The Man Who Made Too Much

http://www.portfolio.com/executives/features/2009/01/07/John-Paulson-Profits-in-Downturn

by ojbyrne • 18 years ago

36 49 18 years ago

ph0rque• 18 years ago

What a whiny tone in the article... the man made money on people's downfall; why doesn't he repent? He must be punished!

JoelSutherland2• 18 years ago

Agreed strongly:

One reason for this is that Paulson was able to recognize and act on the unimaginable—that the banks, which took on most of the subprime risk, had no clue what they were holding or how much it was worth.

More Paulsons and maybe the banks might have 'imagined' this possibility. How is it possible to be morally outraged with the irresponsible banks and Paulson.

mynameishere• 18 years ago

You agree strongly that it's whiny then quote something not in the least whiny?

gaius3• 18 years ago

Quite. If the downturn hadn't happened, people would have been happy enough to take his (and his investor's!) money.

Rod4• 18 years ago

You clearly have no clue about trading.

Though short-sellers are hated, they are necessary. For every trader who goes short, there's a trader who goes long. No one is forcing them to enter this trade. They do so because they want to. Banning short-selling would be a disaster because prices would stop reflecting reality.

Paulson may have made money in an "unethical" way, but he played by the rules. I didn't hear any investment banks complaining about short-selling when they were making money. They were dumb. They lost. They won't be missed.

quellhorst• 18 years ago

I don't see this person doing anything wrong. People are envious of someone else doing well.

eru• 18 years ago

And short sellers are the defense of capitalism against bubbles. (Not always working --- but at least they have an incentive to pop bubbles.)

Rod4• 18 years ago

Exactly. Some comments on this:

http://www.automatedtrader.net/announcements-1748.xhtm

mdasen• 18 years ago

I don't care that much, but I can see why people might. He didn't create value. Like, when PG creates something, it adds a certain value to society. Even when PG puts money behind a firm like Disqus, he enables value to be added. This guy didn't create any value or enable value creation. He just saw a situation he could take advantage of.

The banks had created value, but not as much as everyone had thought and he took advantage of that. It's part of our system and that's fine and all, but it certainly isn't something I'm going to be all, "that's the way to do it!" He didn't do anything wrong. He played by the rules from what I know.

However, he really took advantage of something in a way that raises moral questions. Remember the valentine's episode of Futurama? Bender is selling roses and when he knows that Fry is over a barrel he hikes the price incredibly saying that demand just skyrocketed. Yeah, it's how our system works and I don't really disagree with your sentiment, but it still leaves me feeling a little gross about him as a person. Capitalism allows you to act without regard for morality so long as it's within the law and that's fair game. Doesn't mean we need to like the people who do act that way.

whacked_new4• 18 years ago

I'm not the trader type and I don't like the idea of such extreme income disparity, but to say that Paulson didn't create value is factually incorrect; he created it in the same way as the banks you mentioned did: by exposing and exploiting a market inefficiency and causing it to patch itself up.

The reasons behind his actions can make him a saint or an asshole, but the fact that people like him exist just reveal properties of an imperfect system. And he won't be the last.

dgabriel• 18 years ago

Why are we downvoting this comment? It's not offensive, and it contributes a different viewpoint to the conversation. Is it going down because the opinion the poster presents is unpopular?

Rod4• 18 years ago

"Capitalism allows you to act without regard for morality so long as it's within the law and that's fair game. Doesn't mean we need to like the people who do act that way."

It's easy to be "noble" when you don't have the chance to be "evil". Don't get me wrong, but I find it very, VERY hard to believe that if you were on Paulson's shoes and had the chance to make some $3.7 billion, you would still be so moralistic.

Paulson made money within the law (though "unethical" his trade may have been). Seems to me that people who bash him are just jealous.

Paulson can now invest some money in new businesses and create some value. He took money from the idiot banks and those who invest in them. I won't shed a tear.

steveplace3• 18 years ago

The value of what he did comes in liquidity to the market as well as the returns his customers received.

biohacker42• 18 years ago

I agree that a lot of financial magic often adds no value what so ever.

But I've always thought that short sellers have at least one function beneficial to society.

They are the ones either whispering or yelling the king is naked.

The sooner and the louder they yell, the more contained the damage is from the nekkidness!

sethg• 18 years ago

I'm not a big fan of capitalism, but if it's OK to borrow money¹ and buy stocks with the hope of profiting on their sale, then it's just as OK to borrow stock and sell it with the hope of profiting when you buy it back again. If there's a problem with short-sellers trash-talking perfectly sound companies, there's at least as much of a problem with investors overhyping unsound companies.

