Sunday, January 20, 2008
Guts to bet against housing market
Trader Made Billions on Subprime
John Paulson realised the housing market was going to go wrong so he bet against it. This article expalins how he did it. "Most people told us house prices never go down," He was lucky too "Mr. Paulson didn't turn bearish too early. Some close students of the housing market did just that, investing for a downturn years ago -- only to suffer such painful losses waiting for a collapse that they finally unwound their bearish bets." The key thing was he remained patient and determined. Housing remained strong, and the fund lost money. A concerned friend called, asking Mr. Paulson if he was going to cut his losses. No, "I'm adding" to the bet, he responded, according to the investor. "Someone from more of a trading background would have blown the trade out and cut his losses,
Posted by happyrenterz @ 09:25 PM (2689 views)
19 thoughts on “Guts to bet against housing market”
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happyrenterz says:
There is a great moment when things started going wrong at Bear Stearns and there were rumours that they would try some dodgy things to prop up their fund. Paulson was worried about his own short investments.
“Mr. Paulson claimed that Bear Stearns actions would “give cover to market manipulation.” He hired former Securities and Exchange Commission Chairman Harvey Pitt to spread the word about this alleged threat.
In the end, Bear Stearns withdrew the proposal. It was merely about clarifying “our right to continue to service loans — whether that be modifying loans when people can’t pay their mortgage or buying out loans when rep and warranty issues are involved in the underwriting process,” says a Bear Stearns spokesman.”
This is a good example of how a hedge fund played an important role in making sure there was no dodgy manipulation.
happyrenterz says:
“Mr. Paulson has taken profits on some, but not most, of his bets. He remains a bear on housing, predicting it will take years for home prices to recover. He’s also betting against other parts of the economy, such as credit-card and auto loans. He tells investors “it’s still not too late” to bet on economic troubles.”
There it is again, credit cards. A lot of people saying that is the next domino to fall.
japanese uncle says:
Financial business is a Zero Sum business, which by itself creates no value at all, and which if I may has a parasitic nature, ie earning money at the cost of your neighbour’s misery, and this is the culmination. Should someone betting on the bankruptcy of the millions albeit daft millions be rewarded this much? Having said that it is at least better than betting on the deaths of thousands like someone did prior to 911. Disgusts beyond description.
ps Is this bloke by any chance related to the treasury secretary? Haha
dohousescrashinthewoods says:
Well, I’m itching to bet against UK property – especially if we’re a year behind the US. Ain’t got much, but I’ll hapily spread-bet my pocket money on this.
The property cash-cow has got its hooves stuck in the mincer and, if we’re all going to suffer for the sake of a collecitve debt-fuelled hallucination that many of us took no part in, I’d blimmin’ well like to see bloggers here (me included) get some payback for the effort put in, the talking sense in the face of mania, the stigma we’ve weathered and the bloody-minded, clear-sighted analysis dispensed here daily, which is rarely seen in the media, both in terms of impartiality and in terms of intellectual rigour. It’s been a long time coming.
drewster says:
“He tells investors “it’s still not too late” to bet on economic troubles.”
Ok how can we amateur investors get in on this, without having access to megabanks advanced trading systems? My online share broker doesn’t offer spread-betting options on the ABX index. Do I need a spread-betting account (like igindex.co.uk)? The ABX might not go much lower, so what other financial instruments are equivalent to bets on economic troubles? Do we have to keep saying gold?
renting2 says:
I, like many others saw the crash coming, but had little idea of what to do when it came. If we’re not prepared, who is?
