What’s the opposite of a vulture? Vulture funds, in popular imagination (if
not in reality), buy up
debt on the cheap and then profit from the distress of others by trying to maximise
the amount of money they can extract from their debtors. But what would you
call someone who buys up debt on the cheap and then tries to profit by helping
out the debtors as much as possible? If you’re a normal person, you might call
such a trader a hero. If you’re hedge-fund manager John Paulson of
Paulson & Co, however, you accuse
people of market manipulation.
The problem seems to be that Bear Stearns has sold credit protection on subprime-backed
securities to Paulson. If Bear does nothing, it has to pay out on its insurance
contract. But if it buys up the underlying mortgages and restructures them so
that the homeowners don’t end up defaulting, then Paulson gets nothing.
That’s a great trade. Good for Bear. Paulson just got out-traded, is all.