Published March 12, 2009

Hedge fund makes killing shorting UK banks

Paulson may have gained £311m from Lloyds, HBOS bets

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(LONDON) Paulson & Co, the hedge-fund firm that made more than US$3 billion betting that the US housing market would collapse, may have made £311 million (S$657 million) since September by short-selling Lloyds Banking Group and HBOS.

Mr Paulson: His firm made US$3 billion betting on US housing market fall

Paulson, run by billionaire John Paulson, took short positions in Lloyds and HBOS valued at about £367 million in September, based on the holdings and share prices on the dates they were reported. The position equalled to 0.79 per cent of London-based Lloyds, or 129.1 million shares, after the banks merged and holdings were diluted by a government investment.

That position was worth about £56 million on Monday, when it fell below the reporting threshold.

Lloyds, which surrendered control to the government on March 7 in return for asset guarantees, is down 82 per cent since Paulson first disclosed a short position in the bank. Paulson made at least £295 million by shorting Royal Bank of Scotland Group when the fund closed its position in the bank in January after five months.

'They have called the market right,' Leigh Goodwin, financial analyst at Fox-Pitt Kelton, said of Mr Paulson's firm. 'They obviously have decided that the downside is limited, so there is not a great benefit from here on in holding that position.'

Paulson's potential profit from shorting UK banks stands at £606 million. Armel Leslie, a spokesman for New York-based Paulson declined to comment.

Lloyds closed at 43.7 pence a share on Monday, down 82 per cent since Sept 23, when Paulson's short position peaked. Short-sellers sell borrowed shares with plans to buy them back later at a lower price.

Paulson's Credit Opportunities Fund soared almost sixfold in 2007 on bets that sub-prime mortgages would plummet. Last year, his flagship fund returned 37 per cent, compared with a loss of 19 per cent for hedge funds on average.

Paulson, which oversees about US$30 billion, has held a short position of 1.17 per cent in Barclays since Oct 30, according to regulatory filings. Shares of the third-largest UK bank have fallen 67 per cent since that date.

Prime Minister Gordon Brown's government has taken control of four British banks since the run on Northern Rock in September 2007 as it seeks to boost lending and stimulate economic growth.

Lloyds agreed to buy HBOS in September in a government-brokered deal, saddling it with risky loans and investments that slashed profit and forced it to turn to the government for capital and asset guarantees.

The Financial Services Authority, the UK market regulator, lifted a short-selling ban on financial companies on Jan 16. The restrictions were imposed in September as politicians and investors blamed hedge funds for destabilising markets.

Hedge funds are private, largely unregulated pools of capital whose managers can bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

Paulson had a short position of 1.76 per cent in Lloyds on Sept 23, when the stock traded for 261.75 pence, the firm said in a regulatory statement. It held a 0.95 per cent position in HBOS on Sept 19, when the stock traded for 216.83 pence. -- Bloomberg