The Tampa Tribune examines Jeff Greene’s decision to purchase credit default swaps:
A CDS is a way of hedging a bet on an investment such as a loan or a purchase of securities. In effect, it’s an insurance policy that pays off if the borrower fails to repay, or if the securities default.
Greene’s innovation was to buy CDS’s on securities he didn’t own, making them “uncovered” or “naked” CDS’s – insurance policies on investments actually owned by others.
Sensing a bubble in the housing market, he bought CDS’s on securities made up of bundles of subprime mortgages, betting that the mortgages, and the securities based on them, would default.
He was right, big-time.
Sean Snaith, a University of Central Florida economist who studies the Florida housing market, is quoted:
“When you make a bet, and you do it of your own free will, the person who wins is not responsible for you losing your money,” he said.
Greene says he wasn’t just trying to make money off others’ losses.
He had huge real estate investments and stood to lose millions in a market collapse, but couldn’t buy CDS’s on his own investments, mostly rental units, he said.
Greene said he had lost most of his fortune in the early 1990’s market collapse, and didn’t want it to happen again.
“If there’s a hurricane coming, and for some reason you can’t insure your own house, you could still protect yourself by getting insurance on nearby houses. If the neighborhood is destroyed, you get compensated,” he said.
Michael Greenberger, a University of Maryland law professor and former federal financial market regulator, takes a dimmer view of uncovered CDS’s but he declined to blame Greene.
“Greene was the beneficiary of a system that caused the meltdown, but he didn’t cause it,” Greenberger said. “What he did was completely legal.”