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October 16, 2011

The Perils of Paulson

Billionaire hedge fund manager John Paulson lives in a 28,500-square-foot limestone mansion in the posh upper East Side of New York City, a poster child of the excesses of Wall Street, as the inimitable James B. Stewart details in his New York Times column today “A Golden Touch Turns Leaden.”

While most know “Mr. Paulson made more than $15 billion for his hedge funds by betting on the collapse of the mortgage-backed securities market in 2007 and 2008,” many have forgotten how he apparently “won” most of those winning bets: via Wall Street’s biggest investment banks who let him pick the worst mortgages to bet on, which just happened to be betting against those very same Wall Street banks’ customers to whom they sold the other side.

As Mr. Stewart put it, “More fundamentally, allegations made last year by the Securities and Exchange Commission in its civil fraud suit against Goldman Sachs & Company, which Goldman settled by paying a record $550 million, made clear that Mr. Paulson didn’t earn his billions purely because of his shrewd market insights. He helped select the mortgages he was betting against, the ones most likely to default, something Goldman failed to tell the party on the other side of the bet. This wasn’t a level playing field, which contributed to the protesters’ allegations that Wall Street is a game rigged to benefit the wealthy and powerful.”  

Paulson personally “made” billions betting against the US mortgage market in 2007-2008 and, as if that wasn’t enough, “[l]ast year he personally earned what has been estimated as the largest single payday in Wall Street history: $4.9 billion,” which resulted in Forbes recently ranking “him 17th on its list of the 400 richest Americans, with an estimated net worth of $15.5 billion,” according to Mr. Stewart.  

While Mr. Stewart’s entire piece is well worth reading, this money quote really says it all:  “It’s not as if Mr. Paulson gained his wealth by creating new technology that transformed lives, like Steve Jobs (net worth $7 billion, according to Forbes) or Mark Zuckerberg ($17.5 billion), or by entertaining people (Oprah Winfrey, $2.7 billion) or clothing them (Ralph Lauren, $6.1 billion).  No one’s protesting against them.”


Read the full piece here



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