John Paulson made $3.7B in 2007 betting against an over levered financial system. The ability to go left when everyone else is going right is truly the mark of a great investor.
I would like to point out some of Paulson’s superhuman abilities:
1. Paulson had an almost clairvoyant insight into the machinations of Bear Stearns, who at the time was propping up faltering Mortgage Backed Securities (MBS),
“..by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments”.
2. In the days leading up to the Bear Stearns collapse Paulson instinctively cashed out of all Bear Stearns related investments.
I would also point out what his detractors say:
1. Paulson’s insight was more like insider information.
“Back in January (2007).. Bear’s head mortgage trader, Scott Eichel, talked with a small group of traders over drinks in the Venetian hotel about propping up the ABX index by buying and rescuing some struggling subprime bonds, say two people who were there.”
and,
“In April .. Paulson executives called Mr. Eichel to ask whether he was contemplating a plan to repurchase mortgage-backed securities. ‘Maybe we are, maybe we’re not,’ Mr. Eichel replied, according to two Paulson executives, who say he added they should call him if they were interested.”
2. Paulson’s early cash-out even made the SEC suspicious of wrong doing:
“Bear Stearns Cos. plans to turn over documents to securities regulators showing that several financial giants, including Goldman Sachs Group Inc., Citadel Investment Group and Paulson & Co., slashed their exposure to the securities firm in the weeks before its collapse.”
and just days before the fall of Bear Stearns,
“Beginning March 10, Paulson .. unloaded dozens of credit-default swaps with Bear Stearns.. In every case, Bear Stearns owed Paulson money on the swaps, based on mark-to-market values at the time of the transfer.”
Disclosure (“none” means no position): None
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