If you wanted to short the housing market in 2007 you could just buy protection on mortgage-backed securities via a synthetic CDO, and that’s what John Paulson did in the Abacus deal, for which Goldman Sachs and Fab Tourre got in trouble. But the problem with that is that buying protection costs money; just for instance the super-senior protection in Abacus would run you about 50bps, or around $4.5 million a year on the $909mm notional that ACA Capital wrapped.1 And who wants to throw away millions of dollars a year waiting for the housing market to crash?
So another way to short the market is to buy a lot of protection on senior tranches of CDOs (cheap because: what are the odds that the housing market will crash?) while also selling a little protection on junior tranches (expensive because the odds that there’ll be some defaults are higher). If you do this, you can have a positive carry (you get paid as more each year on the protection you sold than you pay on the protection you bought), but you can make just about as much money if the housing market craters and there are massive defaults. (The tradeoff is that if performance is mediocre, with some defaults, then you lose money on the junior protection you sold and don’t make it back on the senior protection you bought.)
This second trade is a very stylized description of what Magnetar did,2 in another CDO deal for which JPMorgan got in a bit of trouble. Less than Goldman, though! Read more »
In testimony Wednesday, Paolo Pellegrini, the former Paulson & Co managing director, said he made clear to ACA Capital Holdings Inc that Paulson wanted to bet against the deal.
“As I told all collateral selection agents, we were interested in shorting a CDO, shorting subprime securities in a CDO,” said Pellegrini, one of the architects of hedge fund manager John Paulson’s bet against subprime mortgages in 2006 and 2007. …
Pellegrini, one of two people who worked on Paulson’s strategy to take the stand so far, testified Wednesday he believed he told the principal employee at ACA working on Abacus, Laura Schwartz, about Paulson’s strategy over drinks during a “shindig” for people in the CDO industry.
“I think there was some discussion of the portfolio and what we were trying to accomplish by shorting the market,” he said.
Why do people (investors, media, random passersby on the street, this lady) like to harp on all the money John Paulson has lost in the past couple years, despite the fact that they could be talking about his new hot-ish streak? Why can’t he get a little credit for all of his great investment ideas, instead of relentless bitching and negativity about the ones that haven’t yet panned out? It’s something the hedge fund manager has thought a lot about lately and while “I’m surrounded by fucking assholes” seems like it could account for some people’s behavior, he’s finally come up with what seems like a pretty good general explanation: it’s those damn gold funds. Sure, they’ll make money one day but first they’ve got to lose a lot and reading that “have lost forty seven percent for the year” distracts people from “up 3.4 percent!” So, there’ll be no more of that. Read more »
Billionaire John Paulson, the hedge- fund manager seeking to reverse two years of losses in some of his strategies, lost 27 percent in his Gold Fund last month after the precious metal and related securities plummeted, according to two people familiar with the matter. The loss brings the strategy’s decline to about 47 percent this year, said the people, who asked not to be identified because the information isn’t public. The fund is made up primarily of Paulson’s own money, one of the people said. The strategy has about $500 million, down from about $700 million at the end of March. [Bloomberg]
Billionaire investor John Paulson told investors on Wednesday he is staying the course on gold even though there may be more short-term volatility in the price of the metal. The New York-based hedge fund manager has long stuck by his thesis that gold will someday be a powerful hedge against inflation, and it was no different on the investor call he held, two people who listened to the call said. John Reade, a partner at Paulson & Co, said that the firm, which oversees about $18 billion, is not veering off its course even as he cautioned that there could be more price fluctuations in the short term. [Reuters]
A couple weeks back, we went on the record to say that John Paulson was in the early stages of a grand comeback. The hedge fund manager, who had become a billionaire many times over thanks to his subprime bets, only to spend the last several years sucking a magnificent amount of wind, had finally turned things around in his Advantage and Advantage Plus funds, which gained 5.6 percent and 7.6 percent, respectively, in March. Like us, Paulson obviously saw the tides turning and while that had to have felt good, it left him with a bit of a conundrum.
While seeing Advantage plus lose over half its value from the end of 2010 through March of this year was probably not exactly JP (nor his investors’) idea of fun, the situation did present a unique silver lining, in that it meant that during the annii horribilis, those invested in the fund did not have to pay Uncle Sam a dime. Sensing a change in his investing karma, Paulson clearly panicked, waking up in the middle of the night to ask himself: ‘But wait? How am I going to replicate the euphoria of paying no taxes, without managing a hedge fund that loses a fuckton of money first?’ Read more »
Starting today! Every day before it (not including 2007-2009) shall never be spoken of again! Don’t even entertain the thought of uttering ‘2010-2012,’ in his presence or otherwise! Don’t say it, don’t even think it! Someone run out and get some holy water because we are witnessing a rebirth! Today is the first day of the rest of his life! Read more »
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