Friday, April 16, 2010

John Paulson who made billions is not charged

Three and half years ago, a New York hedge fund manager with a bearish view on the housing market was pounding the pavement on Wall Street.

Eager to increase his bets against subprime mortgages, the investor, John A. Paulson, canvassed firm after firm, looking for new ways to profit from home loans that he was sure would go sour.

Only a few investment banks agreed to help him. One was Deutsche Bank. The other was the mighty Goldman Sachs.

Mr. Paulson struck gold. His prescience made him billions and transformed him from a relative nobody into something of a celebrity on Wall Street and in Washington.

But now his brassy bets have thrust Mr. Paulson into an uncomfortable spotlight. On Friday, the Securities and Exchange Commission filed a civil fraud lawsuit against Goldman for neglecting to tell its customers that mortgage investments they were buying consisted of pools of dubious loans that Mr. Paulson had selected because they were highly likely to fail.

By betting against the pool of questionable mortgage bonds, Mr. Paulson made $1 billion when they collapsed just a few months later, the S.E.C. said. Investors, who bought what regulators are essentially calling a pig in a poke, lost the same amount.
Read the rest here.

For the record, that's how the game is played. Capitalism does not guarantee everyone wins. If you make bad bets you can loose. Paulson gambled and won. He lied to no one. He did not misrepresent anything he was doing. In fact he was quite open about it and was generally laughed at. Of course if Goldman was making false statements that could be a problem. But it would be Goldman's problem, not Paulson who was 100% above board in his dealings. All in all it sounds like the Times is trying to convict Paulson of being a smart investor who made a lot of money for himself and his investors when other people could not find their southern quarters with both hands in the dark.

For those who did not grasp this; Wall Street is not a charity operation. Before going there with your money, know your risk tolerances and don't play with money you can't afford to loose. Don't invest in anything you do not understand and stay out of debt.

5 comments:

James the Thickheaded said...

Hogwash my friend. Goldman went rogue and descended from the Seraphim long ago... when they sold themselves first to the Japanese, and then went public. Today... it's no white shoe firm, but more like you're average garbage. Reputation made them, and now it will break them and the rest of the Street... not because it's about making money, but because they wanted to make ALL the money. They used to leave crumbs on the table so that those who rode along with them would be tahnkful, and they were. Then they got greedy, and began slurping up the crumbs... word gets around, and aside from the few chumps still shilling for them and impressed with their legerdemain, there tends to be a narrowing of who will trade with you. As a famous investor once said, "You can spend a lifetime making a reputation, but you lose it in a minute." They've spent years losing it, and their profits, and likely all the Street's - are going to go sharply down. It's history, it's repeating, and no... we're not going to avoid the negative consequences any more than Goldman could maintain its once-good culture and trade on it at the same time. It may take time to play out... it's a multiyear scenario, but we're following it to the letter so far.

John (Ad Orientem) said...

James,
My defense was of Paulson, not Goldman Sachs. A court will have to decide if GS broke the law. But I do agree that at the very least their actions raise troubling ethical questions.

In ICXC
JOhn

James the Thickheaded said...

But today's SEC is much more like the Wicked Witch: "I'll get you and your little dog, too!" So Paulson... ought not be too comfortable. There's an unholy alliance between regulators and the plaintiff's bar these days: They share information, and this will be no exception, and suits aren't afraid to name individuals and sue them personally as part of the case. That's just the MO. It's why we all have that E&O. I don't get the double jeopardy bit, but we moved beyond the constitution a LONG time ago I guess.

My guess is that Goldman will settle. Politics could well spoil the courtroom long before anyone gets there and make those risks too great. And look at how cheap Spitzer used to let folks off for high crimes with a pittance + a campaign contribution :) So smart money says settle and pray the judge okays it.

The Anti-Gnostic said...
This comment has been removed by the author.
The Anti-Gnostic said...

Paulson did nothing more than bet against the suckers who thought housing prices would rise forever. Why pile on the one guy who pointed out that the emperor had no clothes? Wait, I think I know the answer ...