John Paulson makes $5 billion in 2010

frankmatthews

frankmatthews

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Yes, Billion!
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This is the same cat that made 4 billion in 2007 betting against subprime mortgages.  This guy just doesn't stop.  Unreal.

http://www.reuters.com/ar...ds-idUSTRE70R7CS20110128
 
Didn't he keep most of his money in his funds anyway?

He's got quite a few now anyway...so incentive fee and mgmt fees alone are probably netting a good weight of that versus sole performance.
 
Originally Posted by LazyJ10

Didn't he keep most of his money in his funds anyway?

He's got quite a few now anyway...so incentive fee and mgmt fees alone are probably netting a good weight of that versus sole performance.
Click to expand...
From today's WSJ article:
Mr. Paulson and his fellow managers seldom take much of their profits in cash. Some of the profits are so-called paper gains, which reflect the rising value of their firms' holdings, and could erode if those investments sour. Other gains come from selling investments, and most of those are rolled back into their funds.
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The article also said that 20% of the profits came from "performance fees."
 
How is this possible?

I know its legal but jesus... does he just wager on people's stupidity?
 
Yeah I get it, what some articles I read earlier weren't clear on whether or not this amount was on realized gains.

If it's not, it's a part of the carried interest he's earning across the board but hasn't taken distribution on. Depends on his fund's structure.
 
Can someone break down the article?
I'm trying to get familiar with hedge funds and just financial news in general.

How does someone like Paulson just bet money on subprime mortgages?

I'm kinda slow with stuff like this.
 
Originally Posted by GUTTA BOB

Can someone break down the article?
I'm trying to get familiar with hedge funds and just financial news in general.

How does someone like Paulson just bet money on subprime mortgages?

I'm kinda slow with stuff like this.
Click to expand...
LazyJ can probably break it down much better than I can. He's very knowledgeable about these topics.
But basically you can be "long" or "short" in the stock market. Taking a long position means that you think the price will rise, while being short means that you expect the price to fall. 

As far as I know, investing in subprime mortgages is typically done through mortgage backed securities and collateralized debt obligations. Paulson and several other investors took short positions on these derivatives.

I haven't really read too much about the topic of subprime mortgages (I'm currently in the process), so I don't really want to break those down too much more. I hate to suggest Wikipedia as a place to do research, but there's a pretty decent article on there titled "Subprime mortgage crisis" that can probably help you to understand some of that stuff better.
 
Originally Posted by GUTTA BOB

Can someone break down the article?
I'm trying to get familiar with hedge funds and just financial news in general.

How does someone like Paulson just bet money on subprime mortgages?

I'm kinda slow with stuff like this.
Click to expand...
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Read that book.
 
The Big Short is a pretty good book to read if you're going to read more on the subject or just casually want to learn about the subject. That's what I'm currently reading.

But if you really want to learn about the crisis, I've heard that there are other books that should be read first. I don't have the list of other books with me right now, though.
 
Originally Posted by tmay407

The Big Short is a pretty good book to read if you're going to read more on the subject or just casually want to learn about the subject. That's what I'm currently reading.

But if you really want to learn about the crisis, I've heard that there are other books that should be read first. I don't have the list of other books with me right now, though.
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I just started reading Too Big To Fail and it hits on exactly this. Only a few chapters in, but it's really interesting. Paulson is actually a really smart dude and so far (first 2 chapters) he seems to know his stuff.    
 
Originally Posted by tmay407

Originally Posted by LazyJ10

Didn't he keep most of his money in his funds anyway?

He's got quite a few now anyway...so incentive fee and mgmt fees alone are probably netting a good weight of that versus sole performance.
Click to expand...
From today's WSJ article:
Mr. Paulson and his fellow managers seldom take much of their profits in cash. Some of the profits are so-called paper gains, which reflect the rising value of their firms' holdings, and could erode if those investments sour. Other gains come from selling investments, and most of those are rolled back into their funds.
Click to expand...
Click to expand...
The article also said that 20% of the profits came from "performance fees."


Yep, read that article this morning and my jaw dropped cause I remembered his name from back in 07.  It's not exactly money in the bank for him but when your talking billions of dollars it never is.  His funds had rather modest gains this year, I think his biggest gain was in a gold heavy fund that returned something like 45%.  The rest were 25% and under.  Compared to 07 when he made something like 500% on the subprime bets.  He netted about $1 billion in "performance fees" last year.
For the people asking how he does it, it's basically a factor of having tens of billions of dollars under management and really being able to foresee what the future holds for the markets.  As far as subprime goes he basically assembles a portfolio of many different kinds of financial instruments that would increase if what he predicts comes true.  These things are very mathematically complex and are proprietary, meaning it's a secret as to exactly how they are constructed but I know his subprime bets had a lot to do with CDS's.  When you are managing that much money you can't just go short becasue you would be basically shorting entire companies.

To go short you basically borrow shares of stock from a broker and sell them immediately.  When and if the price goes down you repurchase the same amount of shares you borrowed at a cheaper price and repay the institution you borrowed them from, keeping the difference. If he was shorting with tens of billions he would have been borrowing every share in existence of numerous companies which is impossible.  The things he does are way more complex than that.  These Wall Street cats are going to the Ivy League's and hiring the top math majors and having them create these complex derivatives that no one can really understand except other top math majors.  

In theory you could make similar bets if you knew what this guy knew but you're not gonna have enough money to invest to see the type of returns he is seeing.
 
I know of a fund that was heavy in bank debt the last couple of years. 500m plus in AUM in master/feeder structure.

The counter to all the debt were typically investment banks. Much like a swap, you pick the side you want and the bank/counter party usually invests in the other and "hedges" as to not be fully exposed.

What came of subprime was you had the banks writing and investing in the same junk and not hedging all the while being exposed to ridiculous counterparty risk.

It was a perfect storm that few picked up on.

The money was made because the original positions of being short the mortgage market involved little premium because this crap was rated so highly. So you could accumulate your positions, pay out little interest depending on the terms (IE Bullet swaps versus Total Return, etc) all while waiting for the default event to occur.

Honestly the real impressive part is that the counterparties settled.
 
Originally Posted by LazyJ10


Honestly the real impressive part is that the counterparties settled.
Click to expand...

Haha, your tax dollars at work.
I don't understand how these folks could sell this "insurance" and not collateralize it.  These are not stupid people.  It all seems a bit sketchy if ya ask me.
 
The interest payments were enough and the collateral on the face was nothing in the greater scheme of things.

Think of shorting a stock, you basically have unlimited potential at losses and if you're trading on margin you post money.

The sheer volume of everything striking at once was just a huge overload.

In my fund example -

They can by a share of bank debt (not necessarily a CDO or Swap) from another fund or bank in the secondary market for 80 cents or less on the dollar.
The global volume size of the loan is like 100m. Their tranche is like 15m. But they ultimately don't know who has the other 85m which ultimately puts them at some risk. Now imagine the entire floor being pulled out on everything at once.
 
Had it been regulated like conventional insurance i.e. collateralization, it would have never grew to the levels it did. AIG knew this better than anyone.

Total credit market debt was growing at an astronomical rate. It was clearly unsustainable and i'm quite sure everyone knew this yet they still wanted to play musical chairs. It appears the music is back on.
 
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