The financial meltdown sank some of the most storied names in banking and brought the world financial system to the brink. But John Paulson earned nearly $6 billion betting against the mortgage market and banks, and earned himself a place as one of the savviest hedge fund managers in history.
Motley Fool profiles Paulson in their section on financial giants, tracing his roots from growing up in Queens, New York, to Harvard Business School, where he earned an MBA as a Baker Scholar, the school’s highest academic honor.
Ironically, Paulson worked as an investment banker at Bear Stearns for several years before getting a hedge fund job at Gruss Partners, and then setting up his own hedge fund in 1994 with just $2 million of his own money.
According to the Motley Food profile, Paulson built up a winning track record in merger arbitrage, taking advantage of price differences that arise when mergers and acquisitions are announced. He attracted more investors and built his team.
Paulson’s big breakthrough came in 2005 when he felt that housing prices had appreciated too much and the market bubble was due for a crash. He began shorting mortgage-backed securities (MBS), focusing on triple-B bonds, which are the lowest tranches in subprime securitization. Paulson correctly calculated that a decline of just 6 percent would wipe out these securities. In hindsight, it seems like a reasonable bet, but at the time, big banks (including the aforementioned Bear Stearns), were loading up on these instruments.
As a result of the crash, Paulson earned the biggest pay day in Wall Street history, $3.7 billion in 2007. He kept up his shorting strategy through 2008, earning another $2 billion.
You can read the full profile, including what Paulson is shorting today, at Motley Fool.