Paulson & Co.

Paulson & Co. Inc.
Industry	Investment management
Founded	1994
Founder	John Paulson
Headquarters	New York City

Paulson & Co., Inc. operates as a family office based in New York City. Established in 1994 by John Paulson initially as a hedge fund, the firm concentrates on "global mergers, event arbitrage, and credit strategies". It rose to widespread recognition following its lucrative wager against the subprime mortgage sector in 2007. The company formerly maintained branches in London and Dublin.

Initial phase

Founded by John Paulson, the firm initially targeted undervalued acquisition opportunities, aiming to influence bidding prices through significant shareholder positions. In 1997, Paulson resisted PennCorp Financial Group Inc.'s $400 million acquisition proposal for Washington National Corp., holding out until Conseco Inc. purchased it for $410 million.

The 2008 financial downturn and Great Recession

In 2005, analyst Paolo Pellegrini alerted Paulson to vulnerabilities stemming from weak credit standards, excessive leverage, and mispriced credit risks within the housing market. Acting on this insight, Paulson began shorting credit risk via credit default swaps—essentially wagering against securities they did not own but anticipated would default. The housing market bubble reached its zenith in 2006 before collapsing in 2007.

A pivotal deal was the ABACUS 2007-AC1 synthetic CDO structured by Goldman Sachs, where investors took long positions on subprime mortgage bonds, effectively providing Paulson with insurance against defaults. These bonds defaulted months later, generating approximately $1 billion in profits for Paulson from investors' losses. Overall, Paulson is reported to have gained $15 billion on a $12.5 billion investment during 2007, achieving returns exceeding 100%.

By 2008, Paulson broadened its bearish bets beyond subprime mortgages to include consumer, auto, commercial, and corporate credit markets, specifically targeting highly leveraged financial institutions burdened with deteriorating assets. This strategy involved shorting major banks in both the US and UK markets. Notably, Paulson placed significant wagers against four of the five largest British banks—£350 million against Barclays, £292 million against Royal Bank of Scotland, and £260 million against Lloyds TSB. By January 2009, it was reported that Paulson had realized £280 million from scaling back its short position in RBS.

To safeguard these investments, Paulson and other parties opposed initiatives aimed at limiting foreclosures or restructuring mortgage loans.

Controversies and legal challenges

Paulson encountered criticism regarding the ABACUS deal for compensating Goldman Sachs $15 million to design a portfolio of "toxic" subprime securities that allowed Paulson to bet against them. Critics described this arrangement as ethically dubious though not unlawful. Paulson asserted that his firm neither participated in marketing the Abacus products nor initiated Goldman's program.

In April 2010, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Goldman Sachs over the ABACUS Synthetic CDO transaction, accusing Goldman of misrepresenting the party assembling the mortgage package as an impartial third party while Paulson—who held a short position—played a significant role in its construction. Paulson denied any misconduct and was not charged. Goldman settled with the SEC three months later by paying $550 million—the largest fine ever imposed on a Wall Street firm—acknowledging it had provided incomplete information to investors.

In 2011, ACA Financial Guaranty initiated a $120 million lawsuit against Paulson, alleging that Goldman Sachs and Paulson misled ACA into believing that Paulson was investing in the CDO while simultaneously betting against it. In response, Paulson sought dismissal of the lawsuit in 2013, contending that ACA's claims were based on distorted and out-of-context evidence.

Investment in distressed assets and bankruptcy

John Paulson has demonstrated considerable expertise in investing in distressed debt, corporate bankruptcies, and financial restructurings. During the financial crisis of 2008, he was a prominent investor in several bankruptcy proceedings, notably including the Lehman Brothers bankruptcy.

Following Lehman’s failure and the ensuing market upheaval at the close of 2008, Paulson adopted a cautiously optimistic stance. He initiated a fund dedicated to the restructuring and recapitalization of financially troubled entities such as investment banks, hedge funds, insurance firms, and hospitality businesses impacted by extensive housing-related asset write-downs exceeding $345 billion. By entering investments at depressed valuations, Paulson aimed to support these companies’ survival while positioning for gains from eventual market recovery.

