Wednesday, April 21, 2010

Paulson Now Turns Bullish on Housing and Economy

MARKETWATCH -- "John Paulson, the hedge fund manager famous for betting against mortgage securities, is now bullish on the U.S. housing market and the economy.

During a conference call with investors Wednesday, Paulson said he was concerned earlier this year about a potential double-dip recession. "I'm not concerned about that at all today," he said. It's more likely there could be a V-shaped recovery, Paulson continued.

House prices have stabilized and could climb 8% to 10% nationwide in 2011, Paulson said. Corporate earnings are coming in ahead of expectations, the stock market is stronger and there's a "vibrant" credit market. With the "final leg" of a rising housing market, "the outlook for 2011 could be very strong," Paulson said."

HT: Mike LaFaive


At 4/21/2010 3:08 PM, Anonymous Anonymous said...

Why should we believe him. His word is meaningless until the SEC case is settled.

At 4/21/2010 3:40 PM, Anonymous gettingrational said...

Will John Paulson now take the other side of the deal? Go long on mortgage tranches instead of shorting mortgage bundles that might have been desgined to fail.

At 4/21/2010 3:54 PM, Blogger PeakTrader said...

IMF Raises 2010 Growth Outlook, Sees Public Debt Risk
April 21, 2010

U.S. gross domestic product will expand 3.1 percent this year before slowing to 2.6 percent in 2011, the IMF said. In January the fund expected growth of 2.7 percent for 2010 in the world’s largest economy.

The euro area is likely to expand 1 percent this year, unchanged from the January projection, and 1.5 percent in 2011, according to the report. The IMF forecast U.K. growth of 1.3 percent this year and 2.5 percent in 2011.

My comment: It's still a slow U.S. recovery, given the rebound from a severe recession, huge fiscal spending, lower imports, and the draw-down of inventories spurring growth instead of final demand.

At 4/21/2010 3:59 PM, Blogger KO said...

Anon, is there any accusation that he lied to anyone?

The accusation is that Goldman withheld material information.

Check out this story in which there is testimony that Paulson & Company actually did directly tell ACA Management that they intended to go short.

Also note the comment "Neither Pellegrini nor Paulson & Co has been accused of wrongdoing. Pellegrini has declined to comment to CNBC."

At 4/21/2010 5:12 PM, Anonymous Anonymous said...

Why should we believe him. He has way too much money.

At 4/21/2010 6:30 PM, Anonymous Benny The Man said...

The recession is dead.
The economy is growing.
Next story, please.

At 4/21/2010 7:17 PM, Anonymous Titus Pullo said...

With the economy growing, hopefully teachers, firefighters, police and prison guards will be able to get a pay raise.

At 4/21/2010 9:40 PM, Blogger PeakTrader said...

"Paulson said he was concerned earlier this year about a potential double-dip recession. "I'm not concerned about that at all today," he said. It's more likely there could be a V-shaped recovery."

Policy Makers Seek to Learn From 1937's Stalled Comeback
AUGUST 24, 2009

The Great Depression was W-shaped. The stock-market collapse led to a steep economic decline. But by 1933, the economy had rebounded. Then a series of monetary and fiscal blunders drove the country back into a deep recession at the end of 1937.

The economy was recovering briskly during Franklin D. Roosevelt's first term in the White House. The jobless rate, which had peaked at 25% in 1933, fell to 14% in 1937 -- not exactly cause for celebration but a relief nonetheless.

My comment: What could cause a W-recovery? Perhaps, monetary and fiscal policy constraints rather than "blunders" from inflation and government debt.

At 4/21/2010 10:01 PM, Anonymous morganovich said...

the SEC claims fail to hold up to even rudimentary scrutiny.

they accuse goldman and ACA of designing a portfolio to fail and then buying it and holding it.

why on earth would they do that?

all they did was line up clients that wanted to bet on different things and arrange a transaction.

how is this any different that vegas sportsbook making a book for a baseball game?

if you bet on the giants, they even it out by getting someone to bet on the dodgers. if they can’t, they even out the money by changing the spread or the odds. they don’t want to be making directional bets on who wins.

making a securities market works exactly the same way. mostly, goldman wants to arrange trades, take a fee, and have no exposure. that’s how the brokerage business works.

in this case, they actually did make a directional bet by holding some of the securities, a bet that they lost. they were on the same side of the trade as the guy they are accused of screwing.

if you bet on the giants and your bookie does too, why does it make any sense to blame him if the dodgers win?

