The Man Who Made Too Much

[GG]

http://www.cnbc.com/id/28814840

Meet the man who made $3.7 billion betting on the complete collapse of the financial system.

Paulson is smart enough to know that at this particular moment in history, the less he's heard from, the better. The simple reason: He is not suffering. In an era in which losers are universal and making a profit seems somehow shady, Paulson is the most conspicuous of Wall Street's winners. Paulson & Co.'s funds (with an estimated $36 billion under management and growing by the day) were up a staggering $15 billion as the markets teetered in 2007; one fund gained 590 percent, another 353 percent. All this reportedly garnered him a personal payday of $3.7 billion, among the biggest in history. In 2008, his funds didn't climb nearly as much but were still successful enough to put him at the very top of his profession. By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.

Paulson is smart enough to know that at this particular moment in history, the less he's heard from, the better. The simple reason: He is not suffering. In an era in which losers are universal and making a profit seems somehow shady, Paulson is the most conspicuous of Wall Street's winners. Paulson & Co.'s funds (with an estimated $36 billion under management and growing by the day) were up a staggering $15 billion as the markets teetered in 2007; one fund gained 590 percent, another 353 percent. All this reportedly garnered him a personal payday of $3.7 billion, among the biggest in history. In 2008, his funds didn't climb nearly as much but were still successful enough to put him at the very top of his profession. By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.

Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under.

[Red Arrow]

Somehow it just seems wrong to be able to make money betting that others will lose money.

[Conan71]

quote:Originally posted by Red Arrow

Somehow it just seems wrong to be able to make money betting that others will lose money.

In general I don't have problem with the concept.

However, I do have a problem with a principal architect of the economy banking on it tanking and doing nothing substantive to avert it when there was time.  I'm curious how many members of Congress were aware of this fact prior to awarding Paulson $350 bln in discretionary funds to spread around amongst his Wall St. bretheren.

Maybe we are over-stating the government's ability to affect the economy, aside from mandating risky lending practices which built this whole house of cards in the financial markets.

[Double A]

quote:Originally posted by Conan71

quote:Originally posted by Red Arrow

Somehow it just seems wrong to be able to make money betting that others will lose money.

However, I do have a problem with a principal architect of the economy banking on it tanking and doing nothing substantive to avert it when there was time.  I'm curious how many members of Congress were aware of this fact prior to awarding Paulson $350 bln in discretionary funds to spread around amongst his Wall St. bretheren.

This isn't Hank Paulson the article is referring to, it's John Paulson. As far as I know, there's no relation.

[Conan71]

Damn, I should know better.  Click link, then comment.

[cannon_fodder]

I have no problem with it at all.   If more wall street types figured this out the calamity would have been averted and we would have all made out modest profits by sucking up this mans betting money.  That's how it works.

Semgroup placed a large bet.  Had they placed that bet 6 months later they would have gained about $3,000,000,000 or so at the expense of the poor SOBs that bought the futures contracts.  I'm sure we would have been fine with that as most of that money trickled into Tulsa's economy.

I'm just jealous that I didn't cash in.  I'm still too scared to open my "earnings" statements.

[nathanm]

quote:Originally posted by Conan71

aside from mandating risky lending practices which built this whole house of cards in the financial markets.

I find it hard to accept that you actually believe that line of bull.

[Conan71]

quote:Originally posted by nathanm

quote:Originally posted by Conan71

aside from mandating risky lending practices which built this whole house of cards in the financial markets.

I find it hard to accept that you actually believe that line of bull.

I can't believe the line of bull you are promoting.  

What about the foibles of the CRA, and the secondary and tertiary (and possibly quaternary- no one seems to know for sure the mathematical gymnastics tied to financial markets) guarantee/credit markets that spawned do you not understand?  That's what is hanging us right now.

Do you struggle with history, economics, or the history of economics?

Government's best intentions usually result in a total cluster-**** because there is no such thing as altruism in government.  Only power and what it takes to gain or retain it.  Mandating risky lending practices to benefit the construction industry and to curry favor with lower income voters started the whole thing.  What is one of the benchmarks quoted daily in the financial papers???  Construction industries and home starts.

