Did John Paulson Really Predict the Subprime Crash?

Date: Friday, June 5, 2009
Author: Wall Street Pit

Leading the pack of hedge fund managers who massively benefited from the subprime fallout is New York-based Paulson & Co.’s John Paulson, and Haymans’ Kyle Bass.

Holman Jenkins at Hoover.org asks why did they predict the housing market collapse—while others missed it. But did Paulson and Bass really predict the crisis, or were they a lot like other money managers who knew the subprime was going to be messy but had no clue about the extent of the problems?

Here are a couple of excerpts from Jenkins’ comments.

But, you say, didn’t a handful of shrewd hedge fund managers detect a bubble and clean up from betting against it? Yes, fund managers like John Paulson and Kyle Bass made huge fortunes betting against subprime. This doesn’t prove that all the signs were there to be read and so others must have behaved irresponsibly. Think about this: Somebody is always short something, just as others are long the same thing. For every buyer, there is a seller. But those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes.

Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less. The reason they didn’t, it’s reasonable to suppose, is because no more than anyone else did they foresee the catastrophic consequences we now suppose were destined to flow from excessive issuance of subprime mortgages.