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Billionaires Behaving Badly: John Paulson

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He thought the subprime mortgage market was going to fail, so he stepped up to the plate and... made himself rich.

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Everybody loves capitalism. It's the Cadillac of economic systems and our business elites have the Lamborghinis to prove it. So why does everybody hate the guys who show how it works? John Paulson, for instance. Just because he made billions off the misery of millions, slurping up the lifeblood squeezed from America's crushed dreams, people seem to dislike him.

Paulson played the contrarian as the sub-prime mortgage developed, making big profits in foreclosures and mortgage-backed securities, and shorting large UK banks. According to the New York Times, Paulson's hedge fund made $5.3 billion from 2007 to 2009 betting against sub-prime mortgages.

But his real claim to villainy was yet to come. His masterstroke was delivered via Goldman-Sachs and the infamous investment turd they called Abacus. The Abacus CDO (collateralized default obligation) was a package of mortgage-backed securities offered by Goldman Sachs (GS) and allegedly compiled independently by ACA Management. In fact the CDOs had been largely selected by Paulson, with an eye to creating an investment product that would combine the buoyancy of a limestone canoe with the strength of wet Kleenex. Paulson-and Goldman Sachs-then bet against their own unholy creation, to the tune of over $1 billion.

The SEC came after Goldman Sachs last spring, charging the company with fraud over the Abacus deal.

And Paulson? Not a care in the world. It was Goldman Sachs that had allegedly misrepresented the nature of the investment. Paulson never pretended Abacus was anything other than a sucker bet. As his spokesman Stefan Prelog put it in a statement released after the fraud charges were laid: "While it's unfortunate that people lost money investing in mortgage-backed securities, Paulson has never been involved in the origination, distribution or structuring of such securities. We have always been forthright in expressing our opinion as to the quality of the underlying mortgages."

In other words, you cannot prosecute a man because he recognizes a sucker when he sees one.

To be fair, Paulson has shared some of his windfall. Last year Paulson donated $20 million to the Stern School of Business at New York University and $5 million to Southampton Hospital in Long Island's East End. (Paulson owns a summer home in the area. It was purchased in 2008 for $41 million.) The hedge fund manager has also given $15 million to the Center for Responsible Lending, money that will be used for a center devoted to assisting troubled borrowers. When he announced the donation, Paulson made the following statement: "We are pleased to help [the Center for Responsible Lending] provide legal services to distressed homeowners, many of whom have been victimized by predatory lenders."

It's an exciting new trend in philanthropy -- perhaps one day we'll see Philip Morris Oncology wings at hospitals across the country.

Paulson made his billions by being bearish, which seems appropriate-he uses the free market system as a bear uses the woods. But hey, it's all fertilizer. And those who think the world is just found themselves cheering last summer when Paulson hedge funds began to show significant reverses.

But this fall Paulson has been surfing a golden wave, anticipating huge returns from his gold fund as prices rise.The day may yet come when cosmic justice nails Paulson right in the gonads.

Then again, as all good capitalists know, there's no money to be made betting on justice. As of now, Paulson remains golden.

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No positions in stocks mentioned.
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