Go work in consumer lending for 4-5 years then you can tell me I'm full of **** as I only had 3.5 years experience in it, dealing in anything from signature loans to residential and commercial RE loans.

[nathanm]

quote:Originally posted by Conan71

quote:Originally posted by nathanm

quote:Originally posted by Conan71

aside from mandating risky lending practices which built this whole house of cards in the financial markets.

I find it hard to accept that you actually believe that line of bull.

I can't believe the line of bull you are promoting.  

What about the foibles of the CRA, and the secondary and tertiary (and possibly quaternary- no one seems to know for sure the mathematical gymnastics tied to financial markets) guarantee/credit markets that spawned do you not understand?  That's what is hanging us right now.

Do you struggle with history, economics, or the history of economics?

Government's best intentions usually result in a total cluster-**** because there is no such thing as altruism in government.  Only power and what it takes to gain or retain it.  Mandating risky lending practices to benefit the construction industry and to curry favor with lower income voters started the whole thing.  What is one of the benchmarks quoted daily in the financial papers???  Construction industries and home starts.

Go work in consumer lending for 4-5 years then you can tell me I'm full of **** as I only had 3.5 years experience in it, dealing in anything from signature loans to residential and commercial RE loans.

The CRA has little to do with the situation we are currently in. It doesn't mandate risky lending at all.

What mandated risky lending was the need to sell more and more MBS when they ran out of good loans to sell. The CRA has been on the books for a looong time, yet we didn't have a big problem with bad mortgages until the mortgage lenders decided they didn't need to do much underwriting at all since they were just going to sell off the loans anyway.

Basically putting people in mortgages they couldn't really afford so they could profit when they were resold.

Blame the mortgage brokers and the wholesale lenders who didn't give a rat's donkey about someone's ability to repay, not the right wing noise machine's laughable attempt to blame this mess on the Democrats. (not that the Republicans are any more responsible, aside from the complete lack of banking oversight during the Bush years)

And please, point out where in the CRA it mandates no down stated income loans and other similarly risky lending practices. (I don't have a problem with stated income loans..I have a problem with stated income loans where the borrower isn't putting large sums of their own funds at risk also..if you don't have any skin in the game, you've got nothing to lose!)

[cannon_fodder]

Nathan, per the Vice President of Lending at Stillwater National Bank they are required by having a federal charter to have a certain percentage of what amounts to bad debt on their books at all times.  Technically, they have to make sure that a certain percentage of their lending goes to help "underprivileged people" realize the dream of owning a home - but that's just code for making bad loans to poor people.

But you are correct that such a move is not the main reason we are up sh!t creek.  However, I would contend that a Federal policy encouraging bad loans may have contributed to the feeling int he industry that bad loans aren't a bad thing.  Furthermore, federal policies in both lending and tax have many other facets that both encourage lending to parties that are not eligible and encourage borrowing by parties that can't afford it.

There's plenty of blame for borrowers, lenders, and government policy makers.  If you have a loan that is current, didn't make or profit from these bad loans (origination fees, refinancing, title work, and credit rating services included), and aren't in a position to set police then you are free from blame.

Stated income loans?  Really... no one saw that going bad?  500% rise in real estate prices in 10 years, really?  Idiots.

[Conan71]

Don't underestimate the effect that loosened policies regarding loan guarantees at the hybrid gov't/for-profit Fannie and Freddie had on permissive lending practices with the Clinton mandates that housing programs were to be expanded.

CRA's and government guarantees were the "Pandora's Box" that led the rest of the conventional lending markets adopting riskier lending practices.

There is absolutely no doubt that the direct actions of lenders, borrowers, and appraisers are responsible, but where did this permissiveness start?  What was the example and where did it come from?  Who said: "Don't worry about it, just lend the money, we've got your back?" Government.

You need to understand my glasses aren't really colored with Rep vs. Dem.  I'm more of a Libertarian and a government cynic.  IMO, Clinton expanded the CRA programs too aggressively and credit and investment markets were way too loose during his admin.  Then Bush came in and did very little to preside over fiscal conservatism.  

