Paulson Doing What Paulson Should Have

18 Nov 11:50am
Posted by ToddSullivan
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I wish Hank had done what John is...

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Let's be upfront. I wish the Treasury in its TARP program had bought loans and not provided liquidity to banks. I said before and still feel that giving them more cash will not increase lending.

Onward:
From the FT:
John Paulson, the hedge fund manager who was called before Congress last week to discuss the big profits he made by foreseeing the collapse of the subprime mortgage market, has started to buy securities backed by residential mortgages.

Mr Paulson's move marks the latest example of a famously bearish investor shifting gears to profit from depressed prices in the global credit markets.

US residential mortgage securities fell in value last week after Hank Paulson, Treasury secret-ary, said that the federal government had decided against buying toxic assets as part of its $700bn (£466bn) troubled asset relief programme (Tarp).

John Paulson, who is not related to the Treasury secretary, has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement.

Mr Paulson, who has $36bn under management, was scheduled to hold a dinner and wine-tasting at New York's Metropolitan Club last night so that he could brief his investors on his plans.

According to Alpha Magazine, Mr Paulson made $3.7bn in 2007, reflecting the success of his strategy - begun in 2006 - of betting on a collapse of the subprime mortgage market. At the end of the third quarter of this year, his funds were up 15-25 per cent. His funds also made profits in October, his investors say.

For several months Mr Paulson has been considering investing in distressed subprime mortgage securities, financial firms and debt used to back private equity deals.

He estimated there are $10,000bn in total in such assets.


This is what the treasury should be doing. The original idea, the buy debt, the one Berkshre's (BRK.A) offered to participate in was the way to go. Still is.

Until the bad loans are off the banks books, lending will not pick back up.



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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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