Greene made billions through controversial financial move

"Naked credit default swap" may sound vaguely obscene, but it's actually a complex financial instrument that helped make Palm Beach real estate investor Jeff Greene a billionaire.

His Democratic U.S. Senate opponents, Kendrick Meek and Maurice Ferre, say Greene and his credit default swaps were part of the cause of the 2007 economic crash.

CDS's are controversial, and Congress is considering banning the kind Greene used. But experts say that doesn't make him responsible for the crash.

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.

But while Greene made millions, the financial institutions that sold Greene the CDS's lost billions - not to mention the homeowners who lost their homes.

Does that mean, as Meek alleges, that Greene "became a billionaire on the backs of middle class Floridians," and "helped cause the greatest American recession since the Great Depression"?

Meek campaign manager Abe Dyk said the financial institutions that had to pay off Greene's CDS's then became vulnerable to default themselves.

That may be true, said Sean Snaith, a University of Central Florida economist who studies the Florida housing market, but it's not Greene's fault.

"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.

He said they should be illegal, just as it's usually illegal to buy insurance on someone else's life or property, because it creates temptation to commit crime.

Even so, Greenberger 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."

It's not Greene's fault, he said, that some sellers of CDS's didn't have the financial reserves to back them up.

Greene doesn't agree that all uncovered CDS's should simply be banned. He said they can provide beneficial financial protection for investors. But he said he favors stricter regulation of financial markets, including CDS's.

"If somebody is selling insurance, they should be able to show they have the ability to pay off," he said.