Billionaire: John Paulson
Wealth: $12.0 billion
Source of Wealth: Paulson & Co.
John Paulson, founder of Paulson & Company, was born in New York City on December 14, 1955. In 2010, Forbes magazine ranked him number 45 on their list of the world’s richest billionaires, with an estimated $12 billion fortune. He received an early business education from his father, Alfred Paulson, who worked for Ruder Finn as their Chief Financial Officer.
He attended New York University and graduated with a degree in finance. Showing early promise, the future billionaire graduated at the top of his class and went on to Harvard where he earned an MBA, ranking in the top five percent.
The road to billionaire began when he went to work for the Boston Consulting Group, moving from there to work for Leon Levy at Odyssey Partners. He then joined Bear Sterns, working with the Mergers and Acquisitions Group, before becoming a partner at Gruss Partners LP, an arbitrage firm specializing in mergers.
In 1994, John Paulson founded a hedge fund of his own. Not yet a billionaire, he started with a mere $2 million in capital and a single employee.
From this foundation, he developed Paulson & Company, which created several hedge funds. As of June 1, 2007, this firm managed assets of $12.5 billion, 95% from institutions. Just over a year later, that figure shot up to $36 billion.
The billionaire’s company focused on opportunities in markets for mortgage-backed and foreclosure securities. In 2008 he started a new fund to specialize in Wall Street’s capital problems. The billionaire’s idea was to lend money to businesses plagued with under-performing housing market-linked assets, particularly other hedge funds or investment banks. Writedowns in this area were a breathtaking $345 billion. Where others saw disaster, he saw opportunity for Paulson & Company to prosper.
During the first few months of 2008, Paulson & Company acquired Yahoo stock, to the tune of 50 million shares. A few months later, on May 15, the billionaire announced his support for Carl Icahn in a proxy fight to replace Yahoo’s Board of Directors.
Alan Greenspan, the former Federal Reserve Board Chairman, came on board with Paulson & Company in early 2008, surprising many in the business community.
In September 2008, John Paulson made a bold investment, gambling that stock prices of four of the largest banks in the United Kingdom would decline. The billionaire correctly judged market direction, taking a profit of about £280 million.
More recently, on August 12, 2009, he purchased two million and 35 million shares respectively of Goldman Sachs and Regions Financial stock. The billionaire also invested in Bank of America and said he expects the stock price to double by 2011.
In November, 2009, John Paulson started a fund specializing in gold-related investment, particularly gold mining stocks.
The Securities and Exchange Commission filed suit against Goldman Sachs, as well as one of their Credit Default Obligation traders, which created a problem for John Paulson, because in papers filed in court on April 16, 2010, Paulson & Company was mentioned in connection to that suit.
A CDO can be a complex product. The SEC’s position was that Goldman Sachs made material misrepresentations and had omitted facts in disclosure documents relating to a CDO product it originated. Specifically, the SEC alleged that mortgages providing the foundation of the CDOs was not, as purported, chosen by a neutral third party. The SEC contended that this third party, ACA Management, was in fact controlled by John Paulson, and that he had interests directly contrary to those of potential investors.
Paulson & Company would make a large profit if there was a default. The allegation was that John Paulson had influenced the process to make default more likely so that Paulson & Company could profit from short sales. Paulson & Company was mentioned in the case, but not as a defendant.
According to the New York Times, John Paulson made a one billion dollar profit in 2007, doubled that to two billion in 2008, and increased it again to 2.3 billion in 2009. The billionaire accomplished this primarily by gambling that subprime mortgages would collapse, well before most in the market realized the weakness of these securities.
The Center for Responsible Lending seeks to influence banks to improve mortgage terms for applicants with weak credit ratings. Critics argue that these are precisely the wrong people to have mortgages in the first place and that encouraging them to overextend could only exacerbate the housing bubble, making it bigger before it popped, which in turn made the subsequent recession worse. John Paulson made a $15 million donation to this organization.
The billionaire also made a $20 million donation to his alma mater for scholarships, faculty research, and renovation.
A big part of the secret of this billionaire’s success is early grasp of the inevitable collapse of the real estate bubble. Hindsight is 20-20, but at the time he was one of the few to recognize the trend and to bet heavily on that conviction. In 2007 in particular, Paulson & Company was widely seen as the best-run hedge fund. At one point, John Paulson made $3.7 billion personally, according to Institutional Investor’s Alpha magazine, probably the greatest commission in Wall Street History.
In 2006, he set up two funds specifically to bet against subprime mortgages, contrary to general wisdom. Firms with a different philosophy, such as Citigroup and Merrill Lynch, were taking in huge profits packaging and trading high-risk home loan blocks. It would be different now that he’s established, but at the time John Paulson was not well known; many thought him reckless.
Considering the history of Merrill Lynch and Citigroup, at least on this point history has proven him right.