Trader Made Billions on Subprime

On Wall Street, the losers in the collapse of the housing market are legion. The biggest winner looks to be John Paulson, a little-known hedge fund manager who smelled trouble two years ago.
Funds he runs were up $15 billion in 2007 on a spectacularly successful bet against the housing market. Mr. Paulson has reaped an estimated $3 billion to $4 billion for himself -- believed to be the largest one-year payday in Wall Street history.

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Transcript: Pimco’s Bill Gross on recession, investments and subprime

Bill Gross, founder and managing director of Pimco, discussed interest rates, recession, investments, Mohamed El-Erian, subprime and government intervention with Chrystia Freeland, the FT’s US managing editor.

FT: US interest rates?
MR GROSS: Long.

FT: Hillary Clinton?
MR GROSS: Long.

FT: Oil?
MR GROSS: Short.

FT: Manhattan real estate?
MR GROSS: Short.

FT: Hedge funds?
MR GROSS: Short.

FT: Mitt Romney?
MR GROSS: Short.

FT: The euro?
MR GROSS: Short.

FT: Ben Bernanke?
MR GROSS: Long.

FT: Barack Obama?
MR GROSS: Long.

FT: China?
MR GROSS: Long! [laughs]

Interview I

Interview II

Beware our shadow banking system

The tangled web of subprimes has claimed more than its share of victims in recent months: homeowners by the hundreds of thousands, to be sure, but also those who created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages" but which by a masterstroke of marketing genius received a more respectable imprimatur.

"Skim milk masquerades as cream," warned Gilbert and Sullivan over a century ago, and sure enough, today's subprimes, packaged into financial conduits with monikers such as SIVs and CDOs, pretended to be AAA-rated cubes of butter.

Financial institutions fell for the ruse, and now we all suffer the consequences. Defaults are rising, the dollar's sinking, and -- good Lord! -- even Google's (Charts, Fortune 500) stock price is going down. Something must really be wrong.

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Pimco's Gross: Subprime Crisis Is Far From Over

Credit markets face another $250 billion in defaults over the next two years, indicating that the worst of the subprime crisis is yet to come, the head of the world's biggest bond fund told CNBC on Monday.

"We've only begun to see the pain from the standpoint of the homeowner in terms of those monthly payments," said Bill Gross, chief investment officer of Pacific Investment Management or Pimco. "Defaults and delinquencies will increase as we extend throughout 2007 and into 2008."

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Subprime Risks: Overblown

The market has gone haywire. As I write, the Dow Jones industrial average has experienced 14 triple-digit fits and starts since July 20. Subprime fears have made financial stocks even more volatile. This pinball effect is leaving many investors feeling skittish about where to put their money. During tough times like these I stay focused on the areas I know best, which keeps me calm and confident in my decisions.

This way I can concentrate on what matters most: underlying business fundamentals. And I don't waste time worrying about things I can't control or predict, like what sectors will be in vogue next or where interest rates are going.

Warren Buffett and Charles Munger have dubbed this kind of industry-specific expertise a "circle of competence." The circle's size doesn't matter as much as recognizing its boundaries. When times get tough, fear leads people to overdiversify their investments in hopes of minimizing losses. Bad idea.

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Get Off the Ledge

Unless you're in a highly leveraged hedge fund or running an investment bank, you have no reason to despair the turmoil on Wall Street.

Mortgage lenders are dropping like flies. Hedge funds are blowing up. Central banks are injecting money into financial markets to prevent a meltdown. Little wonder that many investors are fighting the urge to panic.

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Chinese Banks May Take Losses On Subprime

One sharp-eyed set of analysts believes Asian financial banks will be little-affected by the U.S. subprime mortgage crisis, but another sees dangers in China.

Ratings agency Moody’s said Friday that a preliminary survey turned up little exposure among Asian financial institutions to the U.S. subprime market relative to their overall positions.

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Could Hurricanes Blow Subprime Debt Investors Away?

What happens if large-scale hurricane losses arise when securitized debt markets are tanking or seizing up? Might reinsurers be required to fund claim payments at the same time they face losses and illiquidity in their investments?

In 2005, hurricanes Wilma, Rita, and Katrina wreaked devastation in Florida, New Orleans, and much of the Gulf Coast. Insured losses set a record for a single year. Catastrophe reinsurance providers took a significant hit, but they generally stood behind their promises to pay catastrophe claims.


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