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The rumor I always heard on Wall Street about Paulson was that he essentially stole the idea of the sub-prime short from other investors - but I have no idea if

The rumor I always heard on Wall Street about Paulson was that he essentially stole the idea of the sub-prime short from other investors - but I have no idea if that is true. Every bet he's made since has been terrible - I remember him being a part of the "hyperinflation" crowd buying up gold etc. In general, this points out the flaws in both active management and hedge funds. For active management, we see that someone can have an amazing single year or event and then never perform again. For hedge funds investors, the sad story of the high fees and underperformance continues - it's a heads I win, tails you lose structure for investors imho.

xapata 9y ago
It's not a rumor. The first news articles discussing the event said that Paulson won big because he arrived late to the bet. It's just that the market stayed irrational longer than the initial naysayers could stay solvent. "The Big Short" shows Michael Burry arguing with his LPs as they try to bail too early.
- nemo44x 9y ago
  Wall Street is lined with the corpses of people that were right but too early.
  - throwaway40483 9y ago
    There is a word for "right, but too early": wrong
    - markeroon 9y ago
      Saying that the bonds were garbage was not incorrect. It just took a lot longer for most people to realize it
    - gmarx 9y ago
      I disagree. There is a housing bubble and it will pop is a thing you could have been right about or wrong about and many people were. When is it going to pop? You could predict this within plus or minus five years and I'd say you were doing pretty well but I guess in terms of making money you'd better get a little lucky and have all your stuff line up at the right time
    - tedsanders 9y ago
      Low-effort, snarky comments like these are not useful. In my opinion, they are damaging the culture of HackerNews and making it less valuable to read. Was Galileo wrong when he speculated that helicopters were possible? Absolutely not. Was Girolamo Fracastoro wrong when he speculated that germs caused illness? Absolutely not. If you're going to be snarky, at least be right.
      - jstanley 9y ago
        He's not wrong. He's just early.
      - retsibsi 9y ago
        I think he had a reasonable point, though. If you predict that X will happen, and it eventually does, then sure, you were right about that. But if you take an action that will cause you to profit if X happens within 5 years and to lose money otherwise, you're effectively predicting that X will happen within 5 years. If X happens after 10 years, then to say that you were right, just too early, is misleading: in fact you were right that X would happen, but wrong about when it would happen, and you chose to bet on both of those things. Maybe this is a bit pedantic, but surely it's at least correct.
      - nickjarboe 9y ago
        Galileo and helicopters? I think you mean Leonardo da Vinci.
  - kolbe 9y ago
    Thanks, but that's not really the point that is being communicated. We're just trying to empasize the fact that, while some track records can be used as an indication of future success, a guy who makes a bet with the same logic as others but years later than they did (then got rich merely being lucky enough to be late) should never have been thought of as someone who could generate alpha in the future off of that track record.
JackFr 9y ago
I worked software developer for a securitized products prop trading desk at a bank during the up to and during the crisis. Paulson was not the only short. In particular the two guys who I worked for traded subprime mortgages, and they were net short for two years leading up to the crisis. The first got out of his position as soon as he could take a decent profit. As soon as he got paid that year he quit (and I believe left the industry), his parting words were to the effect of "Being told your wrong and you don't know what your doing every week for two years takes its toll. I'm out." The other guy is more interesting. He was very model driven, and kept his trades on longer. Eventually though he began to distrust his model. His models pointed to the market going much much lower, and he didn't think that was possible. His gut told him that his model had become detached from reality, so he took his profit, and put on a much more conservative trade. Turns out his model was right and his gut was wrong. This was a prop trading desk for a bank, not a hedge fund. In the end, none of it mattered. These two guys showed profits on the order of hundreds of millions, while the bank overall lost on the order of tens of billions, so kind of a drop in the bucket.
- aswanson 9y ago
  Sounds like interesting work. Did you leave that area of development? Were you allowed input into the modelling?
  - JackFr 9y ago
    It was pretty interesting work, and working for a really bright guy was great. The work largely dried up in 2008. We were all laid off. There was still some stuff going on, but between streetwide layoffs, and Bear and Lehman and Wamu and Countrywide and Merrill, there were a lot more people than jobs. With respect to input to the models the main idea was risk neutral pricing from more liquid (ABX indices) to less liquid (Subprime MBS bonds). But he had special sauce which he kept very close to the vest, and didn't really look for any input (although very open to any pragmatic implementation w/ respect to the software. )
- CakeDuke 9y ago
  Interesting. Would you put me in touch with those people?
easilyBored 9y ago
The rumor I always heard on Wall Street about Paulson was that he essentially stole the idea of the sub-prime short from other investors Ideas are a dime a dozen. He put his money where his mouth is. There's no shortage of people talking about China's crash and maybe one day it will. But when and are you willing to invest in that idea?
- inthewoods 9y ago
  Oh I completely agree - my point was that may have just been lucky in this case rather than drawn any great conclusion from doing his own research - thus the lack of any follow-on investments that worked.
dopamean 9y ago
I heard this rumor as well and believe it to be true. I don't think there has been much mention here of how Paulson & Co colluded with Goldman Sachs during that time to essentially rip off Goldman customers. There was a huge lawsuit about that that I believe Goldman ultimately lost. IIRC the vehicle involved was called Abacus. I always thought Paulson was slimy. After the increased scrutiny it is no surprise to me that his returns have plummeted.
- sumedh 9y ago
  > essentially rip off Goldman customers. I have mixed feelings about this, when you are dealing with millions of dollars, you should understand what you are buying, you cannot blindly trust your banker.

