Arrogance of 'One-Trick Pony' Hedge Fund Billionaire Paulson; Is the Wall Street Protest Misguided?

By: Mike Shedlock | Thu, Oct 13, 2011
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Bill Gross, manager of the world's biggest bond fund, and Jim Chanos, founder of of $6 billion hedge fund Kynikos Associates, understand the protest against Wall Street.

John Paulson, who became a billionaire "hero" (now under attack) by betting against the housing market fought back against the protesters according to the Bloomberg article Chanos, Gross Understand Wall Street Protest Paulson Rejects.

Demonstrators in New York marched to the upscale Upper East Side neighborhood as the Occupy Wall Street movement that started last month in New York's financial district spread to other U.S. cities. BlackRock Inc.'s Laurence D. Fink, who runs the world's biggest asset manager, and billionaire investor Warren Buffett have said they understand the protesters' frustration.

Hedge-fund manager John Paulson, who became a billionaire by betting against the U.S. housing market and then profited from the recovery of banks, criticized the movement. His townhouse was among those targeted by marchers who left a fake tax-refund check made out for $5 billion on his doorstep, which was barricaded by police.

"Paulson & Co. and its employees have paid hundreds of millions in New York City and New York State taxes in recent years and have created over 100 high paying jobs in New York City since its formation," the $30 billion hedge fund said yesterday in a statement. "Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow."

The protest march, which organizers called a "billionaires walking tour," targeted other executives including Jamie Dimon, who runs JPMorgan Chase & Co., and billionaire oilman David Koch.


One Trick Pony

For starters it might help if Bloomberg got its facts correct. Paulson has not benefited from the "recovery of banks" as the article suggests.

Indeed, Bloomberg itself sports the headline "Paulson's Main Fund Said to Lose 47% in 2011 Through September"

John Paulson, the billionaire who is betting on an economic recovery by the end of 2012, has lost 47 percent this year in his largest hedge fund, according to three people with knowledge of the matter.

Paulson's Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies, uses leverage to amplify returns. The fund's gold share class declined 32 percent this year through the end of September, said the people, who asked not to be identified because the fund is private.

Paulson, 55, would have to return about 89 percent in the remainder of the year to break even in the Advantage Plus Fund. Paulson & Co., which is based in New York and manages $30 billion, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp.


One Idea Executed to Perfection

Paulson had one idea, played to perfection, with leverage. That idea made Paulson a billion dollars. I do not begrudge Paulson in any way for that billion.

However, by betting the farm on a financial recovery he proved he is a one-trick wonder who does not understand history, debt deflation, and most importantly risk management.

Never in history has the "last bubble" been immediately re-blown. Once look at the share price of Cisco, Intel, or the Nasdaq in general proves as such. Sure there are some individual winners like Amazon and Apple, but the rest has been slop, with many corporations long since bankrupt.

Quite frankly I do not care about any of that. I am writing this post because Paulson brags about creating "100 high paying jobs in New York City since its formation".

Well La-de-fricken-da.

Paulson made a billion dollars and wants a statue for creating 100 jobs even though he paid a low tax rate as a result of hedge fund laws, when the economy shed 4.5 million jobs in three years vs. expected demographics (Please see Hypothetical Employment and Unemployment Charts from the Atlanta Fed; Mish "What If" Scenarios for details)


Who Is Really to Blame?

To be fair, I have some sympathy for Paulson. After all, he has proven he does not know what he is doing (at least recently). Moreover, and more importantly, I can make the case that the attacks on Paulson are misguided.

The Fed sponsored this bubble. Paulson, saw it and profited from it, to perfection.

Is Paulson to blame for profiting from Fed mistakes or is the Fed to blame for piss poor economic policy? I suggest the Fed.

Who bailed out the banks? The answer of course is Congress and the Fed.

Where should the protests be? The answer is the Fed and Congress.

Yet Paulson is so arrogant he cannot see the protests for what they are. People are losing their homes, their dreams, and families are being torn apart as millions of jobs vanish and he frames his response about creating 100 jobs when he gets huge tax breaks on a billion in profits.


Message to Paulson

Paulson, it is no wonder you are reviled. But why should you care? You have a billion dollars and you created 100 jobs.

Congratulations for being on-time (or simply lucky). I suspect others had the exact same idea but went up in flames because they were one year early.

 


 

Mike Shedlock

Author: Mike Shedlock

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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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