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China told property risk is worse than in US

UH OH: China told property risk is worse than in US. “The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank. . . . ‘The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,’ he said in an interview. ‘It is more than [just] a bubble problem.’”

The Wall Street Book Everyone Should Read

In 1997, though, such arguments were pretty close to unheard of. Which is what makes Doug Henwood’s book Wall Street, published that year, such an amazing document. Along with explaining in clear if caustic terms how financial markets work, the book prefigures almost every criticism of the financial system that’s been levied since the crisis of 2008. An overleveraged housing market?Check. A link between financial sector growth and income inequality? Check. A natural tendency toward instability in financial markets? Check.

I don’t want to paint Henwood, who edits a newsletter called the Left Business Observer, hosts aweekly radio show, and knows more about economic indicators than anyone has a right to, as some kind of Nostradamus. In Wall Street he doesn’t so much make predictions as expose, in his crotchety, almost absurdly erudite way, the inconsistencies and contradictions in conventional views of how the financial world is supposed to work. (more…)

The perils of Paulson

The crown may be slipping fast from billionaire trader John Paulson’s head.

The hedge fund manager became an overnight sensation in 2007 by betting big and early on the collapse of the U.S. housing market, and then doing much of the same on a surge in gold prices. But he is now emerging as one of this year’s big losers in the $2 trillion hedge fund industry.

His Paulson & Co. hedge fund firm, which managed $38 billion as recently as this past March, is down to about $35 billion as of the first week of August, and it shrinks a little bit more with every big drop in the U.S. stock market.

One of Paulson’s two main funds is now down more than 30 percent this year, the firm has reported to clients, compared to a much smaller 6.1 percent decline for the average hedge fund, according to Hedge Fund Research.

The problem for the 55-year-old manager: His equally daring bet that the U.S. economy and housing market would rebound strongly from the financial crisis — a big wager that looked prescient a year ago — isn’t panning out as planned.

Paulson’s funds have amassed huge, mutual fund-style stakes in shares of financial institutions like Bank of America, Citigroup, Hartford Financial, Popular Inc. and American Capital. But these are ringing up hefty losses.

And with fears of a double-dip recession in the United States mounting, coupled with this month’s 13 percent plunge in the S&P 500, the talk is growing on Wall Street that unless Paulson can quickly turn things around, the hedge fund king could be hit with a wave of year-end investor redemptions.

“There are many investors who have experienced great gains with John Paulson, but a lot of the money has come into his funds after those great gains were achieved, and the relative newcomers are seeing a lot of heavy losses,” said Daryl Jones, director of research at Hedgeye Risk Management, which sells investment research to institutional investors. “I would imagine it would lessen their appetite to stay with someone who is supposed to be a big superstar but is down double digits right now.”

Paulson, through a firm spokesman, declined to comment. But people close to Paulson point out that other than hedge fund guru George Soros, no one has consistently made more money for clients than the man referred to by his friends and associates as “J.P.”

LOYALTY TEST

This year, however, his investors’ loyalty is being put to the test.

Maybe no one single trade has come to symbolize Paulson’s bullishness on the U.S. economy more than Bank of America. By August 9, the troubled lender’s shares were down 43 percent this year, reducing the value of the 124 million shares Paulson owned as of March 31 by $784 million. Paulson is believed to have sold some of his Bank of America shares as the stock has plunged toward the $7 mark, but the firm has refused to comment on its current position. (link.reuters.com/gem23s)

The picture isn’t much prettier for Paulson’s large share holdings in Citigroup, Popular (formerly Banco Popular) and SunTrust Banks. The value of Paulson’s equity stake in those three banks, assuming the funds haven’t sold any shares since March 31, would have declined by more than $800 million over the past four months.

And then there is Sino-Forest, the troubled Chinese forestry company. Paulson absorbed a $500 million loss on the stock in June after allegations of accounting irregularities at the Hong Kong-based company surfaced earlier in the month. (link.reuters.com/hem23s)

The series of missteps is tarnishing the near god-like status the former Bear Stearns trader has earned over the past few years.

Much of the $20 billion in outside investor money Paulson manages has come from pension funds and clients who bought in after he made $15 billion for the firm in 2007 on his well-chronicled subprime mortgage trade. Paulson raised that money by making his hedge fund one of the most widely available to wealthy customers of dozens of large and small brokerage firms. (more…)

John Paulson's 8 Secrets

  1. Don’t follow the crowd.
  2. Have an exit strategy before the bubbles burst
  3. Focus on the debt markets for predicting the future.
  4. Take the time to figure out how fancy new investment products like credit default swaps (CDS) work.
  5. Buy insurance. No one wanted out of the money puts on the housing market.
  6. Remember the past. Some of the big winners in the housing crash were those dismissed as out-of-touch dinosaurs.
  7. Remember that no trade lasts forever so don’t fall in love with your investment. After making his $20 billion. Paulson went long banks at the bottom. (The verdict is still out on this trade).
  8. Timing is everything and luck helps.