Skip to main content

Paulson & Co. push subprime bets

In our last post, we talked about T. Boone Pickens' plans to create a Texas water pumping district and a water transport pipeline, whose right of way will be pieced together with the help of eminent domain laws.

Today, we'll focus on another hedge fund manager who may take advantage of some helpful legislation. Legislation that, if passed, could aid his short positions in the subprime market.

We posted an interesting profile on John Paulson and the outperformance of the Paulson Credit Opportunity Fund back in September. For those of you who haven't seen it yet, give it a read. You'll find an excellent interview in which Paulson discusses the firm's highly rewarding subprime bets.

Having successfully positioned themselves this past year on the short side of the subprime mortgage bond market, Paulson & Co. has recently announced that it has scaled back its bets against subprime backed securities.

Details from Bloomberg:

Paulson & Co. scaled back bets against subprime-mortgage securities, recording investment profits that helped the New York-based hedge-fund manager double assets to $24 billion this year.

``We felt it advisable to lock in most of the gains'' in its merger and corporate event-driven funds, the firm said in a third-quarter report to investors obtained by Bloomberg. Paulson cut holdings of securities linked to subprime home loans by 86 percent across its eight funds in those two strategies.

The firm told investors it expects more profits as home prices decline and delinquencies soar. Its Credit Opportunities funds, with about $8 billion in assets, kept subprime-related ``short'' positions to benefit from that forecast, according to a second report to clients of the credit funds.

Still, as Bloomberg reports, the Credit Opportunites funds have kept some of the subprime short positions on, as Paulson & Co. still expect to see further home price declines and rising delinquencies.

Now here's where the legislation and political angles come in. You may recall that back in October, Paulson & Co. were in the spotlight for giving $15 million to "borrower advocates" who were "backing bankruptcy legislation that would further reduce the value of subprime loans".

It seems that the legislation these groups were advocating would allow bankruptcy judges to forgive mortgage debt exceeding the value of a home, and this change would further devalue securities backed by the loans of subprime borrowers.

These are the class of securities that Paulson & Co. correctly and profitably shorted earlier in the year and of which they remain short (with their scaled back position).

You can read more about this in Bloomberg and BusinessWeek's articles on the subject.

Are Paulson & Co. just providing a service to homeowners in need of legal assistance, or are they shrewdly positioning themselves to profit more quickly from homeowner defaults and debt forgiveness? Tell us what you think.

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance , I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart. So here's what a real stock market bubble looks like.  Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ $BCOR pic.twitter.com/xjsMk433H7 — David Shvartsman (@FinanceTrends) February 24, 2015   For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan , turned to rubble. As detailed in our post, " Round trip stocks: Momentum booms and busts ", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months.  In a pattern common to many parabolic shooting stars, the s

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL!  Please bookmark our new web address at Financetrendsletter.com Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner .   Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead! As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter . You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter).  Stay up to date with our real-time insights and updates on Twitter .

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore . Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf). But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry). "During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and