xapata 9y ago

It's not a rumor. The first news articles discussing the event said that Paulson won big because he arrived late to the bet. It's just that the market stayed irrational longer than the initial naysayers could stay solvent. "The Big Short" shows Michael Burry arguing with his LPs as they try to bail too early.

nemo44x 9y ago
Wall Street is lined with the corpses of people that were right but too early.
- throwaway40483 9y ago
  There is a word for "right, but too early": wrong
  - markeroon 9y ago
    Saying that the bonds were garbage was not incorrect. It just took a lot longer for most people to realize it
  - gmarx 9y ago
    I disagree. There is a housing bubble and it will pop is a thing you could have been right about or wrong about and many people were. When is it going to pop? You could predict this within plus or minus five years and I'd say you were doing pretty well but I guess in terms of making money you'd better get a little lucky and have all your stuff line up at the right time
  - tedsanders 9y ago
    Low-effort, snarky comments like these are not useful. In my opinion, they are damaging the culture of HackerNews and making it less valuable to read. Was Galileo wrong when he speculated that helicopters were possible? Absolutely not. Was Girolamo Fracastoro wrong when he speculated that germs caused illness? Absolutely not. If you're going to be snarky, at least be right.
    - jstanley 9y ago
      He's not wrong. He's just early.
    - retsibsi 9y ago
      I think he had a reasonable point, though. If you predict that X will happen, and it eventually does, then sure, you were right about that. But if you take an action that will cause you to profit if X happens within 5 years and to lose money otherwise, you're effectively predicting that X will happen within 5 years. If X happens after 10 years, then to say that you were right, just too early, is misleading: in fact you were right that X would happen, but wrong about when it would happen, and you chose to bet on both of those things. Maybe this is a bit pedantic, but surely it's at least correct.
    - nickjarboe 9y ago
      Galileo and helicopters? I think you mean Leonardo da Vinci.
- kolbe 9y ago
  Thanks, but that's not really the point that is being communicated. We're just trying to empasize the fact that, while some track records can be used as an indication of future success, a guy who makes a bet with the same logic as others but years later than they did (then got rich merely being lucky enough to be late) should never have been thought of as someone who could generate alpha in the future off of that track record.

JackFr 9y ago

I worked software developer for a securitized products prop trading desk at a bank during the up to and during the crisis. Paulson was not the only short. In particular the two guys who I worked for traded subprime mortgages, and they were net short for two years leading up to the crisis. The first got out of his position as soon as he could take a decent profit. As soon as he got paid that year he quit (and I believe left the industry), his parting words were to the effect of "Being told your wrong and you don't know what your doing every week for two years takes its toll. I'm out." The other guy is more interesting. He was very model driven, and kept his trades on longer. Eventually though he began to distrust his model. His models pointed to the market going much much lower, and he didn't think that was possible. His gut told him that his model had become detached from reality, so he took his profit, and put on a much more conservative trade. Turns out his model was right and his gut was wrong. This was a prop trading desk for a bank, not a hedge fund. In the end, none of it mattered. These two guys showed profits on the order of hundreds of millions, while the bank overall lost on the order of tens of billions, so kind of a drop in the bucket.

aswanson 9y ago
Sounds like interesting work. Did you leave that area of development? Were you allowed input into the modelling?
- JackFr 9y ago
  It was pretty interesting work, and working for a really bright guy was great. The work largely dried up in 2008. We were all laid off. There was still some stuff going on, but between streetwide layoffs, and Bear and Lehman and Wamu and Countrywide and Merrill, there were a lot more people than jobs. With respect to input to the models the main idea was risk neutral pricing from more liquid (ABX indices) to less liquid (Subprime MBS bonds). But he had special sauce which he kept very close to the vest, and didn't really look for any input (although very open to any pragmatic implementation w/ respect to the software. )
CakeDuke 9y ago
Interesting. Would you put me in touch with those people?

easilyBored 9y ago

The rumor I always heard on Wall Street about Paulson was that he essentially stole the idea of the sub-prime short from other investors Ideas are a dime a dozen. He put his money where his mouth is. There's no shortage of people talking about China's crash and maybe one day it will. But when and are you willing to invest in that idea?

inthewoods 9y ago
Oh I completely agree - my point was that may have just been lucky in this case rather than drawn any great conclusion from doing his own research - thus the lack of any follow-on investments that worked.

dopamean 9y ago

I heard this rumor as well and believe it to be true. I don't think there has been much mention here of how Paulson & Co colluded with Goldman Sachs during that time to essentially rip off Goldman customers. There was a huge lawsuit about that that I believe Goldman ultimately lost. IIRC the vehicle involved was called Abacus. I always thought Paulson was slimy. After the increased scrutiny it is no surprise to me that his returns have plummeted.

sumedh 9y ago
> essentially rip off Goldman customers. I have mixed feelings about this, when you are dealing with millions of dollars, you should understand what you are buying, you cannot blindly trust your banker.