Monday, April 19, 2010

The Minnow's John Paulson

Like a knight on a white steed, riding to rescue the drowning minnow, John Paulson arrived on the scene when Barry O'Callaghan's tower of debt threatened to tumble down and take him with it.

Where did Mr. Paulson come up with the kind of money needed to bail out the mega-merger of Riverdeep, Houghton Mifflin, Harcourt, et al.?

From hedging his bets, wouldn't you know.

The John Paulson who has been named in the Goldman Sachs fraud suit is the same John Paulson who owned the hedge fund that bought up EMPG's debt.

He bet that the mortgage-backed securities that Goldman Sachs was peddling would ultimately collapse, even as the housing market was on a hot streak. Smart man, to see what so many others knew all along would happen.

With his enormous hedge fund to provide some heft, he threw his weight around at Goldman Sachs and had them set up and then sell a new fund that he bet would fail. It's the nature of business on Wall Street. Some investors gamble on the shooter and some bet with the house. In this case, Mr. Paulson figured the shooter was due to crap out and he was right. So he won the bet and took home the winnings.

And he bought EMPG's debt, leaving Barry O'Callaghan as little more than another employee.

Now Goldman Sachs investors are planning to sue Mr. Paulson and his merry band of tricksters, based on the hedge fund's considerable involvement in the fraud perpetrated on the unwary.
The question becomes, did Mr. Paulson invest in EMPG because its stock was such a bargain and he's betting it will win? Or did he figure that with time the stock would go up in value, he'd get his return on investment, and then pull out? Leaving what behind?

When you learn that your new owner doesn't have dreams of being the king of educational publishing materials, but the king of hedge funds, it's not reassuring. Perhaps he could issue a company-wide e-mail to let everyone know that he isn't about to chop up the whale of a firm into bait, with a mind to catch as much cash as he can reel in.

Then again, who would believe him? A good gambler never shows his hand and can bluff his opponent into some foolhardy investing in mortgage-backed securities when the mortgages aren't worth the paper they're printed on.

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