Paulson & Co Opening New Fund to Re-Capitalize Banks

There is no small amount of irony in this:

"John Paulson, the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is now seeking to profit from Wall Street’s search for capital to offset mortgage writedowns.

Paulson plans to open a hedge fund by December that will invest as the world’s biggest banks and brokers add to the $345 billion they’ve raised in the past year, according to two people with knowledge of the matter. His Paulson & Co., which oversees $33 billion, hasn’t set a size target for the fund, said the people, who declined to be identified because the plans aren’t final.

The New York-based firm’s credit funds rose as much as sixfold last year, helped by bets that rising defaults on subprime home loans would pummel the value of mortgage-backed securities. The meltdown has forced the world’s biggest banks and securities firms to take $467 billion in asset write-offs and credit losses and led to the collapse of Bear Stearns Cos.

"Investors who are able to make money in a declining market and then rapidly turn around and profit from a rising market is highly unusual,” said Thomas Whelan, president of Greenwich, Connecticut-based Greenwich Alternative Investments, which advises clients on investing in hedge funds. Paulson declined to comment. His 2007 earnings made him the highest-paid hedge-fund manager, according to Institutional Investor’s Alpha magazine."

Note that Paulson was early in shorting Mortgage back securities, but had the conviction and the patience to wait out the eventual sell off. I would expect something similar here . . .

>

Previously
Those Damn Short Sellers Are Just Killing It!
http://bigpicture.typepad.com/comments/2008/07/those-damn-shor.html

Source:
Paulson & Co. Plans Fund to Provide Capital to Banks
Saijel Kishan
Bloomberg, July 23 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aANbt26C4Kuk&

What's been said:

Discussions found on the web:
  1. Pat G. commented on Jul 23

    Is he related to the Treasury Secretary?

    ~~~
    BR: None

  2. jhunt commented on Jul 23

    hmmm… interesting to see him about face like this. obviously its a rumor and the fund hasnt been set up yet. but on a timeline of 3 to 6 months he should have that taken care of. is he trying to catch the falling knife, or does he see a real turnaround that quickly…

  3. John commented on Jul 23

    Nothing ironic about it. Buy low sell high. One of the basic rules of business. Obviously there are going to be some bank bargains out there in 6-9 months time, Dimon’s already stated that, so there’s nothing surprising about this.

  4. shoeless commented on Jul 23

    I think it’s a case of “If you can’t beat ’em, join ’em.” He’s been short the financials for over a year and now sees that the FED et al intend to move mountains to save them. Why not get in on the action?

  5. Andy Tabbo commented on Jul 23

    Agree with the sentiment here Barry. Smells like someone who is going to be about 12-18 mos earlier, but who will likely make a boatload of money in 2011-2013…

    He’ll make a few billion again….

    Jealous.

    – AT

  6. Estragon commented on Jul 23

    Mish has a piece about “death spiral” equity issues from the financials. If true, it wouldn’t be surprising to see some of the HF’s that were heavily short financials move in for the kill by buying equity with look-back provisions.

  7. ChrisG commented on Jul 23

    Good post, though I’m not so sure I agree with the statement that Paulson was early in shorting subprime mortgages. Buying protection on ABX tranches was actually a popular hedge fund trade in the second half of 2005, but all the early entrants eventually stopped out of the trade some time in 2006 after getting crushed relentlessly. Paulson only started his Credit Opportunities Fund in late 2006 if I’m not mistaken, so there was plenty of luck involved in his not getting into the trade too early…

  8. Stuart commented on Jul 23

    Astute observation.

    “This news was released by Bloomberg simultaneously with an early release of the Fed’s Beige Book which spoke about the discouraged and morose mood of the public.

    Doug Kass reports that “bank stocks just moved up on a story on the newswires that Bank of America (BAC) is going to buy back 75 miillion shares. Actually Bank of America is reducing its expiring 200-million-share buyback to 75 million shares (it had remaining authority of 190 million shares).”

    It does not get much more “in-your-face” than this.

  9. Patrick commented on Jul 23

    Good post, though I’m not so sure I agree with the statement that Paulson was early in shorting subprime mortgages. Buying protection on ABX tranches was actually a popular hedge fund trade in the second half of 2005, but all the early entrants eventually stopped out of the trade some time in 2006 after getting crushed relentlessly. Paulson only started his Credit Opportunities Fund in late 2006 if I’m not mistaken, so there was plenty of luck involved in his not getting into the trade too early…

    What you call luck some people call perfect timing.

  10. Andy Tabbo commented on Jul 23

    Banc of America buying back stock….

    Luv it.

    Brilliant.

    Genius.

    Everyone in government telling you to raise capital and stay well capitalized. And, then you go out there and buy back stock.

    Maybe these guys really are geniuses and making the great buy of all time….but after a 100% bounce off the lows…I would not be buying stock…my strong bias would be preservation of capital/liquidity….

    – AT

  11. Stuart commented on Jul 23

    This past week has been an SEC and Treasury lead pump and dump for the bank stocks. We’re in the pump phase.

  12. Mike Laskowski commented on Jul 24

    Barry,

    Do you have any links to what the actual procedure is for a bank when it fails /is taken over by the FDIC?

    Thanks.

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