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

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of GreenStockInvesting.com , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li