Hedge fund manager John Paulson has profited more than anyone else from the financial crisis. His $3.7 billion payday in 2007 broke every record, and he made it all by betting against homeowners, shareholders, and the rest of us. Now he's paying the price.
There's a lot of talk about how this is equivalent to currency speculation, but is it? I mean morally.
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The bubble was caused (in part) by there not being enough people betting against it. The few who did made huge profits because there were so few of them. If there had been more, they would have shared less total profit between them, and the rest of us would have lost less.
Paulson has to be the least guilty person on Wall Street
Technically Paulson did make his returns from shorting, rather he bought credit default swaps on a range of subprime mortgage securities and other related garbage that Wall Street was issuing. You can only make a maximum of doubling your money on a short position and have theoretically an infinite loss potential, these trades had huge upside and capped downside (like a put option). Other hedge funds and banks were his counterparties.
Had there been more Paulsons back in 2005 or 2006 their collective actions would have increased the cost of CDS (they were ridiculously cheap, in hindsight you could have bought an "insurance policy" that would pay in full on any credit losses on this toxic subprime garbage for less than 1% of the face value). The costs of issuing more subprime garbage would have then increased, perhaps reducing the size of the credit bubble.
A good chunk of Paulson's investors are University Endowments, pension funds and other non-profit institutions whose portfolios would now be smaller had they not invested with him.
Good for him, imagine if every one else was as smart as he was.
You might argue against him if he were promoting investments in real estate and then secretly betting the other way, but he's been a pretty vocal critic of the mortgage securities market and has been predicting with a fair degree of precision the current financial disaster for some years.
People like to say "life isn't fair", but what they really hate more than anything else is when it *is* fair. The system worked precisely as it should for this guy: he was right when everyone else was wrong, and he cleaned up. Rewarding delusion and punishing clearheadedness is what got us into this mess in the first place, and it seems some people are intent to keep it happening until the end of time.
It has never been clear to me what is morally bad about currency speculation. We need restrictions on it because rampant currency speculation can create problems but there is nothing inherently morally bad about it. Paulson's behavior may fall in a similar category.
It's things like this continue to remind me that the basic forces of capitalism are utterly amoral, and often will push directly against what we think is moral, useful, or even fair.
Not that it doesn't serve its purposes, but so many people tend to forget this....
So what's wrong with currency speculation?
"It's things like this continue to remind me that the basic forces of capitalism are utterly amoral, and often will push directly against what we think is moral, useful, or even fair."
Precisely: this is its greatest virtue.
Blaming him for anything is nothing more than sour grapes. And really, if he had started yelling and screaming about the impending crisis, would anyone have listened? This is capitalism... If you don't like it, why don't you quit whining and come up with something better. The only people I would really say are immoral are the idiots who were creating the toxic mortgages, and of course the morons who overextended themselves (yes, those poor homeowners). They knew, or should have known, that something was wrong. They are the ones that caused the crisis, not this guy.
Ummm...let's see, if I make 25 grand a year mowing lawns and planting flowers, should I take out a $500,000 adjustable-rate loan for the next 30 years?
Yes, because that way me and my newlywed can show the in-laws our new house, even have them over for dinner and TV!
Heck I can even leverage the house to get me a new pickup truck!
A brand new house and a brand new truck! From MOWING LAWNS!
What's not to like?
Sounds like the American (Wet) Dream to me!
Yeah, what's the moral objection to currency speculation?
You could rephrase the title question as "Is being right when everyone else is wrong bad?" Bearing in mind that we know now that at least some of those people weren't so much "wrong" as "committing fraud"...
Ahh, but what if you were assured by your knowledgeable banker that not only was it affordable, but fiscally safe, and that you'd be an idiot not to?
Not that it removes the buyer's culpability, but how many of have bought something due to a pressure sale? Or heeding professional advice?
I don't feel very sorry for those who tried to flip a house, but I do reserve my contempt for those who neglected their ethical obligation to give sound advice.
The problems with the subprime mortgage were evident to anyone even moderatly familiar with finance.
Have a look at 1:55 on this clip at a Canadian Business school challenge where a student predicted the problems with the subprime mortgage market in 2007 only to get shot down by an 'experienced wall street investor'.
http://www.youtube.com/watch?v=YJQ-czhRedA&feature=related
Andrew Lahde a small hedge fund trader set up his own shop and generated 900% returns betting against subprime mortgages. He talks about some of the problems with the finance industry in his retirement letter.
http://richard-wilson.blogspot.com/2008/10/andrew-lahde-hedge-fund-clos…
There are lots of people who saw the bubble but just didn't have access to the kind of capital that John Paulson commanded. I don't see any wrongdoing on his part.