The Wizard starts to buy......?John Paulson Buys Mortgages After U.S. Drops TARP Purchases
By Tom Cahill
Nov. 18 (Bloomberg) -- John Paulson, the hedge-fund manager who generated sixfold returns last year with the help of bets against subprime mortgages, has started buying debt backed by home loans, investors said.
Bonds linked to U.S. residential mortgages fell last week after U.S. Treasury Secretary Henry Paulson abandoned plans to buy distressed securities using money from the $700 billion Trouble Asset Relief Program. The ABX-HE-PENAAA 07-2 index of credit-default swaps tied to AAA-rated securities has fallen 13 percent to 36.25 since the Treasury’s announcement on Nov. 12, according to Markit Group Ltd. That indicates the bonds might fetch about 36 cents on the dollar.
John Paulson, whose New York-based Paulson & Co. oversees $36 billion in assets, said at a conference in June that he sees “opportunities this year” to buy mortgage-backed debt. While he said it was “premature” to start buying, the ABX indexes have since fallen 35 percent.
“Paulson’s timing is typically very good,” said Louis Gargour, chief investment officer of LNG Capital LLP, a London- based hedge fund that invests in distressed credit markets. “Pulling the TARP program was the last straw for this market. Now that Paulson is buying others may say this is a great trade.”
Gargour said he isn’t buying residential securities for “technical” reasons, including the prospect for legislative changes to home-foreclosure rules in the U.S.
Armel Leslie, a spokesman for Paulson’s firm, declined to comment on purchase of residential-mortgage securities, which the Financial Times reported yesterday.
Hearing Testimony
Paulson, in an appearance Nov. 13 at a U.S. Congressional committee, said that the TARP program could be more effective by investing in companies rather than buying mortgage debt itself.
“I’m thinking we’ve probably got the wrong Paulson handing out the TARP money here,” Representative John Tierney, a Democrat from Massachusetts, said during the hearing. The two Paulsons aren’t related.
John Paulson, 52, corrected Representative Jim Cooper, a Tennessee Democrat, when he said the headline of the hearing was “Paulson versus Paulson.”
“I, in no way, want to be critical of Secretary Paulson,” he said. “He’s done a great deal for this country. He’s willing to change his position when the circumstances change.”
All of Paulson’s funds profited last year buying credit default swaps on mortgage assets, which are instruments that rise in value as the risk of default increases. Paulson told investors in November that he had increased his holdings of derivatives that gain in value when the chances of corporate credit defaults rise.
Paulson’s Advantage Plus fund has climbed 29 percent this year through October while many managers are enduring the worst year of their careers.
To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net
Last Updated: November 18, 2008 17:13 EST |
