Before 2007, not much people knew about Paul Johnson. He was just a small player on Wall Street. His company Paulson & Co. has 60 employees looking after hedge funds worth 1 billion USD. But today, the name John Paulson was hailed as god on Wall Street. God of money making, number one in hedge funds are some of the titles given to him. George Soros invites him for meals and coincidentally having the same family name him, US Secretary of Treasury Henry Paulson was grievously called as 'another Paulson' to mark the difference.
All these is because amidst the financial crisis storm sweeping the world, John Paulson made money and he is the most efficient money maker on Wall Street. In 2007, he was the hottest hedge fund manager making 3.7 billion USD. The money he made was however built on a lot of peoples' pain. He shorted heavily on the US stock market and housing market. He bet that Americans cannot afford their houses and won.
Comparing to stock investment guru Warren Buffett's buying up of quite some small bankrupt companies when the market was down and king of re-structuring Wilbur Ross buying and re-structuring of the steel industry in 2000, Paulson's success was due to the ability to break the conventional market thoughts.
5 Miles Jog in Central Park Daily to Release Stress
At the beginning of 2006, Wall Street's financial community common thinking was that although the loose credit ratings need to be watched out, but the housing and real estate credit market will not cause too much trouble from it. A lot of Wall Street's big financial institutions and banks were all in that happy camp.
A lot of people said that housing prices will never drop across the country and housing and real estate market tied investment bonds never had problems and credit experts were blinded by the boom in the housing and real estate market said Paulson.
In actual fact since 2005, Paulson was worried US economy will go into recession. So he started to short car suppliers and related companies bonds betting that their value will drop. However, although those companies have entered bankruptcy procedures, their value are still increasing.
One of Paulson's analyst said that it was crazy. Paulson urged his agents to think of ways to protect his investments and profits. The problem Paulson gave to his agents was where is the bubble that they can short?
Paulson's agents found the answer afterwords - the housing and real estate market. At that time, housing and real estate people were saying repeatedly that housing prices will never drop across the whole of US and even if it does drop, the FEDs will save the market by lowering interest rates greatly.
On the housing and real estate market, the Wall Street financial people invented 2 new types of investment tools, Collateralized Debt Obligation (CDO) and Credit Default Swap (CDS). The relationship between these 2 products is that the higher the risks for CDO, guaranteeing products CDS value will be higher. If the default rate or default expectations goes up, CDS value will go up together. But when the housing and real estate market is booming, most people do not think that CDO will have any danger and so the guaranteeing products CDS value are very low.
After analyzing large amounts of data, Paulson was sure that those investors greatly underestimated the risks in the mortgage credit market. He bet that the market will crash. He said that he has never done such deals and so many were optimistic and not much were looking down on that market.
So Paulon designed a complicated fund operation model. He started to boldly bet on bond tradings. On one side he shorted the dangerous CDO and one the other side he bought the cheap CDS. Paulson said to his agents in mid 2005 that they need to take the most advantage out of peoples blind happiness in the housing and real estate market.
But Paulson's bet did not bring him victory as the housing and real estate lenders are still generously lending out their money to home buyers and the buyers are glad to accept the loose borrowing conditions. Paulson started to doubt rating agencies being too loose on their ratings on the sub-prime products and so he let his team begin a large scale investigation and the results was that the lenders are having increasing difficulties in getting their money back.
On January 2006, there is one news that made Paulson more confident about the downfall of the housing and real estate market. The largest US rating agency, Ameriquest Mortgage comes out with 325 million USD to investigate the housing and real estate market's credit industry's non-standard lendings.
Paulson decided to start a hedge fund to specifically deal in shorting of CDO. Although some cautious investors advised him not to abruptly go into some territory that he is not familiar with, Paulson still got funding of about 150 million USD for that fund. In mid of 2006, the fund started to operate.
But, the housing and real estate market continues to flourish and Paulson's fund keeps on loosing money. A good friend called Paulson and asked him whether he should stop loss. Paulson replied that he will not stop but will continue to add on. He says that in order to release stress, he will go to the Central Park and jog for 5 miles daily and he told his wife that such things needed to wait.
When encountered with such a situation, most experienced people will choose to get out of the deal to stop loss but strangely, the losses made Paulson more firm in his views said Peter Soros who is a relative of George Soros who has also invested in Paulson's fund.
Pualson's add on stake was to short ABX, an index being created in beginning of 2006 to reflect the housing sub-prime market. At the end of 2006, ABX falls and Paulson's fund value increased by 20%. He then created another second similar fund.
On 7 February 2007, a dealer ran to Paulson's with a news article saying that US second largest sub-prime mortgage enterprise New Century Financial Corp. quarterly report shows a loss. At the same time, ABX has dropped from July 2006 value of 100 points down to 60 plus points. Paulson's second fund value increased by 60% within 2 months.
