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
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.
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
More bad bets
Paulson also owns a major stake in MGM Resorts
Let's not forget about a 23.5-million-share bet on the mess that is Hewlett-Packard
And don't leave out gold. Paulson has made giant bets on SPDR Gold
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.
Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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