More than perhaps any other investor, John Paulson has been lauded for his foresight in predicting a quick and painful end to this decade’s mortgage boom. And the hedge fund manager has been rewarded handsomely for his big bets.
He was fourth on the 2009 annual ranking of top earners in the hedge fund industry by AR: Absolute Return+Alpha magazine. He came in second in 2008 with reported gains of $2 billion.
And Paulson & Company's performance in 2007 was estimated to be the best of any hedge fund, according to several publications. According to Institutional Investor's Alpha magazine, Mr. Paulson himself made $3.7 billion, at the time considered the richest bounty in Wall Street history.
Mr. Paulson began betting against subprime mortgages as early as 2006, setting up two funds focused for that purpose. At the time, the bet seemed highly contrarian: Big firms like Merrill Lynch and Citigroup were gorging on enormous profits by packaging and trading blocks of risky home loans.
And Mr. Paulson himself was a relative unknown. A native of Queens, he was a former banker at Bear Stearns before forming his own hedge fund in 1994.
But by the time the housing market began to slump in 2007, Mr. Paulson’s pessimism seemed well founded. The housing crisis led to a near-cratering of the mortgage market, forcing hundreds of billions of dollars in losses at major investment banks.
It also precipitated the sales of Countrywide Financial, the big mortgage lender, and Bear Stearns, his former employer and the investment bank that drew much of its profits from trading in subprime-backed securities.
And in a surprising twist, Paulson & Company was reported in January 2008 to have hired Alan D. Greenspan, the former Federal Reserve chairman, as an adviser.