The Hedge Fund Manager's Gift to Obama

Photograph by Jin Lee/Bloomberg

John Paulson, the hedge fund manager who made billions of dollars shorting the housing market before the crash, is no fan of President Obama. Like so many people on Wall Street, he prefers Mitt Romney. He’s made his devotion known as only a billionaire can. Last year, Paulson gave $1 million to Restore Our Future, the super-PAC supporting the Republican Presidential candidate.

But in recent weeks, Paulson has shown surprising faith in Obama’s economic policies. He has been buying residential mortgage bonds, which were considered so risky after the crash that few investors would touch them. So Paulson is effectively betting the housing market is finally recovering after its five-year-long slump. This is the kind of tacit endorsement that should embolden Obama as he seeks four more years.

Of course, Paulson, whose spokesman declined to comment, would probably explain his investment decision differently. Like any hedge fund manager, he faces the challenge of generating better-than-average yields at a time when interest rates are at record lows. Mortgage bonds can deliver them, especially the subprime variety. Last week, securities stuffed with option adjustable-rate mortgages were trading at 55 cents on the dollar. If these exotic bonds pay off, they could juice Paulson’s numbers, which weren’t so great last year.

It wasn’t long ago that many people on Wall Street thought that would never happen. They put their money into surer things like bank debt, which carried an implicit government guarantee. Now Paulson apparently thinks mortgage bonds might not be so bad after all. He’s not the only believer. Goldman Sachs and AIG are also buyers.

If Paulson is right, he’ll make more money himself and Romney will be the financial beneficiary. But if the housing market improves, it will strengthen Obama, not his challengers. In that case, the hedge fund star might want to think about donating to the other candidate whom he’s effectively endorsing with his clients’ money. It might turn out to be a better investment.

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