Nov. 5 (Bloomberg) -- Smarts, good timing and a touch of the renegade. That’s what it took to pull off the investment coup that Gregory Zuckerman brings to life in “The Greatest Trade Ever.”

The trade was John Paulson’s bet against the U.S. housing bubble -- a wager in credit-default swaps that allowed his hedge fund, Paulson & Co., to make $15 billion in 2007, when markets began melting, Zuckerman says.

“Paulson’s personal cut was nearly $4 billion, or more than $10 million a day,” writes Zuckerman, a Wall Street Journal reporter. Pause for a minute to ponder those winnings.

For months, I’ve been reviewing books that describe, in heartbreaking detail, how Wall Street’s best and brightest got it wrong and drove us into the worst financial crisis since the Great Depression. Zuckerman presents a behind-the-scenes account of how a small band of outliers got it right.

“Cracking Paulson’s moves seemed at least as instructive as the endless mistakes of the financial titans,” Zuckerman says. He’s being too modest.

What we get here is more than a cinematic narrative of how Paulson and others figured out how to short the market. We’re also reminded of how opaque and illiquid some financial instruments are, how little Wall Street executives understood them, and how difficult it was for more knowledgeable bankers to say that the subprime emperor had no clothes.

“You’re making us look stupid,” a senior salesman told one trader, Greg Lippmann of Deutsche Bank AG, who dared to challenge the bull-market consensus.

Accuracy Dispute

Paulson has called the book a disappointment, saying in an e-mailed statement that it contains “numerous inaccuracies” -- without specifying which -- and faulting what he calls its “gossip tabloid” style. Zuckerman’s publisher, Broadway Books, says it stands by the account, with publicist Rachel Rokicki calling it “fair and accurate” in an e-mail. Sounds to this reviewer like a manufactured controversy.

The story opens on Paulson grimacing at data flickering on computer screens in his corner office overlooking Manhattan’s Central Park. It was 2005, the housing market was booming, and Paulson wasn’t making much money compared with rivals, we read.

“This is crazy,” he told one of his analysts, Paolo Pellegrini. He challenged Pellegrini and others to find a bubble they could short.

Pellegrini, a brainy native of Italy whose Wall Street career had fizzled, sifted through housing data and concluded that prices had reached unsustainable levels, Zuckerman says. Paulson -- who had never traded real-estate investments -- agreed, yet knew he had to get the timing right and to figure out how to bet against housing.

Credit Default

The answer lay in credit-default swaps. At the time, Paulson’s knowledge of such swaps was limited to “a vague understanding that these instruments provided insurance against losses from debt investments,” Zuckerman writes.

Soon, Paulson and Pellegrini were dabbling with housing bets. What they didn’t know was that rivals were already chasing the same trade. These included Michael Burry, a doctor in California who had turned hedge-fund manager, and Lippmann of Deutsche Bank, who laid his own wagers against housing and taught hundreds of Paulson’s competitors to make their own bearish bets, Zuckerman says.

Others joining the fray included real-estate developer Jeffrey Greene, a Los Angeles bachelor who dated would-be starlets and hosted parties for friends including Mike Tyson and Paris Hilton, Zuckerman says.

True Love

Written as a zippy novel, the book shows how hard it was to measure the dimensions of the bubble. It even gives us whiffs of romantic interest, as when Greene finds true love:

“She touched his shoulder. He held her hand. Then they found a quiet spot in the back of the room and began to discuss mortgages.”

Zuckerman based the account on more than 200 hours of interviews, some 50 of them with Paulson himself, he says. This presents a predicament shared by other recent accounts of the crisis: A reporter who gets enough access to reconstruct an inside story may find it hard not to take sides.

The result here is a convincing yet mostly flattering picture of Paulson as a restrained man with a limp handshake and Calder gouaches on his walls. Contrary to one London press report, he doesn’t come across as a “short-selling fiend.”

Zuckerman goes out of his way to avoid apportioning blame for the meltdown: “Like a modern version of Agatha Christie’s ‘Murder on the Orient Express,’ guilt for the most painful economic collapse of modern times is shared by a long cast of sometimes unsavory characters.”

Better yet, he closes on a timely warning: “Another bubble inevitably awaits,” he says.

“The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History” is from Broadway Books (295 pages, $26). To buy this book in North America, click here.

(James Pressley writes for Bloomberg News. The opinions expressed are his own.)

To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net.

Last Updated: November 4, 2009 19:00 EST