Paulson Hedge Fund Buys Banks That Lost Value in Credit Crisis

By Saijel Kishan and Cristina Alesci

Aug. 13 (Bloomberg) -- John Paulson, the hedge-fund manager whose wagers against the U.S. housing market helped him earn an estimated $2.5 billion last year, bought Bank of America Corp. and Goldman Sachs Group Inc. stock in the second quarter, while adding to stakes in gold companies.

His firm, Paulson & Co., bought 168 million shares of Charlotte, North Carolina-based Bank of America valued at $2.2 billion as of June 30, according to a filing yesterday with the U.S. Securities and Exchange Commission. It was the biggest new purchase in the second quarter for Paulson, 53, and made him the bank’s fourth-largest owner.

“It’s ironic because he was the one that made the right call shorting subprime,” said Jerome Dodson, who oversees $2.5 billion at Parnassus Investments in San Francisco. “His timing is good but he probably won’t be as successful with this purchase as he was with betting the housing market would collapse.”

Paulson, who manages about $29 billion, last year started a hedge fund, called Paulson Recovery fund, to invest in financial firms hurt by mortgage writedowns. He boosted investments in gold companies this year to help mitigate potential inflation as governments worldwide increase spending to help their economies recover from recession. Gold has gained 7.7 percent this year.

Stefan Prelog, a spokesman for New York-based Paulson, declined to comment on the filing.

Bank Stocks

Bank of America gained 94 percent in the second quarter as concern the government would take an ownership stake eased amid signs of an improving economy. Paulson also bought 2 million shares of Goldman Sachs, the New York-based investment bank, in the period.

He ended the quarter with 7 percent of the UltraShort Financials ProShares exchange-traded fund, which is used by investors who expect bank shares to decline. The fund declined 57 percent in the quarter as the Dow Jones U.S. Financials Index rose 29 percent. Paulson’s 2 million shares were valued at $84 million on June 30.

Bank of America is the second-largest home lender, trailing Wells Fargo & Co., after acquiring Countrywide Financial Corp. last year. Countrywide lost $703.5 million in 2007 and almost collapsed under the weight of defaulting subprime mortgages.

Paulson’s filing came a day after Timothy Barakett, founder of the $5.5 billion Atticus Capital LP, said he was closing his $3.5 billion Atticus Global Fund to spend more time with his family and concentrate on philanthropic interests. Atticus bought Bank of America shares valued at $355 million in the second quarter, according to a regulatory filing on Aug. 10.

Betting on Gold

Paulson’s stake in the bank is the fund’s second-biggest holding after SPDR Gold Trust. He left unchanged his 9 percent stake in the investment fund that buys gold bullion, according to the filing.

His firm became the largest holder of Johannesburg-based gold producer AngloGold Ashanti Ltd. after buying 40 million shares to end the quarter with a 12 percent stake. Paulson also increased his stake in Johannesburg-based Gold Fields Ltd., becoming the third-largest owner of its U.S.-listed shares.

The fund reduced its stake in Market Vectors Gold Miners ETF, a fund that mirrors moves in the Amex Gold Miners Index, after selling 11 million shares. He owned a 5.3 percent stake in the fund in the second quarter valued at $227 million, down from 15 percent in the first three months of the year.

The hedge fund manager left unchanged a 4.4 percent stake in mining firm Kinross Gold Corp., according to the filing.

Paulson’s Pay

Paulson earned an estimated $2.5 billion last year, according to Institutional Investor’s Alpha Magazine. His Credit Opportunities Fund soared almost sixfold in 2007 on bets that subprime mortgages would plummet. Last year, his flagship fund returned 37 percent, compared with a loss of 19 percent for hedge funds on average.

Money managers who oversee more than $100 million in equities must file a Form 13F within 45 days of each quarter’s end to list their U.S.-traded stocks, options and convertible bonds. The filings don’t show non-U.S. securities or how much cash the firms hold.

Paulson reported holdings valued at $17.1 billion at the end of June compared with $9.3 billion at the end of the first quarter. He placed bets during the quarter on companies including Sun Microsystems Inc. and Wyeth that are takeover targets.

Paulson bought 74 million shares of Santa Clara, California-based Sun Microsystems, which is being taken over by Oracle Corp. for $7.4 billion. The new purchase was his second- largest in the second quarter, according to the filing.

The hedge fund increased its stake in Madison, New Jersey- based Wyeth, which is set to be acquired by Pfizer Inc., by buying 18 million shares of the drugmaker, according to the filing.

Paulson also increased his stake in Schering-Plough Corp. after buying 44 million shares in the Kenilworth, New Jersey- based firm. Schering-Plough agreed in March to be taken over by Merck & Co.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net;