A Primer on Paulson & Co.
NEW YORK (
) -- Famed hedge fund investor
was thrust into the limelight Friday because of a connection to the
Goldman Sachs
(GS) - Get Goldman Sachs Group, Inc. Report
drama that is rocking the markets.
Goldman shares were plunging 11% in late trades after the
Securities and Exchange Commission
filed civil charges earlier in the day alleging the company committed fraud by deceiving investors on subprime mortgage-backed securities.
John Paulson, hedge fund manager |
That's where Paulson comes in. The SEC is alleging that his firm Paulson & Co., one of the world's largest hedge funds, paid Goldman to structure a transaction in which the hedge fund could take short positions against residential mortgage-based securities chosen by none other than Paulson & Co., which presumably would pick RMBS that it thought would experience negative credit events.
In other words, after participating in the portfolio's selection, Paulson & Co. allegedly then shorted the same portfolio it helped create by entering into credit default swaps with Goldman Sachs. Goldman did not disclose Paulson & Co.'s short position or its role in the collateral selection process to investors, the SEC alleges.
The news has placed Paulson, who has been lauded because his hedge fund posted positive returns throughout the financial crisis, in a nefarious role -- one that contradicts the public praise he has received for being able to keep above water during the crisis when so many other hedge funds went belly up.
By betting against real estate when everyone else remained optimistic,
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Paulson
was able to net $15 billion in returns. This equated to a personal profit of nearly $4 billion, according to
RealMoney
contributor Don Dion.
Last year, as the financial crisis began its retreat, Paulson once again showed his foresight by eagerly snapping up bank stocks including
Citigroup
(C) - Get Citigroup Inc. Report
,
Bank of America
(BAC) - Get Bank of America Corp Report
and
SunTrust Banks
(STI) - Get SunTrust Banks, Inc. Report
, among others.
As of Dec. 31, funds run by
were valued at $19.5 billion, according to
TheStreet's
sister site,
Stockpickr
. Two of Paulson's biggest positions at the end of the year were in the aforementioned Bank of America and Citigroup, which have both surged ahead of the first-quarter reporting season.
Even though Paulson & Co. was not charged by the SEC, the firm issued a statement Friday afternoon following the SEC's complaint against Goldman:
"While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties," the statement, which was emailed to
TheStreet
by an outside representative, said. "ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody's.
The statement went on to say Paulson "did not sponsor or initiate Goldman's ABACUS program, which involved at least 20 transactions other than that described in the SEC's complaint."
Those comments contain fairly strong wording, and more specifics about its own conduct than Goldman was willing to disclose, but it's fair to say Paulson & Co. would rather not be discussing strategy -- past or future -- with the media.
--Written by Laurie Kulikowski in New York.
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