Clinton DID encourage more spending, but from private debt markets with public guarantees via Freddie and Fannie.

It's not Dems at their worst or Reps at their worst, it's government at it's worst with best intentions.  There are many things cloaked as it, but again, there's no such thing as altruism in gov't.  

[we vs us]

quote:Originally posted by cannon_fodder

Nathan, per the Vice President of Lending at Stillwater National Bank they are required by having a federal charter to have a certain percentage of what amounts to bad debt on their books at all times.  Technically, they have to make sure that a certain percentage of their lending goes to help "underprivileged people" realize the dream of owning a home - but that's just code for making bad loans to poor people.

But you are correct that such a move is not the main reason we are up sh!t creek.  However, I would contend that a Federal policy encouraging bad loans may have contributed to the feeling int he industry that bad loans aren't a bad thing.  Furthermore, federal policies in both lending and tax have many other facets that both encourage lending to parties that are not eligible and encourage borrowing by parties that can't afford it.

There's plenty of blame for borrowers, lenders, and government policy makers.  If you have a loan that is current, didn't make or profit from these bad loans (origination fees, refinancing, title work, and credit rating services included), and aren't in a position to set police then you are free from blame.

Stated income loans?  Really... no one saw that going bad?  500% rise in real estate prices in 10 years, really?  Idiots.

I'd like to hear from the VP of Lending at Stillwater NB whether or not the Federal initiative to help "underpriviledged buyers" required them and banks like them across the country to toss lending standards completely out the window.  I'd wager that there was nothing in the initiative that required no doc, or even better NINJa (no income, no job) loans to qualify for $300,000 homes.  

What I assume he didn't say was what percentage of his total loan mix was required to be subprime, and what it actually was.  I'm also curious to know what the mix was prior to the Clinton initiative in '99, and whether or not they had been making these loans prior to it,and whether or not their risk was more or less acceptable then.  

(Disclaimer:  I don't know if Stillwater Bank itself partook in the subprime mess.)

Point being that subprime loans were made with a good deal of success before the credit crash, and, if they're offered and administered with basic lending standards, the risk is limited.  Even after all this time, I haven't seen any proof (aside from the assertion itself) that Clinton's initiative was a prime driver of the subprime bubble. What HAS been well documented is just how off the rails lending of all sorts became under the direction of the unregulated investment houses.    

In the end, though, it's erroneous now to think of this as a crash brought on by subprime mortgages alone.  As a commenter on CNBC said recently (sorry, I don't have a cite) the subprime crash was really only symptomatic of larger troubles in the larger economy.  It was just the first to go under and to get the most press, but certainly not the end all and be all.

[Conan71]

One difference in this crisis wevus is that usually massive mortgage defaults follow massive job cuts.  That wasn't the pattern this time, obviously.  

There's a lot of psychology that drives  recessions as well as economic realities.  Loss of value in the housing market and loss of faith in the lending system

There's no doubt without stupidity and outright greed of the lenders that the problem would not be as bad.  There was no shortage of investors looking for a piece of the higher yield pie that sub-prime brought with it.  

[cannon_fodder]

No Wevus, they did not.  I explicitly said the crisis is not the exclusive result of governmental policy... but encouraging bad loans in any capacity did not help.  I believe my previous post makes my position clear.

[nathanm]

quote:Originally posted by cannon_fodder

No Wevus, they did not.  I explicitly said the crisis is not the exclusive result of governmental policy... but encouraging bad loans in any capacity did not help.  I believe my previous post makes my position clear.

That FHA is not bankrupt is a pretty strong indication that lending to borrowers with low credit scores does not have to be all that risky. What is risky is putting borrowers like that in option ARMs. (or ARMs at all for that matter)

CRA didn't require any of that.

The mainstream banks started doing subprime lending because they externalized the risk onto the buyers of their MBS, so they were able to keep profits up by just looking the other way. Along the way some idiots decided they ought to start eating their own dung. We have a long history of that in our country.

The banks would have started making prime loans to subprime borrowers in any event, unless the government had specifically banned the practice. Their focus was on their stock price and quarterly results, not on the long term health of the economy. (or on the long term health of their institution once they started buying their own MBS)