JOHN PAULSON: The Man Who Turned Contrarian Bets Into Billions

john paulson

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John Alfred Paulson was born in Queens, and grew up in the borough’s Whitestone section, a neighbourhood about 25 minutes out of Manhattan, which “mostly consists of well kept single to three family homes.

It’s a neighbourhood that counts Charlie Chaplin and Harry Houdini among its former residents; two men who were both influential, creative pioneers in their respective fields.John Paulson, hedge fund billionaire and the CEO of his eponymous firm Paulson and Co, shares some similarities with his former Whitesoners.

Like Chaplin, he’s incredibly protective of his work and methods, and rarely speaks about either in public. Like Houdini, his scepticism has been one of the major determinants of his success.

His suspicion that the sub-prime mortgage market would eventually trigger a catastrophic economic crisis, made him billions and catapulted him from little known portfolio manager to Wall Street superstar.

“Paulson was virtually alone in predicting the fallout from the housing bubble,” Henny Sender of the FT wrote in 2009. “Although that view now appears obvious, Mr Paulson made tens of billions of dollars for his investors and himself in 2006 and 2007, thanks to it.”

In 2005, Paulson foresaw a hazardous credit bubble that most missed, and, more importantly, had the guts to bet on it.

He noticed the value of residential real estate was growing at “at unsustainable levels, in excess of incomes. At the same time he saw banks lending money to buy homes to people with no credit history or regular job,” the FT said.

“Our firm became concerned about weak credit underwriting standards, excessive leverage and mis-pricing of credit risk,” Paulson told a house oversight committee in 2008.

Convinced he could see what was waiting for the U.S economy when the sub-prime mortgage market imploded, Paulson bet against it. He launched a portfolio called the Credit Opportunities Fund, and began investing in CDS bonds in the summer of 2006.

In 2006, the fund returned 19%. By February of 2007, the fund was up 66%. Investors assumed it was a misprint. In the first nine months of 2007, the Credit Opportunities Fund rose an average of 340%. The firm raked in $15 billion; Paulson personally pocketed almost 4 billion by shorting the housing market.

“Coverage [of Paulson] is tinged with wonder at this savant who had the wit to spot what was going to happen, the gall to defy conventional wisdom by betting on it, and the determination to carry on betting until his prediction materialised,” the Times reported in 2008. “‘It’s just a matter of waiting,’ he is said to have told his wife.”

That what vaulted him into the wealth stratosphere, was his accurate bet on the destruction of millions of American’s personal wealth, makes his success story an uncomfortable one. But Paulson wasn’t born rich.

He was born to an Ecuadorian immigrant called Alfredo Paulson, and his wife Jacqueline, on December 14, 1955, the night of a solar eclipse. His father was the CFO of public relations firm called Ruder Finn.

Paulson attended the Whitestone Hebrew Centre, and then earned a B.A in finance from NYU’s Stern School of Business. He graduated first in his class, and then earned an MBA from Harvard.

Paulson’s career timeline begins with Boston Consulting Group, followed by Odyssey Partners — run by Oppenheimer co-founder and investment prodigy Leon Levy — then a gig in the M&A division at Bear Stearns.

He launched Paulson and Co. in 1994 with one other employee, after some time at mergers arbitrage firm Gruss Partners.

When Paulson’s vision of the black hole that was America’s subprime market became clear, he “used technology to prevent clients from forwarding his e-mails, stalling anyone inclined to pinch his idea,” according to the Times.

In 2008, he began to short Barclays, Lloyds and RBS, adjusting his bet against housing into a broader short “against financial firms,” Newsweek explained, from which he made another $5 billion.

But Paulson doesn’t just have an uncanny ability to short, his vision extends to securities and assets that are swinging upward.

His bet that Citi would rally, for example, earned him about $1 billion. His bets on gold earned him $5 billion last year. He “doubled down on the precious metal… believing that the dollar would lose value,” Dealbook explained, and “to implement that long-term bet, he created a gold fund.”

As in the early days of his Credit Opportunities Fund, investors didn’t have the intuition Paulson did, and nor did they have his appetite for risk. So some of them bailed when the gold fund “lagged the market” for much of 2010.

“But those who stayed were rewarded. In the final quarter of the year… His two largest funds, with a combined $18 billion in assets… were up 11.1% and 17.6% by the end of the year,” Dealbook reported.

For the longest time, Paulson traveled the golden road with George Soros. But Soros recently divested a huge portion of his investment in the precious metal, and gold prices have been sliding. But Paulson is bullish on the commodity for the next few years.

Chances are, he sees something we don’t.