Mr. Paulson made over $15 billion for his hedge funds by betting on the collapse of the mortgage-backed securities market in 2007 and 2008, then followed up with an equally well-timed bet that large banks would survive the financial crisis and that the price of gold would soar. Last year he personally earned what has been estimated as the largest single payday in Wall Street history: $4.9 billion.
The media branded him the man with the Midas touch. Institutional and individual investors rushed to give him their money, eagerly paying management fees of 2 percent plus 20 percent of any gains, and pushed his funds’ assets earlier this year to $38 billion. In September, Forbes ranked him 17th on its list of the 400 richest Americans, with an estimated net worth of $15.5 billion. The man-who-could-do-no-wrong embarked on 2011 with confident predictions that a global economic recovery would strengthen, inflationary pressures would push gold to new highs and financial institutions would prosper.
This week Mr. Paulson reported his results through the third quarter, which ended Sept. 30. His flagship Advantage Plus and Advantage funds were down 47 percent and 32 percent. His Recovery Fund was down 31 percent. His once high-flying gold fund lost 16 percent in September, cutting its gains this year to just 1 percent. HSBC ranked Mr. Paulson’s Advantage Plus fund the fourth-worst-performing hedge fund in its entire universe, and that was before it recorded September’s dismal results.
It’s hard to feel all that bad for Mr. Paulson. For one thing, he remains fabulously wealthy despite his recent setbacks, and his management fees alone— 2 percent of roughly $30 billion— which depend only on the amount under management, and not performance, would amount to $600 million. His ability to stand back from the real estate mania and recognize it for the bubble it was offered the trade of a lifetime, one that few others had the courage or conviction to embrace.
At the same time, Mr. Paulson has suffered the fate of most short-sellers, investors who typically make bets on the misfortunes of others. Markets arguably need such speculators to provide liquidity and price discovery. But to many if not most people, there’s something distasteful, even offensive, about profiting from the suffering of others, especially so for the protesters occupying Zuccotti Park.
It’s not as if Mr. Paulson gained his wealth by creating new technology that transformed lives, like Steve Jobs (net worth $7 billion, according to Forbes) or Mark Zuckerberg ($17.5 billion), or by entertaining people (Oprah Winfrey, $2.7 billion) or clothing them (Ralph Lauren, $6.1 billion). No one’s protesting against them.
Even among the elite group of billionaire hedge fund managers, Mr. Paulson is distinctive, and not only because he appears to be the richest. He was the only one of them targeted by the protestors on their march through the Upper East Side, and he displayed a tin ear when he lectured them (in a news release) about how much he pays in taxes, adding: “Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow.”
More fundamentally, allegations made last year by the Securities and Exchange Commission in its civil fraud suit against Goldman Sachs Company, which Goldman settled by paying a record $550 million, made clear that Mr. Paulson didn’t earn his billions purely because of his shrewd market insights. He helped select the mortgages he was betting against, the ones most likely to default, something Goldman failed to tell the party on the other side of the bet. This wasn’t a level playing field, which contributed to the protestors’ allegations that Wall Street is a game rigged to benefit the wealthy and powerful.
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