgage holders.
Banks, in turn, produced huge losses. The financial industry collapsed.
Between 2000 and 2008, the market for swaps ballooned from $900 billion to more than $30 trillion, the New York Times reported.
AIG, for instance, traded Credit Default Swaps -- though not necessarily to Greene. The federal government had to offer $182.3 billion to rescue AIG at the height of the financial crisis.
But it wasn't the only problem.
Critics have argued that banks were too easily making loans, and that the government lacked proper regulation.
And when it comes to Credit Default Swaps, the real problem was that banks made the investments so cheap and the reward so great that it wasn't the idea of Credit Default Swaps that was the problem, but the terms of specific deals, Zuckerman said.
"Credit Default Swaps are like fertilizer," Zuckerman said. "They can be used for good or bad."
We liked another description, this one coming from a report from NPR: "If bad mortgages got the financial system sick," they wrote, "Credit Default Swaps helped spread the illness worldwide."
And then, to round out our casino analogy, here's what Fortune said: "There is at least one key difference between casino gambling and Credit Default Swap trading: Gambling has strict government regulation."
This is a tricky one, in part because we know Credit Default Swaps are going to be talked about a lot more as this Senate primary plays out. In this case, we want to be clear that we're sticking specifically to fact checking the statement Meek made, that Greene is the "king" of the Credit Default Swap that "brought about the destruction of our economy that we have right now."
Greene wasn't king of the practice of Credit Default Swaps, but we think it's fair to say he was in the royal court. He actually stole the idea from a New York hedge fund manager, who himself wasn't the first to bet on mortgages going bad. Greene was, however, one of the more successful cases stories and made about $500 million.
And saying Credit Default Swaps brought about the destruction of the U.S. economy glosses over the subprime mortgage crisis and concerns over lax regulation, for starters. Banks helped people get into homes they simply couldn't afford, and wrote risky mortgages that resulted in delinquent payments, defaults and eventually foreclosures.
In our mind, Meek's statement is an attempt to boil a very complex issue into a made-for-TV sound byte. The statement may be sexy, but it's more hyperbole than anything. We rate it Barely True.
Editor's note: This statement was rated Barely True when it was published. On July 27, 2011, we changed the name for the rating to Mostly False.