Aaron M says:
At first, I was surprised at how long the bubble lasted. But not any more. I was sceptical since 2002, but didn’t realise just how far the madness of crowds could go. But now I realise that pyramid schemes can continue until everybody is involved, but cannot go any further. Like any true pyramid scheme, the house price bubble relied on a constant stream of fresh victims (it is not sufficient to have a fixed constant number of victims, it needs to grow rapidly for its entire existence). People won’t (or can’t) buy into the pyramid scheme a second time because they are likely still waiting on their payback from the first one. Therefore, it was probably inevitable that the bubble would be unstoppable until such time as NINJAs (No Income, No Job, No Assets) were being given mortgage loans. And once the poorest are in the pyramid scheme there are no more people to suck in, house prices suddenly flatten and then everybody realises they were in a pyramid scheme.
Don’t give into the temptation to bet on the crash. I find my sense of smugness is sufficient 🙂 I don’t want to be as bad as them, betting money I don’t have when I should just continue working and saving. If I lose my job in the upcoming depression I want easy access to my savings, and not have trouble extracting it from my bets. (although it could be justified as prudent hedging against the risk of losing my job, as that risk would probably be correlated with the scale of the house price crash)
drewster says:
Ok guys take a look at this: IG Index – House Prices
Basically with this tool you can place bets on UK house prices. Spread-betting looks pretty risky to me (the word “betting” puts me off!). Does anyone know more about it?
whiteknight says:
Knowing stuff ahead of time is always useful for making money.
I have noticed that LVMReader has posted a number of leading indicators over the last 12 months.
drewster says:
@whiteknight:
Based on those indicators, what are your predictions for the next 12 months?
lvmreader says:
@drewster
What has this got to do with house prices?
drewster says:
@lvmreader,
There’s no need to take it so personally just because I questioned the relevance of a couple of your posted articles. There were plenty more which I didn’t complain about. You’ve made some good posts too.
Incidentally, are lvmreader and whiteknight the same person? Here’s a link to some old blog comments which appear to suggest a connection, particularly comments # 7 – #9:
News Blog > Someone is trying out some new toys…. – HousePriceCrash.co.uk
drewster says:
In case anyone actually read my earlier comments about spread betting and using the IG Index House Prices bet, think again. Here’s an article which will put you off the idea:
Times Online: Gambling on a fall in house values
bystander says:
Sorry all, but I find it abhorrent that we celebrate parasites who capitalise on human suffering. I try hard to teach the adults of tomorrow to be good citizens and look out for each other, what chance do I have if the media et all raise people like Paulson to the top ranks of iconography, just because of the amount of money he has made, and forget to mention the details of those he made it off. I might be an idealist, but my idealism lies in integration and community not segregation and self-interest.
tick tock says:
@bystander
Here here.
george monsoon says:
so how do I place a bet against the housing market?
Do I just walk into a bank and ask “cashier number 7 please” if I can place a bet, or should I be looking elsewhere?
Sorry to appear completly ignorant about this kind of thing, but I have never done it before. It must be worth a small bet though..!
george monsoon says:
bystander, just to add.
any money made from this would go to buying my own home for my family.
happyrenterz says:
At first glance it does seem like this trader has benefitted by someones misery. But is their misery in any way his fault? I argue that without him at other short traders the bubble might have got even bigger. I think traders who go short/bet against price falls play an important role in finance in moderating bubbles. If you outlaw the short (as in China) bubbles get even bigger. The people who have been unscrupulous here are those who have sold mortgage products to people who could not pay them back. The market supported this by misjudging risk. One way this happened was by making the insurance on these loans too cheap. This Paulson guy bought up this cheap insurance when no one wanted it. So if anything his actions were a moderating effect on the bubble because he DID buy them. As the cost of insuring has gone up he has made a lot of money. He donated $15 million to Center for Responsible Lending to fund legal assistance to families facing foreclosure. That does not strike me as the actions of a man wanting to profit from the suffering of others. I don’t see BTL millionaires and people who have stoked up this housing bubble making these donations. They have benfitted by snapping up the houses first time buyers would otherwise be living in. The creators of this bubble are unscrupulos not the ones who saw it coming and profit from its collapse.
lvmreader says:
The HP Admin can put to bed any worries that @LVMReader and @WhiteKnight are the same person.
He can see that they are not.