Nov. 14 (Bloomberg) -- John Paulson disclosed that his hedge-fund group acquired 300 million shares of Citigroup Inc. during the third quarter, while selling its entire stake of Goldman Sachs Group Inc.

The Citigroup holding, listed by New York-based Paulson & Co. yesterday in a regulatory filing, marks his second billion- dollar-plus investment in a bank that received government bailout funds during the credit crunch. Paulson’s group bought 168 million shares of Charlotte, North Carolina-based Bank of America Corp. in the second quarter.

Paulson, who earned some $2 billion last year in part by betting that the housing market would collapse, has invested in bank stocks that plunged during the 2008 financial crisis. He sold shares during the third quarter in Goldman Sachs and JPMorgan Chase & Co., while building a stake in a bank that remains partly owned partly owned by the government.

“If you are guided by what happened to these companies, you would have to think Citigroup is the most problematical of the major banks,” said Warren Marcus, who ran the bank research department at Salomon Brothers Inc. during the 1970s. “Maybe there is a perception that Citi over time has got a better upside than some of the others.”

Armel Leslie, a spokesman for Paulson & Co., declined to comment on the holdings. The firm has about $29 billion under management that it invests in four strategies: merger arbitrage, event-driven trading, credit and financial services.

Betting on Recovery

Paulson ranked second in fund-manager earnings last year, according to Institutional Investor’s Alpha Magazine. His Credit Opportunities Fund soared almost sixfold in 2007 through wagers that subprime mortgages would sour. He started the Paulson Recovery Fund in 2008 to invest in financial firms hurt by mortgage writedowns.

Citigroup shares now trade at $4.05 each, quadruple the low of 97 cents that they hit in early March, yet below the peak of about $57 in December 2006. The number of common shares outstanding quadrupled to 22.9 billion in September through a preferred stock conversion that gave the U.S. Treasury Department a 34 percent stake in the company.

Paulson sold 2 million Goldman Sachs shares that he had acquired during the second quarter and cut his stake in JPMorgan to 2 million shares as of Sept. 30 from 7 million at June 30. He bought 2.75 million shares of Hartford Financial Services Group Inc. and more than doubled his holdings in First Horizon National Corp. to 7.1 million shares from 3 million.

Liberty Media

The Paulson funds more than doubled their stake in the Liberty Media Corp. shares that track the company’s entertainment assets. The fund group’s holdings rose to 44.75 million shares at Sept. 30 from 20 million, filings show.

David Tepper, another hedge-fund manager who invested in Bank of America and Wells Fargo & Co. during the first half of this year, also bought Citigroup in the third quarter. Tepper’s Appaloosa Management LP acquired 79.7 million Citigroup shares during the period, according to a Form 13F the Chatham, New Jersey, money-management firm filed yesterday with the SEC.

Billionaire investor Edward Lampert disclosed in 2007 that he had acquired almost 25 million Citigroup shares through his ESL Investments Inc. hedge fund. ESL began cutting its stake during the fourth quarter of 2007, and the New York Times estimated that November that the fund’s paper loss totaled as much as $471 million.

Citigroup’s share price doesn’t mean the company is a bargain, according to Marcus in Chappaqua, New York, the former Salomon Brothers analyst who now invests in banks on behalf of institutions. Banks may be less profitable going forward because they are using less leverage and regulators are creating more constraints, he said.

“You could make a case that you have to trim back what the returns will be at a well-run, normal bank because there will be a lot more pressure on them to be run conservatively,” Marcus said.

To contact the reporter responsible for this story: Miles Weiss in Washington at mweiss@bloomberg.net

Last Updated: November 14, 2009 12:46 EST