George Soros Invited Him For Meals
But when the situation gets better, Paulson starts to worry. When chatting in the bar, some people in the same industry and previous colleagues from Bear Stearns (at that time the 6th largest investment bank in US Wall Street) told him that Bear Stearns is preparing to buy up personal mortgages in order to bring back up the housing credit market.
At the same time, Paulson also heard that Bear Stearns is persuading the financial controlling bodies to come out with regulations to allow the guarantor to amend or buy the non-performing debts. Such information are not good for Paulson's fund and he let people spread around that the acts by Bear Stearns are "manipulating the market".
After which, due to certain reasons, Bear Stearns pulled back the 2 previously mentioned plan. In mid of 2007, Bear Stearns 2 hedge funds in the sub-prime market crashed.
Within one night, investors start to throw CDOs and Pualson's fund value shoots up on the situation. At the same time, one fund investor tells friends about Paulson's trading method. The angry Paulson thus installed special software to encrypt all his emails so that they cannot be forwarded.
In autumn 2007, ABX has dropped to about 20 plus points and Paulson's harvesting time has arrived. Panic Wall Street institutions and banks are in big demand for CDS where Paulson has bought and stocked up earlier on when they were cheap. Paulson has no worries to cash them.
In the end, in the sub-prime crisis storm in 2007, Paulson's first fund value went up by 590% and the second fund value went up by 350%. Within 2007 that year, 6 billion USD worth of funds flowed into Paulson's fund and this does not include the profits from the fund's investments.
According to data compiled by the trade magazine Alpha, Paulson income for himself in 2007 has reached Wall Street's record of 3.7 billion USD, successfully taking the lead for the most money making fund manager in 2007 and putting George Soros (George Soros income in 2007 was 2.9 billion USD) behind him. Paulson rose to the top from nothing and makes it to the 165 place on the Forbes US richest list.
With such high effective earning method made George Soros admire him and took opportunities to invite him out for meals to learn from Paulson the details on how he shorted the housing market. Paulson, who was still a small player 2 years ago may never have thought that in his life time that he has the opportunity to sit at the same table with big players like George Soros.
Stayed Away From the Media, Encrypts Emails
Before Paulson was famous, people knew little about Paulson. What was known that his company was just a middle scale fund company and he is just a middle scale fund manager with not too bad results. Although his fund made money in 8 years out of 9, his fund scale has risen from the beginning value of 2 million USD to the value of 500 million USD in 2002.
After Paulson is famous, the media tried hard but still unable to find more information about him. He does not frequently accept interviews and is tight lipped about his personal life and even encrypts his emails so that people cannot forward his emails. About Paulson's family, people only knew that he is married with 2 daughters and his favorite hobbies are snowing, sailing and jogging.
After Paulson having made the highest yearly income on Wall Street, Paulson did not forget to reward himself. He put up for sale of his 2,600 square meter house worth 14.7 million USD on New York's fifth avenue and moved into a bungalow by the lake in the outskirts east of New York worth 40 million USD.
From the pieces of information collected together, Paulson is a low profile and steady person. Even after becoming the idol of Wall Street, he still wears his suite and goes to work early to his office in Manhattan, goes off from work at about 6pm to rush home for dinner.
To Paulson, the only change is that his company is now easier to attract funds than before. In just 2007, investors fund invested in Paulson & Co. increased by 6 billion USD making the scale of the fund increasing from 1 billion USD to 7 billion USD. After 2007, including profits, Paulson & Co. fund scale has reached 28 billion USD making it one of the world's largest hedge fund company.
Not Celebrating When Americans Are In Pain
Paulson keeps a low profile for his success and says that there are no celebrations when the American people are in pain because of the collapse in the housing market. In a nod to sub-prime victims, Paulson & Co. has donated 15 million USD to the Center for Responsible Lending to finance legal assistance for people fighting repossession. The center is talking to congress to allow those families who met conditions to apply for bankruptcy. Paulson thinks that the court to judge a portion of the families to be bankrupt and hep them restructure their debts is the best way to help them deal with the crisis. In doing so, the house owner will not be homeless and the government does not have to be burdened with a lot of money to work things out.
Paulson says that he did not create the sub-prime loans and did not issue usurious loans but he knew that everybody is a victim in this crisis.
Although some people believe that Paulson is out of good will and that he is very low profile, but when almost 99% of the people suffered losses, he earned an astronomical amount of 3.7 billion USD in a year. If calculating that he worked 40 hours per week, his income per hour would be over 1.4 million USD.
Comparatively, the average pay per hour is 17.86 USD from data compounded by the respective US department. Simply put it, on average, 80,756 Americans can then match up to 1 Paulson, not hard for people to be jealous and angry about it.
Quite some organizations accused that Paulson making money from this crisis is 'filthy'. "I don't think a system where you can profit from people losing their homes is a good way to make money," said Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America.
There are some newspapers that found Paulson's mother and let her expressed her views. 81 year old lady helplessly told reporters that his son John is an important person and that she has nothing else to say.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment