Thursday, August 13, 2009

A Massive Bet on Bank of America

John Paulson, the head honcho at Paulson & Co. (not to be confused with ex-Treasury chief Hank Paulson), invested $2.2 billion in the bank during the second quarter, at an average buy price of $13.20 a share.

The investment is somewhat shocking, given that Paulson bathed in a significant amount of limelight for making boatloads of money by betting against a host of things related to mortgage, housing, and banking. And I do mean boatloads; reportedly, he personally pocketed $3.7 billion in 2007 as his funds skyrocketed.

Interestingly, while B of A was Paulson's largest banking investment of the quarter (and his second-largest equity investment overall), he also picked up shares of a host of other financial stocks, including JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Capital One (NYSE: COF), and Fifth Third Bancorp (Nasdaq: FITB).

But there's another twist here. Paulson's investments during the quarter also maintained a healthy amount of exposure to gold-producing companies, including the SPDR Gold Shares (NYSE: GLD) exchange-traded fund, AngloGold Ashanti, and Kinross Gold (NYSE: KGC).

So on the one hand, we've got a big bet on the banking system and financials, while on the other hand we've seemingly got a big bet against the dollar and financial system. Why would Paulson do this? I've got several ideas:

  1. The financials are a short-term bet, assuming that shares are underpriced and will charge back with the economy, while the gold holdings are a longer-term purchase to profit from inflation and a weak dollar.
  2. One of Paulson's traders brought her kids to the office and they ran amok, making billions of dollars of random trades.
  3. Paulson is now bullish on the financial system, and the gold holdings are a hedge on that bet.
  4. He did this just to mess with all of us.
  5. Paulson is brilliant, and if he told us the reasoning behind these trades, our lesser brains would implode from the sheer genius.

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