Remember the valentine's episode of Futurama? Bender is selling roses and when he knows that Fry is over a barrel he hikes the price incredibly saying that demand just skyrocketed.

I haven't seen the episode but from your summary it sounds like Bender is doing what economists call "rent-seeking", profiting from his monopoly power (if Bender didn't enjoy any monopoly power then Fry could have just bought roses from someone else). I don't see where Paulson was rent-seeking; he was buying and selling in a market where there were lots of other people going after the same securities.

¹...and of course with our fractional-reserve currency system, in a sense, the vast majority of money is borrowed money.

1gor2• 18 years ago

>He didn't create value.

???

He created $15 billion of value for his shareholders.

>The banks had created value

The banks have destroyed their shareholders' and depositors' money by investing in junk and failing to prepare for a downturn.

Your 'moral' arguments are upside down.

brl• 18 years ago

"The banks had created value, but not as much as everyone had thought and he took advantage of that."

He didn't 'take advantage' of anything. He did his homework and reached an accurate and objective conclusion about the state of the financial system. He then provided this information to the markets by betting on what his research predicted.

The real people who were taking advantage of the situation were the counterparties on his trades who were recklessly speculating on an unsustainable bubble (with other people's money).

He was so successful doing this because at that point there were so few other dissenting voices to compete against. I don't know how you can say that it provides no value to be right when everybody else is wrong.

coliveira4• 18 years ago

Of course he created value. The value of markets is to reduce the risk of individual transactions (or to amplify it, if you want to increase your risk and improve your gains). This guy was taking a lot of risk while accumulating positions against the global market. He could lose all his investment if things were different. This allowed others players in the market to "hedge" their risk -- clearly, they didn't think this meltdown would happen.

Dilpil• 18 years ago

Ironic that he of all people ended up buying a house at the height of the bubble.

run4yourlives2• 18 years ago

When you make 15 Billion, you probably don't care too much about the price of the house you bought last year was. Especially since you most likely don't have a mortgage.

coliveira4• 18 years ago

I would question his financial acumen if he doesn't have a mortgage. Houses (specially the expensive ones) are a bad place to have money parked. Although, it doesn't make any difference in his fortune, anyway.

dantheman• 18 years ago

The article was interesting but I really didn't like the tone, it was almost as if the author was sneering at the man. He tried to make him seem all sheepish and quiet, then try to lay guilt on him for doing his job well, and then mocking him for making a bad housing investment.

gruseom• 18 years ago

Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down?

Give me a break. He should have gone on Faux News to be shouted down and laughed at? Who would have listened to this guy?

This line is so indicative of bad journalism (practically a tautology, that phrase) that even though I want to read the rest of the article and am interested in the topic, I think I'll pass.

arockwell• 18 years ago

I agree, arguably betting real money that the system was going to meltdown was the absolute best way to tell others he thought the system was fucked.

Its not like anyone would have listened to him if he played the whistle blower roll. The recent Madoff debacle is proof of that.

tokenadult• 18 years ago

"If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down?"

If he was trading with real money, he was giving quite enough of a signal to the market. Plenty of people were writing about the possibility of the housing bubble popping, and about derivatives being "financial weapons of mass destruction." The people trading as if those warnings weren't important threw caution to the winds, and have no one but themselves to blame if they didn't learn from the behavior of the counterparties to their trades.

From farther down in the linked article: "By 2005, the amount of money he could make on the riskiest securities was not enough to justify the risk he was taking. Pricing, in his view, made no sense. Paulson concluded that he could do better on the short side--wagering that prices of risky securities would fall."

mistermann• 18 years ago

"Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging?"

Please. There were thousands of people, and hundreds of very prominent bloggers shouting as loud as they could that this was going to happen, and no one listened. No one wanted to listen. So, now, instead of blaming the people that caused the problem, they demonize the sensical people, who should have been listened to all the time.

Seriously, how big of an explosion do we need before we start listening to the people that predict the explosions accurately. This world is starting to get surreal.....in the past (maybe a year or two ago), one could pass this off as ignorance, but what we are seeing lately just can't be ignorance. Is this writer for portfolio.com really this uninformed? Has the entire financial commentary industry been poisoned by deliberate hiring of clueless people? They seem to only read each other and watch CNBC rather than reading bloggers who have had this all figured out with very high levels of accuraqcy for literally years.

The Man Who Made Too Much

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