THE big losers in the United States sub-prime crisis are well-known – Citigroup, Merrill Lynch and UBS.
But probably the biggest winner is Mr John Paulson, a little-known hedge fund manager who made an estimated US$3 billion to US$4 billion (S$4.3 billion to S$5.7 billion) for himself from the crisis – believed to be the largest one-year payday in Wall Street history.
Ironically, his hedge fund company, Paulson & Co, that has profited most from the bursting of the US housing bubble hired as adviser this week the man widely blamed for inflating it in the first place – former Federal Reserve chairman Alan Greenspan.
Mr Paulson smelled trouble in the market for risky home loans two years ago and devised what proved to be a wildly profitable strategy for betting against the housing market, The Wall Street Journal said on Tuesday in a profile of the man.
Like many legendary market killings, such as Mr Warren Buffett’s takeovers of small companies in the 1970s, Mr Paulson’s sprang from defying conventional wisdom, said the Journal.
In early 2006, the wisdom was that while loose lending standards might be of some concern, deep trouble in the housing and mortgage markets was unlikely.
A lot of big Wall Street players were in this camp, as seen by the giant mortgage-market losses they are now disclosing.
‘Most people told us house prices never go down on a national level, and that there had never been a default of an investment grade-rated mortgage bond,’ Mr Paulson told the Journal.
He also devised a technical way to bet against the housing and mortgage markets.
Also key: Mr Paulson did not turn bearish too early.
Some close students of the housing market did just that: investing for a downturn years ago, only to suffer painful losses waiting for a collapse that they finally unwound their bearish bets, said the Journal.
The low-key Mr Paulson, who grew up in New York, began his career working for another legendary investor, Mr Leon Levy of Odyssey Partners.
Now 51, Mr Paulson has benefited from an earlier housing slump 15 years ago, buying houses in foreclosure sales. In 1994, he started his own hedge fund with US$2 million and built it up to US$500 million by 2002.
In January 2006, he launched a hedge fund solely to bet against risky mortgages. The result: Funds run by him were up US$15 billion last year. His investment gains have boosted the total amount his firm manages to US$28 billion, making it one of the world’s largest.
Source: The Straits Times 17 Jan 08