Trader Of The Year: John Paulson Made Billions Shorting Subprime Mortgages
Trader Monthly recently named John Paulson trader of the year for 2007.
Funds run by Paulson, a hedge fund manager, were up $15 billion in 2007 and he is estimated to have made beteween $3-$4 billion himself.
How’d he do it?
Paulson saw the housing debacle on the horizon long before others did and set up funds to essentially short subprime mortgage backed securities.
He did this by buying credit default swaps (CDSs), essentially insurance policies that pay if a security defaults, and shorting indexes that track subprime mortgage backed securities such as the ABX.
As the housing market imploded, his shorts skyrocketed and the price for the insurance provided by the CDSs he owned took off.
Paulson made a windfall the likes of which have never before been seen in the history of investing.
On Wall Street these days, John Paulson is pretty much God. In fact, he is so revered that Treasury Secretary Henry Paulson is now apparently known as “the other Paulson”.
Anybody who wants to read the front page Wall Street Journal article on Paulson and his story, “Trader Made Billions on Subprime” (subscription required), can e-mail me for the link.