ACA is one of the most sophisticated debt investors in the world. they haven’t sued because they know there is no issue.

this is just politics. in my view, deliberately mischaracterizing a situation and attacking a private actor to gain legislative traction is immoral. done by a private actor, this would be actionable as libel.

At 4/21/2010 10:02 PM, Anonymous morganovich said...

NEW YORK (MNI) – The following is the text of a statement issued by Goldman Sachs late Friday:
Goldman Sachs Makes Further Comments on SEC Complaint
NEW YORK — April 16, 2010 – The Goldman Sachs Group, Inc. (NYSE: GS) said today:
We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.
We want to emphasize the following four critical points which were missing from the SECs complaint.
* Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.
* Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.
* ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.
* Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SECs complaint accuses the firm of fraud because it didnt disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.
In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction
IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.
The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.
Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.
The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs’s substantial long position in the transaction lost money for the firm.

At 4/21/2010 11:02 PM, Blogger KO said...

Peaktrader, you wanna be stunned a little?

Ind. Tax Rates History, 1913-2010

The top income tax rate was 25% in 1932. In 1933 through 1935, the top rate was 63%, then 78% in 1936 through 1940.

To top it off, the capital gains tax rate was 12.5% up to 1933. Then went to 31.5% in '34 and '35. Then 39% in '36 and '37.

So the max income tax rate and max cap gains rate was in 1937. Whatever else was going on, it wasn't a friendly environment to be making money.

Even though those max tax rates applied to higher tiers, follow a given income level through those years and the rates go up a lot. Someone making $5,000 was paying 3% in 1931, and 8% in 1937.

Cap gains rate here:

Corporate was pretty low then:

At 4/22/2010 1:26 AM, Anonymous Lyle said...

Oa to take it a bit further the max tax rate reached a nominal 91% in WWII, although the actual rate was capped apparently in the 80% range by other features. This lasted until JFK's first tax cut when the max rate went to 70%
One of the issues that keeps being avoided is motivation yes if your an investor or motivated only by money the max rate makes a big difference, but perhaps we have to many people doing useless work on wall street anyway.
If you found a company particularly with a new idea money is secondary to showing them that your idea is great. Having met at least one business leader that felt that way, his company never broke even but kept going for 40 years all be it it did acumulate a bunch of patents. It appears that Bill Gates did not start out to be rich but rather to create insanely great computer ideas. The money came along for the ride. Note that Bill never took a large salary but rather made is money by keeping a large share of Microsoft. (Since he did not have to deal with the vampires of venture capitalism)

At 4/22/2010 2:48 AM, Blogger PeakTrader said...

Lyle said: "perhaps we have to many people doing useless work on wall street anyway."

The work on Wall Street is at least as valuable to society as the work in Silicon Valley.

In the 2000s, Wall Street created and captured trillions of dollars of wealth in the global economy, distributed that wealth to the U.S. masses, and diversified the risk globally.

OA, yes, taxes were raised in the 1930s. Taxes were also raised and cut simultaneously in 2009 and 2010.

At 4/22/2010 3:01 AM, Blogger PeakTrader said...

The Inflation Outlook
Dr. Scott Brown
April 19, 2010

It’s been suggested that the Fed could reduce the government’s debt burden by allowing inflation to increase – effectively monetizing the debt. However, that makes no sense. Entitlement programs are tied to the CPI. So higher inflation would simply raise future obligations accordingly. In addition, higher inflation would raise borrowing costs, adding further to the deficit.

My comment: It's hard to believe the Fed would allow inflation to get out of control, which would eventually cause a greater tightening of the money supply, to slow inflation, and subsequently create a severe recession. So, monetary policy is constrained by price stability.

At 4/22/2010 9:50 AM, Anonymous gettingrational said...

Infectious Greed has posted John Paulson's Response to Shareholders on the Goldman Sach's "problem" and Paulson's now positive position on mortgage securities.

