[quote=deadzone]Why would any big time manager announce their strategy to the world? Not gonna happen. If you’d read the book about Paulson (Greatest Trade Ever) you’d know that he was very secretive about all of his credit default swap dealings. If too many other people were in on his side of the trade it wouldn’t have worked.[/quote]
Let’s be clear about what John Paulson did. He cherry-picked the worst loans he could find and helped Goldman structure them in a way that the resulting MBS would still be classified as “investment grade”. Then Goldman went out and found additional investors to buy the MBS and Paulson provided a sliver of equity to get the deals funded. Then he went out and bet against the MBS that he helped create using the CDS market. In relative terms, he lost 10 cents on his long position and made $1 on the “short” position in the CDS.
Here’s an analogy (albeit imperfect). Let’s say I go out and find a house that I’m highly confident is only worth $200K (let’s say it has myriad defects that only I know about). But I find a group of folks who are willing to buy it for $400K in cash with me as a co-investor. I put up $10K of the $400K. Then let’s assume that there’s a market that allows me to bet on the price of that house and I take a short position that’s several multiples of my $10K long position. The defects are uncovered and the house ultimately sells for $200K and I lose $5K on my long position but I make a multiple of that on my short position.
Basically, Paulson helped Goldman structure mortgage-backed securities DESIGNED to fail, and disguised by the fact that he was a co-investor in the MBS. Then he went out and made leveraged bets against them.
Legal? Apparently. Diabolical? Absolutely. Ethical? I don’t think so.
