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Goldman's Fraud, But What About John Paulson’s Other $13 Billion?

Politics / Credit Crisis 2010 Apr 30, 2010 - 01:12 AM GMT

By: Graham_Summers


Best Financial Markets Analysis ArticleDisaster has been good to John Paulson.

The hedge fund manager rose from relative obscurity to legend within the span of 12 months when his bets against the subprime mortgage market netted him and his investors billions. The returns on invested capital were absolutely absurd: one of his funds returned 590 in 2007, another returned 353 percent. By the time the smoke cleared, Paulson had made $3.7 billion for himself, and another $10+ billion for his investors.

However, in the last two weeks these mega-bets have begun garnering a lot of negative attention largely from a civil fraud suit involving Goldman Sachs. In simple terms, back before the financial world imploded, Paulson approached Goldman and asked it to put together a complicated security called a Collateralized Debt Obligation (or CDO) consisting of some worthless mortgage backed securities.

Paulson did this not out of the kindness of his heart, but because he wanted to bet big against these mortgages, insuring that he’d make a fortune if they defaulted and the CDO blew up.

Goldman then went out and sold these securities to other investors without (allegedly) informing them that the entire reason these securities existed was because John Paulson wanted to have a net worth larger than Botswana’s GDP. At the end of the day, the mortgages defaulted, Paulson can now afford to buy an entire 3rd World Country, and Goldman’s other clients lost money.

The SEC has now charged Goldman with civil fraud and Paulson isn’t looking quite as awesome as he used to, though he has yet to be charged with anything. However, appearances need to be maintained, so he hosted a conference call with investors last Wednesday to discuss the suit as well as his firm’s current investment strategies. I couldn’t tune into the call, so the following is taken from an article published on the Wall Street Journal Blog (my emphasis added).

Paulson says his funds have made several bets that the recovery will be stronger than expected. “The U.S. economy is showing strong signs of a recovery. I am really not concerned any more about a double dip recession. It looks more like a ‘V’ shaped recovery and we hope actual growth in the U.S. is going to be stronger than the 3% (GDP) growth that is anticipated.”

On inflation, Paulson sounded hopeful that the U.S. could avoid inflationary pressure in the next two to seven years. The Federal Reserve’s easing of monetary policy to cushion the blow of the financial crisis has greatly expanded the world’s money supply. “To use up the money supply, you have to have economic growth and unemployment has to go down. We are seeing that today, more banks are not tightening, but easing (lending standards) and there has been positive employment growth.”

Now the above is really third hand information (again I didn’t hear what Paulson said directly). But it’s quite staggering coming from a guy who’s made vast sums of money betting AGAINST the popular consensus in the past.

Unless it’s all a ruse.

For starters, the above quote claims Paulson believes that inflation will be kept under control in the next couple of years. If that were indeed the case, why has he bought $4 billion+ worth of Gold? Sorry, but I have to call BS on this. You don’t buy a ton of Gold because you figure inflation is not an issue.

On top of this, Paulson is quoted as saying that he believes the US economy will recover even more aggressively than the CNBC crowd believes. Looking at his firm’s quarterly holdings he’s got some sizable bets on financials ($5 billion+), which, on the surface, go along with his reported “all is well” sentiments.

However, Paulson bought most of these in 2Q09 when everyone still thought the financial world was imploding. So he’s already up big on all of these positions. I would also like to point out that all of the financials  Paulson has bought are the ones backed implicitly by Uncle Sam via various bailouts. So these investments could just as easily be considered bets on continued moral hazard as anything else.

Regarding investments that show direct involvement in an economic recovery, Paulson’s funds are largely in Consumer Staples (Kraft, Dr Pepper/ Snapple, Pepsico) and Tech (3Com, Sun Microsystems, Boston Scientific). However, all of these amount to less than one third of his fund’s holdings. Indeed, his entire stock holdings only show $19 billion in value. And Paulson manages $32 billion total.

So where are the other $13 billion?

Who knows? Paulson doesn’t have to file his more esoteric investments in the credit or derivative markets. But considering that Paulson made his massive fortune betting on CDOs and other derivatives, I cannot help but wonder if his “I’m Bullish on Uncle Sam” talk is really just a load of bunk to mask the fact that he’s got some major capital betting on disaster in the economy and financial markets. 

We know for a fact that his reported belief that inflation will remain contained is a load of nonsense (the massive bets on Gold). So why couldn’t his claims of a “V –shaped” recovery be the same?

Again, I have no proof of this. But given that we’re talking about a guy who made BILLIONS by investing in esoteric derivatives that returned hundreds of times his invested capital when the financial world imploded, I cannot help but wonder if the unaccounted for $13 billion is invested in similar investments that will skyrocket if the another Crisis erupts.

After all, Paulson could easily more than make up for the losses on his financials and other stock holdings by doing this. Guys like this don’t “show their hand” to anyone. And we’re talking about a guy who made a fortune by being a contrarian. So do you really think John Paulson is going long the CNBC “Kool Aid”?

Me neither.

Good Investing!

Graham Summers

PS. I’ve put together a FREE Special Report detailing THREE investments that will explode when stocks start to collapse again. I call it Financial Crisis “Round Two” Survival Kit. These investments will not only help to protect your portfolio from the coming carnage, they’ll can also show you enormous profits.

Swing by to pick up a FREE copy today!

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2010 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


toby chamberd
01 May 10, 18:34
should paulson be charged insider trading

I understand paulson sold out of Goldman Sachs late 2009 and obviously he would have had inside knowledge of potential damage Goldman Sachs reputation and Share price. Shoud paulson face charges of insider trade if he sold out of ?

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