How the Mighty Have Fallen

The bigger they are, the harder they fall.

That's what appears to be happening to one of the poster children of the subprime mortgage crisis. John Paulson, who became famous by making billions betting against subprime mortgages and was at the center of the Goldman Sachs (NYSE: GS  ) mess, has seen his fortunes turn.

After making billions more betting on a banking sector recovery, the tables have turned and Paulson is sitting on losses in excess of 20% at two of his largest funds this year. In the hedge fund world, that's bad news and means not only that investors are likely to cash out, but also that other hedge funds are circling, waiting for Paulson to liquidate his positions.

So what does Paulson own?

Crazy for banks
Paulson's exposure to the banking sector is massive.

According to recent filings, he owned more than 33.5 million shares of Citigroup (NYSE: C  ) , 33.6 million shares of Wells Fargo (NYSE: WFC  ) , and 40.5 million shares of Hartford Financial Services (NYSE: HIG  ) . And it gets worse from there.

More bad bets
Paulson also owns a major stake in MGM Resorts (NYSE: MGM  ) along with debt and equity in Caesar's Entertainment at a time when Las Vegas is struggling to put odds in its favor.

Let's not forget about a 23.5-million-share bet on the mess that is Hewlett-Packard (NYSE: HPQ  ) . The company that's become the laughingstock of corporate boards and executive management is still one of Paulson's top 10 holdings.

And don't leave out gold. Paulson has made giant bets on SPDR Gold (NYSE: GLD  ) and AngloGold Ashanti. Those looked like genius investments until recently, when gold started to fall out of favor. The jury is still out on where gold will end up, but for now, Paulson has taken a hit.

Why you should care
When a big fund loses money and investors flee in droves, fund managers sometimes sell a lot of assets in a hurry. When you're as big a name as Paulson, other hedge funds see it coming and put on the pressure. In Jim Cramer's Confessions of a Wall Street Addict, he discusses squeezing a struggling fund's short positions when a fund was in trouble. If the fund is on margin (leveraged), you can force the fund to buy shares back, thus exacerbating losses.

We may be headed for just that kind of scenario for Paulson.