Paulson’s 13F filings as of June 30, 2009 revealed holdings of 2 million shares in Goldman Sachs and 35 million shares in Regions Financial. Additionally, he purchased shares in Bank of America during its government-mandated recapitalization in spring 2009, ultimately holding an estimated 1.22% stake by 2011. Bloomberg reported that Paulson anticipated Bank of America’s stock price to double by that year.

Between 2009 and 2010, investments in Citigroup reportedly generated approximately $1 billion for Paulson, underscoring his capacity to achieve superior returns through restructuring strategies.

In February 2010, Paulson Capital Investment (PCI) played a key role in the restructuring of Houghton Mifflin Harcourt, converting around $4 billion of its $7 billion debt into equity. This transaction positioned Paulson as the company’s largest equity stakeholder.

Paulson is also recognized for his involvement in proxy contest investments. For example, in May 2008, he supported Carl Icahn's proxy battle at Yahoo aimed at board replacement, holding 50 million shares as of March 31, 2008.

Gold Investment Thesis

In November 2009, Paulson introduced a gold-focused fund targeting mining companies and related assets. This move was based on expectations of inflation resulting from expansive monetary stimulus measures enacted by the Federal Reserve and other central banks. John Paulson highlighted gold’s significance as a currency alternative, forecasting increased importance amid ongoing money printing by major central banks.

Developments from 2011 onwards

By 2011, PCI had grown to become the world’s fourth-largest hedge fund with $36 billion in assets under management. Nevertheless, that year brought notable challenges: the Advantage fund declined by 36%, while Advantage Plus fell by 52%, with further double-digit losses continuing into the subsequent year. These setbacks were partly attributable to an unsuccessful position in Sino-Forest Corporation and declining gold prices.

In August 2013, Paulson & Co. agreed to acquire Steinway Musical Instruments for about $512 million. The transaction was endorsed by Steinway's board and finalized by September 2013.

Expanding its media sector exposure, Paulson & Co. purchased a stake in Viacom Inc in April 2018, becoming one of its top-25 shareholders.

Operational model of the hedge fund

Paulson & Co functioned as a partnership under the leadership of founder and CEO John Paulson along with more than ten partners. The firm managed various investment vehicles and accounts on behalf of banking institutions, corporations, pension funds, and profit-sharing plans. As of December 2015, assets under management had decreased to $19 billion from $36 billion at the start of 2011. Approximately 60% of these assets were owned by employees of the firm, including Paulson himself. External investors comprised financial institutions, corporate and public pension funds, endowments, foundations, and affluent individuals.

Primary hedge funds overseen included:

Paulson Advantage Fund (flagship)
Paulson Advantage Plus Fund
Gold Fund (established in 2010 focusing on mining equities and bullion derivatives)
Paulson Partners
Paulson Enhanced
Paulson Recovery
Paulson Real Estate Recovery (launched in 2009 targeting distressed real estate with a private equity approach)
Credit Opportunities Fund

The firm specialized in:

Merger arbitrage: concentrating on high-quality spread opportunities, announced mergers with potential for superior bids, and complex deal structures
Event arbitrage: including spin-offs, litigation-related investments, restructurings, proxy fights, and post-bankruptcy equities
Distressed securities: strategies involving liquidations, high-yield long/short positions, capital structure arbitrage, bankruptcies, and reorganizations

At its peak staffing level, approximately fifteen investment professionals were part of the team with John Paulson serving as portfolio manager. Key personnel included Andrew Klaber; Andrew Hoine (Director of Research); Nikolai Petchenikov (partner based in London); Sheru Chowdry (Managing Director and Partner); Sihan Shu; Michael Waldorf (legal counsel); and Ty Wallach.

Paulson & Co also maintained an external Advisory Board composed of distinguished economists who provided guidance on investment themes and global economic policy. Past notable members included Alan Greenspan (Greenspan Associates LLP), Christopher Thornberg (Beacon Economics LLC), Edward Altman (NYU Stern School of Business), and Martin Feldstein (Harvard University).

The firm was registered with regulatory authorities such as the U.S. Securities and Exchange Commission (SEC), the United Kingdom’s Financial Services Authority (FSA), and Hong Kong’s Securities and Futures Commission (SFC).

External links