I hope you are not hooking up with Paulson in any way, shape or form.
Read this, about how Paulson did essentially the same thing with CDOs that Goldman did - promote them, buy into them with a minimal stake, then short the entire issues with leverage. If even a schlump like me could figure out in 2005 that the housing bubble was going to burst with horrific results, imagine what Wall St. thugs saw, and maneuvered into. Well, it increasingly appears that they got the CDOs going, then shorted the bejesus out of them.
I call that fraud, but it won't get prosecuted.
Yep, Paulson gets lionized for profiting immensely from things we knew would happen but [with the exception of one poster I know] didn't act upon.
But lift the cover off the trash can ever so slightly and this lionization smells very badly. More PR, smoke, lies and mirrors.
nakedcapitalism.com
He is a snake. And by the way, he is using leverage on his gold venture, which makes the whole thing very suspect.
Was his 'purchase' of $250 million in bullion an inducement just like his minimal stake in CDOs which he shorted 100% and then some?
Careful. He is undoubtedly hedged, and perhaps set to profit if gold falls. Given his reputation, he may well be setting things up just as he and GSachs did with CDOs.
It is one sordid affair.
A portion of the article:
There has been a tendency to lionize subprime shorts, with no consideration to the destruction they left in their wake. While I am not opposed to stock shorting (all it takes is the uptick rule to prevent bear raids), shorting via CDS is quite another matter, particularly since, with CDS, the exposures are typically a multiple of the value of the cash bonds. Given the levered nature of a short via CDS, this creates a very big incentive for the CDS holders to see if they can take action to make events turn out their way.
Now that may seem like a peculiar characterization; how could people who shorted subprime have done damage? After all, the housing market is huge. But CDS made the exposures to subprime going bad much bigger than the size of the market, and the parties on the wrong side of the bet were often highly levered players like big capital markets firms (per the BIS, with only 3-4% equity on average) and insurers.
The part that has surprised me is that the John Paulson story, which Gregory Zuckermann attempted to tell glowingly in his book The Greatest Trade, is actually quite damning. Deutsche Bank and Goldman come off badly too. To make a much longer story short, credit default swaps on mortgages became possible starting in June 2005 when ISDA came up with a protocol. Zuckermann credits Greg Lippmann of Deutsche, a particularly aggressive derivatives salesman, as the moving force behind this effort:
Lippmann’s radical thought was, What if an investment could be created to mimic the existing mortgages? That way, new mortgages wouldn’t have to be created to satisfy hungry investors; rather, a “synthetic” mortgage could be sold to them.[emphasis in original]
In February, Lippmann called traders from Bear Stearns, Goldman Sachs, and a few other firms struggling with the same issues, inviting them, along with a battalion of lawyers, to a conference room at Deutsche. Sitting around a blond-wood conference table, they debated ideas into the night, while picking at take-out Chinese food. Their light-bulb idea: Create a standardized, easily traded CDS contract to insure mortgage-backed securities made up of subprime loans
Yves here. Zuckermann contends that Paulson went to Wall Street to create synthetic CDOs so Paulson could short subprime. Paulson was open about his intention: he wanted to create the deal (by funding the equity tranche, typically 4-5%) and go short the ENTIRE deal, that is, buy all the CDS used in the synthetic CDO (well probably not all; even subprime CDOs had to have a certain potion be less drecky stuff). This was an out and out plan to toast the party on the other side, particularly since the party funding the equity layer had (at a minimum) veto rights (which in this case could be used to exclude better quality exposures!).
Bear Stearns, ironically, thought the Paulson plan did not pass the smell test, but Deutsche and Goldman were eager. Paulson was responsible for creating $5 billion in synthetic CDOs, but in the end this was not his main mechanism for shorting the subprime. |
