Wednesday, July 23, 2008

Asset-backed oversold? Paulson ready to get back in!

John Paulson made $15 billion for his fund ($3.7 billion for himself!) betting against subprime securities last year. Now Bloomberg reports that he's ready to get back in on the upside!

I'm as dismayed as anyone else about taxpayer dollars going to bail out mortgage holders, commercial banks and the GSE's (Fannie, Freddie). I complained about Fannie back in 2004 when Franklin Raines was still CEO and the story first got out about their smoothing of earnings and use of derivatives accounting.

But, on the other hand, maybe Uncle Sam can actually generate positive return by buying oversold securities! Rumor says that current prices of subprime mortgage backed securities suggest implied default rates which are unrealistically high (e.g., like 50% !). Barring a complete economic meltdown these assets are underpriced and will generate a handsome return for an intelligent investor willing to take some risk. Is Uncle Sam smart? Let's hope that the other Paulson negotiates some upside for us taxpayers in any bailout organized by the Treasury.

Bloomberg: John Paulson, the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is now seeking to profit from Wall Street's search for capital to offset mortgage writedowns.

Paulson plans to open a hedge fund by December that will provide capital to the world's biggest banks and brokers as they add to the $345 billion they've raised in the past year, according to two people with knowledge of the matter. His Paulson & Co., which oversees $33 billion, hasn't set a size target for the fund, said the people, who declined to be identified because the plans aren't final.

The New York-based firm's credit funds rose as much as sixfold last year, helped by bets that rising defaults on subprime home loans would pummel the value of mortgage-backed securities. The meltdown has forced the world's biggest banks and securities firms to take $467 billion in asset write-offs and credit losses and led to the collapse of Bear Stearns Cos.

``Investors who are able to make money in a declining market and then rapidly turn around and profit from a rising market is highly unusual,'' said Thomas Whelan, president of Greenwich, Connecticut-based Greenwich Alternative Investments, which advises clients on investing in hedge funds.

Paulson declined to comment. His 2007 earnings made him the highest-paid hedge-fund manager, according to Institutional Investor's Alpha magazine.

2 comments:

Anonymous said...

Without knowing anything about how to price assets, I bought a load of Wachovia stock when it was $30/share, with a vague version of this principle in mind. Must say things got much worse than I expected, but maybe in a few years my original plan will pan out.

los angeles bail said...

Funds he runs were up $15 billion in 2007 on a spectacularly successful bet against the housing market. Mr. Paulson has reaped an estimated $3 billion to $4 billion for himself -- believed to be the largest one-year payday in Wall Street history.

Now, in another twist in financial history, Mr. Paulson is retaining as an adviser a man some blame for helping feed the housing-market bubble by keeping interest rates so low: former Federal Reserve Chairman Alan Greenspan. Mr. Paulson, who was already worth over $100 million before his windfall, isn't changing his routine much. He still gets to his Manhattan office early -- wearing a dark suit and a tie, unlike many hedge-fund operators -- and leaves around 6 p.m. for the short commute to his East Side townhouse.

One thing is different: It's easy to attract investors now. The firm began 2007 managing $7 billion. Investors have poured in $6 billion more in just the past year. That plus the 2007 investment gains have boosted the total his fund firm manages to $28 billion, making it one of the world's largest.

Mr. Paulson has taken profits on some, but not most, of his bets. He remains a bear on housing, predicting it will take years for home prices to recover. He's also betting against other parts of the economy, such as credit-card and auto loans. He tells investors "it's still not too late" to bet on economic troubles.

At the same time, he's looking to the next turn in the cycle. In a recent investor presentation, he said his firm would at some point "start preparing" for opportunities in troubled debt

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