Paulson May Have Made $428 Million Shorting Lloyds

Date: Thursday, March 12, 2009
Author: Andrew MacAskill, Bloomberg.com

Paulson & Co., the hedge fund run by billionaire John Paulson, may have made 311 million pounds ($428 million) since September by short selling Lloyds Banking Group Plc and HBOS Plc.

The firm took short positions in London-based Lloyds and HBOS that were valued at 367 million pounds in September, based on the holdings and share prices on the dates they were reported. The stake fell below the reporting threshold on March 9, regulatory filings show.

Paulson, which made $3 billion anticipating the U.S. housing market would collapse, gained as Lloyds, HBOS and Royal Bank of Scotland Group Plc sought bailouts from British taxpayers. Lloyds surrendered control to the government on March 7 in exchange for asset guarantees. Paulson made least 295 million pounds shorting RBS, bringing its profit from betting U.K. banking stocks would drop to 606 million pounds, according to earlier disclosures.

“They have called the market right,” Leigh Goodwin, a financial analyst at Fox-Pitt Kelton Ltd. in London, said of Paulson’s firm. “They obviously have decided that the downside is limited, so there is not a great benefit from here on in holding that position.”

Armel Leslie, a spokesman for New York-based Paulson & Co., declined to comment.

Betting On Subprime

Paulson’s Credit Opportunities Fund soared almost sixfold in 2007 on bets that subprime mortgages would plummet. Last year, his flagship fund returned 37 percent, compared with a loss of 19 percent for hedge funds on average.

Short sellers sell borrowed shares with plans to buy them back later at a lower price. The Financial Services Authority, the U.K. market regulator, lifted a ban on short-selling financial companies on Jan. 16. The restrictions were imposed in September as politicians and investors blamed hedge funds for destabilizing markets.

Paulson had a short position of 1.76 percent in Lloyds TSB Bank Plc on Sept. 23, when the stock traded for 261.75 pence, the firm said in a regulatory statement. It held a 0.95 percent position in HBOS on Sept. 19, when it traded for 216.83 pence.

Those positions were converted into a 0.79 percent stake in Lloyds Banking Group after the banks merged in January, according to regulatory filings. That holding was valued at about 56 million pounds on March 9, when Lloyds closed at 43.7 pence.

Paulson, which oversees about $30 billion, has held a short position of 1.17 percent in Barclays Plc, the U.K.’s third- biggest bank, since Oct. 30, according to regulatory filings. Barclays has fallen 67 percent since that date.

Government Bailout

Prime Minister Gordon Brown’s government has taken control of four British banks since the run on Northern Rock Plc in September 2007 as it seeks to boost lending and stimulate economic growth.

Lloyds agreed to buy HBOS in September in a government- brokered deal that saddled it with risky loans and investments that slashed profit and forced it to turn to the government for capital and asset guarantees. Edinburgh-based RBS joined the asset insurance program last month. Barclays, based in London, says it is evaluating the benefits of the plan.

Hedge funds are private, largely unregulated pools of capital whose managers can bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net