Cheat-Seeking Missles

Wednesday, January 16, 2008

Making Billions Off The Housing Slump

Ever heard of John Paulson? Me neither, but George Washington sure has, since Paulson made three or four billion Washingtons last year -- and his hedge fund made $15 billion -- by betting against housing. While others wallow in misery as their over-leveraged houses go into foreclosure, or as they look for new jobs outside the mortgage industry, Paulson is luxuriating in their misery.

WSJ subscribers can read the story here (non-subscribers can read an NYT piece on Paulson here). Here are the basics:

In early 2006, while most thought the housing market and its closely affiliated mortgage market could suffer a downturn but not a collapse, Paulson saw things differently and decided to bet on a collapse.
In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn't enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, "you can't short houses."
Among the ways Paulson accomplished this were to "short risky CDO slices" and to "buy the credit-default swaps that complacent investors seemed to be pricing too low." Got it? I don't.

Paulson's been a successful investor for a long time, and he did what investors do. Most of us prefer folks who see a market need and fill it more than we like those who see a market weakness and exploit it, but it's all capitalism.

As he has before with earlier, smaller, killings, Paulson will invest his winnings back into the market. I suggest he use a part of it to help lift the housing market back up. That won't only benefit a lot of people, it will also allow him to pull off the nifty trick of profiting off a market as it falls, and again as it recovers.

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