Meet man who saw the crash coming – for biggest-ever Wall St pay-day

HE IS the New York financial guru who predicted the crash of the global economy – and cashed in big-time.

Hedge-fund manager John Paulson saw the signs of trouble on the horizon for the US housing market three years ago and made a fortune betting against risky mortgages.

Yesterday, Paulson, who is believed to have earned the largest one-year "pay-day" in Wall Street history, was revealed to have been taking multi-million-pound bets against Lloyds TSB and HBOS.

Mr Paulson was worth around £163 million at the beginning of last year, but last month was said to be worth a cool £2.4 billion. He entered the Forbes magazine list of billionaires after taking £1.9 billion in fees.

Under new rules of disclosure, his hedge fund Paulson and Co was forced to reveal it had "short" positions in Lloyds TSB and BoS totalling 1.76 per cent and 0.95 per cent of its shares.

Short-selling, or "shorting", is when a hedge fund "borrows" shares in a company and sells them in the hope of buying them back later at a lower price to return to the original owner – pocketing the difference as profit. Short-selling has been blamed for helping drive down share prices of the big banks, most notably HBOS.

It emerged yesterday that Mr Paulson is shorting shares in Lloyds worth £260 million while he has taken a £92 million gamble on HBOS.

Paulson's major breakthrough came in 2005, when he was convinced the US economy would soon fail and asked his employees to find a "bubble" to short.

In mid-2006, when few people expected a crisis in the housing market, Mr Paulson believed aggressive lending was widespread and set up a hedge fund solely to bet against risky mortgages.

He took advantage of the market by finding a way to make complex deals pay off if mortgages lost value.

The "exuberance in the credit markets and the massive liquidity was severely mispricing these securities", he told Pensions and Investments magazine.

While housing remained strong, Mr Paulson remained convinced of its imminent crash, despite his funds losing money, and said it was "just a matter of waiting".

His hedge funds bought "credit-default swaps" – designed for buyers who wanted to insure against the debt going bad – that he thought had been priced too low.

He also took "short" positions in risky "collateralised debt obligations" – repackaged mortgage securities. When the subprime mortgage crisis and the credit crunch hit, Mr Paulson saw the value of his funds soar 600 per cent.

The Financial Services Authority has ordered those "short-selling" more than 0.25 per cent of shares in banks and insurers to tell the wider market on a daily basis. It has also slapped a temporary ban on the practice for 32 financial stocks until 16 January due to "disorderly" market conditions, although the FSA will review the arrangements after 30 days.

Chancellor Alistair Darling told the Labour Party conference yesterday that the temporary ban on shorting was the right move "to help bring calm back to the markets".

"Short-selling is not the prime cause of the present financial turmoil. But it has made it far worse in recent weeks by undermining confidence in financial companies," he said.

PROFILE

BORN on 14 December, 1955, John Alfred Paulson studied finance at New York University's College of Business and Public Administration, where he graduated first in his class.

He went on to receive an MBA from Harvard Business School and was named Baker Scholar, the school's top academic honour, for graduating in the top 5 per cent.

He joined Bear Stearns in 1984 as a member of its mergers and acquisitions team before moving to Gruss and Co four years later. He launched his own business in 1994.

Aware that he was benefiting from others' misfortunes, the married father-of-two has kept a low profile, saying he was reluctant to celebrate while so many Americans faced losing their homes in the crisis.

According to the Wall Street Journal he even used software to stop his clients forwarding his e-mails and spreading his tactics. He told the paper: "I've never been involved in a trade with such an unlimited upside and a very limited downside."