John Paulson, Proud Short

Gary Weiss has a profile of John Paulson in the February issue of Portfolio which I misread when I first came across it. He talks a bit about Paulson being "unrepentant" about the money he's made during the market crash and making "no apologies" for it. And as if to answer the question of what Paulson has to apologize for, he adds this:

Left unexamined is the uncomfortable moral dimension of Paulson's achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging?

My feeling is that Paulson is exactly the kind of person we want more of: someone who makes big directional down bets when he sees a market getting overheated. Enough of those, and the market might be able to self-correct, rather than implode. Far from having anything to apologize for, Paulson is one of the heros of this crisis, all the more so for actually putting big money on the line rather than simply waxing bearish in the financial media.

Weiss cleared this up for me: "I don't think Paulson did a thing wrong, morally or legally or in any other way," he said. In fact, Weiss is quite the fan of short selling, as he's explained on his blog and in his book:

Short selling is the only market force that can impede the inflated pricing of hyped stocks. Countless studies of short selling have proven that shorting improves the liquidity of the market, and is the only means by which negative information is incorporated in stock prices.

Weiss also gets an anecdote from short-seller Jim Chanos, who says that he was put under some pressure by Bear Stearns CEO Alan Schwartz to go on CNBC and defend the bank, the day before it went under. "That fucker was going to throw me under the bus," says Chanos; Schwartz's people deny the whole thing, but the denials, coming as they do only from an anonymous person "who has spoken to Schwartz," are unconvincing.

There are precious few heroes in the story of this financial crisis, but if there are any then Paulson should probably be counted among them. Don't hate him for his money, or for his hubris: there are lots of proud rich fund managers, and most of them have avoided receiving the kind of opprobrium which has been aimed at Paulson. As Jesse Eisinger says in his own column this month:

We need more dissidents. We need to make the world a safer place for short-sellers to criticize companies. Regulators should publicly praise short-sellers, rather than periodically ban their activities. Critics and whistle­blowers, no matter how self-motivated, should be regularly consulted about suspicious companies, not dismissed as cranks once they expose wrongdoing.

Comments

[Smarty_Pants:]

"Left unexamined is the uncomfortable moral dimension of Paulson's achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down?"

If your neighbor buys a new luxury car for $100,000 and you find the exact same make and model and buy it for $80,000, should you feel guilty for not giving your neighbor $10,000?

Hell no! Whatever happened to caveat emptor?

If I'm too dense to avoid losing my money, despite the existence of several pundits who WERE warning of the horrors just ahead in public and on the internet, then I should be the one who suffers for my ignorance or laziness.

It's about time our country reverted to the old-time tradition of being responsible for your own choices and actions again. Make a good choice and reap the gains, make a bad choice and suffer the consequences. Period.

The kum-by-yah stuff isn't providing any incentive to TRY to avoid such mistakes. Quite the opposite actually.

Mr. Weiss should have his wrist slapped for even asking the question. Since he came to the right conclusion the slap should be a light one.

Jan 07 04:56 PM

[patio:]

But, but, stocks and house prices should always go up, over time. Don't you get CNBC?


On Jan 07 04:56 PM Smarty_Pants wrote:

> "Left unexamined is the uncomfortable moral dimension of Paulson's
> achievement. If he saw all of this coming, was it right for him to
> keep his own counsel, quietly trading while the financial system
> melted down?"
>
> If your neighbor buys a new luxury car for $100,000 and you find
> the exact same make and model and buy it for $80,000, should you
> feel guilty for not giving your neighbor $10,000?
>
> Hell no! Whatever happened to caveat emptor?
>
> If I'm too dense to avoid losing my money, despite the existence
> of several pundits who WERE warning of the horrors just ahead in
> public and on the internet, then I should be the one who suffers
> for my ignorance or laziness.
>
> It's about time our country reverted to the old-time tradition of
> being responsible for your own choices and actions again. Make a
> good choice and reap the gains, make a bad choice and suffer the
> consequences. Period.
>
> The kum-by-yah stuff isn't providing any incentive to TRY to avoid
> such mistakes. Quite the opposite actually.
>
> Mr. Weiss should have his wrist slapped for even asking the question.
> Since he came to the right conclusion the slap should be a light
> one.

Jan 07 05:41 PM

[Tony Petroski:]

You guys can't be serious. Parasites may have an important place in nature's scheme, but I don't have to admire them or aspire to be like them.

Jan 07 06:55 PM

[Anthony Alfidi:]

Paulson may be a pretty sharp dude, and his bearish call on MBSs was timely. We do need more counterweights to sell-side permabulls predicting huge GDP gains this year (hello UBS!). The hiccup comes when regulators pull unexpected stunts like banning short selling on select stocks. Hedge fund managers will be reluctant to join Paulson's camp if things like that happen to mess up their models.

Jan 08 12:09 AM

[Moon Kil Woong:]

I don't mindd people making money legitimately. However, Paulson had assymetric data. In fact, he was buying CDS derivatives from AIG that Goldman was advising AIG to write on mortgage bonds Goldman was helping to sell tranches to the market (probably knowing good and well they were far below AAA).

Anyone who can't see what is so very wrong with this should get their head examined. Likewise, anyone who thinks it was just coincidence that Paulson had the Treasury bail out AIG so they could pay over $80 billion to Goldman on their CDS mortgages needs medical attention too.

As for Paulson, he needs his heart examined. It seems to be corrupted through and through.

Gordon Gecko didn't go to jail due to his greed, he went to jail for lack of morals and violations of trust. Paulson should think long and hard about that even if he is fairly comfortable that all his friends will protect him for giving them $100s of billions of taxpayers money to soothe their troubled consciences.

Jan 08 01:04 AM

[Guero:]

Paulson smelled a rat in subprime securities and acted on it. He realized that the banks had been making suckers bets for years, lending to people without asking for any proof that they could pay back the loans.

He saw that the ratings agencies were playing along & under-estimating the risk on these flimsy securities. He put a large stack of money in a CDS that could have, for all he knew, been money wasted. But he knew that he was swimming in a sea of fools so he had a hunch it all may pay off. And pay off it did.

He recognized all these massive failures and made his bets accordingly. He recognized how ridiculous our financial system and collective lemming mindset had become and had the stones to bet his money that it would end badly. For recognizing all this absurdity, he is reviled? I say give the man a medal, he is an effing genius.

Jan 08 12:07 PM