BTW, the letter has to be enlarged, by the magnifier at the bottom, to be read.

At 4/22/2010 10:44 AM, Anonymous morganovich said...


those tax rates are not directly comparable to those presently in place. global income was not taxed and a massive variety of shelters not currently available existed.

it was much easier to keep your income away from the tax man back then.

At 4/22/2010 10:58 AM, Anonymous gettingrational said...

Morganovich, I would appreciate your comments on this: Article revealing makeup of Goldman's position in a particular morgage backed bundle of securities.

At 4/22/2010 1:09 PM, Blogger KO said...

Morganovich, obviously tax rates are not directly comparable over time. Even just this year we're told 98% of people got a tax cut, without any change in rates. And AT&T, Caterpillar, etc. didn't take those big accounting charges due to a tax rate change.

No one even had a SS number back in the 30's so how did the IRS tie income to the right people? You hear those stories about large employers like Bethlehem Steel having 5 employees in the same mill with the same name and it's clear the IRS couldn't catch all income.

But I'd bet that those big government programs like the TVA kept good records. It wouldn't surprise me if the income tax withholding started with government programs or government jobs.

It takes a much smaller change in rates now to have the same effect as back then. So we'll see how things go in the coming years. Many people are going to be paying Medicare tax on investment income. That's on top of the increases for income. I'm not in that group, but no one has to be to see all the new taxes that are being put on the table. I think the clear bias towards ever more taxes is as important in decision making as the taxes themselves. Obama put a VAT on the table just yesterday.

At 4/22/2010 1:36 PM, Blogger KO said...

Another update on ACA Management's role.

They do not appear to be some passive rube. This case is falling apart.

"... ACA actually threw out 68 of the 123 securities suggested by Paulson. Those 68 securities had higher delinquency rates than the remaining ones, according to documents reviewed by CNBC. However, those documents show that ACA added 14 securities with lower credit ratings than the overall portfolio.

Documents also show that ACA added other securities with a higher percentage of mortgages from California and interest-only loans—two favorites of the shorts because they were perceived as having a higher chance of failure. ..."

At 4/22/2010 5:41 PM, Blogger juandos said...

Who cares what 'Take this TARP money or else' Paulson has to say?

At 4/22/2010 7:30 PM, Blogger KO said...

Juandos, that's Hank Paulson, not John Paulson.

At 4/22/2010 8:51 PM, Blogger juandos said...

"Juandos, that's Hank Paulson, not John Paulson"...

Yeah OA I know but I'm pissed off at Hank Paulson since his machinations cost my sister and others in her (30 years) job area with Bank America, she was pinked slipped today...

At 4/23/2010 1:39 AM, Blogger KO said...

This comment has been removed by the author.

At 4/23/2010 1:41 AM, Blogger KO said...

Real shame with B of A in particular. Hadn't made a subprime loan since 2003, and really had no baggage.

That didn't stop the lunacy where politicians said the banks were evil. The companies who did had the most abusive lending practices went out of business. Why weren't those CEO's dragged before Congress?

TARP, which was a loan, was called a bailout, except for GM and Chrysler.

My opinion is, had the lunacy not happened, the banks would have kept the TARP, continued to increase lending, and the economy wouldn't have been nearly as bad. It was talked about as multi-year capital to increase lending right up to the point where the Chuck Shummer types went all political. So the banks reduced lending, sold assets, and gave the money back as fast as they could.

I don't think that story gets told. It all gets spun as things are great because they paid TARP back early. Except success would have been increased lending, not a fast wind down.

At 4/23/2010 9:24 AM, Anonymous Lyle said...

Just to point out if you look on the 1913 tax form posted earlier on the blog it says world wide income. World wide income has been taxed for US citizens since the income tax was re-instated in 1913. Yes there were major difficulties in enforcing it, but it was taxed. Just like at one time interest and dividend income did not result in a 1099. You were supposed to pay but it was hard to enforce.
As things change the new requirement that all purchases of stocks be recorded by the brokerage so that they can report both sides of the sale on the 1099 will reduce the capital gains leakage over the next 20 years or so.


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