Wall Street heavyweight John Paulson under SEC glare in Goldman case

John Paulson has worked outside the limelight for most of his career. That changed after betting that low-quality mortgages would sour.
John Paulson has worked outside the limelight for most of his career. That changed after betting that low-quality mortgages would sour. (Rick Maiman/bloomberg News)
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By Steven Mufson
Washington Post Staff Writer
Thursday, April 22, 2010

Hedge fund titan John Paulson -- who made $3.7 billion in 2007 alone -- has been called "the man who made too much" by Portfolio magazine. A Wall Street Journal reporter has penned a book about his lucrative bet on the collapse of the U.S. housing market called "The Greatest Trade Ever." A blogger dubbed Paulson the MVPM of 2008 -- "most valuable portfolio manager."

Now, however, the Securities and Exchange Commission has cast Paulson in a harsher light.

In its fraud case against Goldman Sachs, the SEC alleges that Paulson's firm handpicked mortgage securities that it thought would fail, hired Goldman to package and sell them to unwitting customers and then made $1 billion by betting against them.

Not that there's anything wrong with that, as Jerry Seinfeld might say. The SEC hasn't charged Paulson with wrongdoing, but neither has it made him look good by spelling out how he profited at others' expense.

"What he's doing is exploiting the idiocy of the system," said Michael Lewis, author of "The Big Short," a book about the recent financial crisis. "He used the securities-building process to build him something likely to fail."

This week, the hedge fund manager -- who said in November 2008 that he had approximately $36 billion under management -- has been reassuring his investors that the SEC isn't targeting him or his firm, and that he has done nothing wrong. In a letter on Tuesday and in a conference call on Wednesday, Paulson argued to investors that he made billions of dollars in 2007 and 2008 by seeing the weakness of the U.S. housing market when most institutions were still overpaying for flimsy mortgage securities.

He said he was "often a lone voice."

"It is easy to forget," he wrote, "that before the collapse, the overwhelming view of investors, ratings agencies and economists was that the housing market was strong and would continue to get stronger." Paulson added that his firm had been "transparent and open regarding its concerns about the mortgage market, which were driven by analysis of publicly available data."

Paulson, 54, is an unlikely figure in what has become a political as well as financial drama against a backdrop of regulatory reform efforts and public anger about the nation's severe downturn.

For nearly 30 years, Paulson worked away from the limelight -- first in the mergers and acquisition department of Bear Stearns, then as a partner in an arbitrage firm specializing in mergers, then setting up his own firm in 1994.

He initially focused on what he knew, buying shares in companies targeted for acquisition. The companies were sold at discounted takeover prices because of uncertainty that the deals would go through, but Paulson bought shares in the least risky of those, whose deals were fully financed. When the acquisitions were complete, he profited.

"He had a very conservative approach to risk arbitrage," said a loyal longtime investor. "That's what we liked."

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